Plan on it
Estate planning involves many pieces. Here’s a checklist of what you and your client must have to ensure an efficient transfer of assets.
No one likes to think about planning for the inevitable. Yet if your clients don’t, the consequences could compound an already devastating tragedy.
To illustrate, Kathleen Rehl, Ph.D., CFP with Rehl Financial Advisors in Land O’Lakes, Fla. and author of “Moving Forward on Your Own: A Financial Guidebook for Widows,” tells the story of the untimely death of her stepdaughter, who died in her late 20s.
She had been engaged but broke off the relationship several years before her death. While engaged, she named her then-fianc? as the beneficiary of a life insurance policy provided by her employer. The ex-fianc? received the death benefit and when Rehl’s husband asked him to return the money to help the family with final expenses, the ex-fianc? refused.
That’s just one example of why estate planning is important for every client. But it takes on added urgency for seniors. Not only do they face a greater risk of dying but there’s also the increased risk of debilitating injury and illness.
Effective estate planning isn’t just about the client’s death, though. Besides reducing estate administration costs and taxes, the estate plan should address the challenges that arise when a client becomes disabled or passes away. Consider the following lifetime and post-mortem estate-planning steps for review with your older clients.
Lifetime planning: Steps to help the client now
1) Build a balance sheet. A personal balance sheet lists clients’ assets and liabilities: what they own and what they owe. It provides a useful summary to estimate potential estate taxes, but it’s also a great organizational tool. By including details on account ownership and where assets are held, clients can help their family members find the information they need if the client becomes incapacitated or dies. That’s particularly important with physical assets, such as gold or silver coins, says Garth Scrivner, CFP, CPA/PFS with StanCorp Investment Advisers of Albuquerque, N.M. Some clients may be hesitant to provide those details because of security concerns but if they don’t share the information, it might be impossible for anyone else to locate the assets.
2) Organize your financial records and important documents. Organizing records and documents in a secure but accessible location makes life easier for clients and their families. Those family members will need to know where the documents are stored and have access to them, of course–otherwise they face the hassle of finding them. The records should also include user IDs and passwords for websites the client uses, Scrivner says.
3) Estimate estate taxes and settlement costs. The current estate tax exemption is $5 million for individuals, while married couples can combine their exemptions up to $10 million. That means many of your clients aren’t at risk–at least through 2012–for federal estate taxes. But they’re not necessarily off the hook for state estate taxes and should plan accordingly. Clark Kendall, CFA, CFP with Kendall Capital in Rockville, Md., notes that many states have decoupled their estate tax rates and limits from the federal government’s levies. Consequently, a client’s estate could pass free of federal taxes but incur significant costs from his or her state.
4) Create a durable power of attorney for financial management. This document allows another person to manage the client’s finances, including paying bills, handling investments, etc. It provides back-up financial management in case the client becomes incapacitated. Clients need to create this document while they have their full mental faculties or the power’s legitimacy could be challenged later.
5) Set up a power of attorney for health care and a living will. This power of attorney lets clients name another person who will make health-care decisions for them if the person is unable to do so. With a living will, clients can describe in advance the types of health-care treatment they want to receive or refuse. Some clients might find it emotionally difficult to create these documents, but they can provide vital guidance when clients are unable to express their wishes. Scrivner reminds clients to also complete HIPAA (Health Information Portability and Accountability Act) forms to give another person permission to access their medical records and information.
Living trusts can provide back-up financial management if the client becomes incapacitated. They’re also useful for keeping assets out of probate and speeding estate administration. But there’s a catch: The client must transfer assets into the trust to get the benefits. Donald Duncan, CPA, CFA(TM), CFP with D3 Financial Counselors, LLC in Downers Grove, Ill., points out that the trust can hold real estate as well. But if the client doesn’t transfer the property to the trust, it will wind up in probate unless it’s owned jointly, he adds.
6) Check for Form DD 214. George Padula, CFA, CFP with Modera Wealth Management in Boston, says that clients who are military veterans may be eligible for military burial benefits but their family will need Form DD 214–the Certificate of Release or Discharge from Active Duty issued by the Department of Defense–to apply for the benefits. An application to request Form DD 214 is available online at www.archives.gov/veterans/military-service-records/get-servicerecords.html.