Investor Education: Tax and Estate Planning

By Wayne Cooper

Today we are going to discuss five types of documents you will need for a properly planned estate. The first two documents are a pour-over will and a revocable living trust, which is your art, jewelry, furniture, things like that. Finally, your will transfers, or pours over, your remaining assets into your revocable living trust. If you have transferred your assets into your revocable living trust during your lifetime you will avoid the probate process and add privacy to your estate. Your revocable living trust will determine who receives your assets and how and when upon your death. For married individuals your trust will create a family trust at your death which is funded with the amount that can avoid estate taxes. For 2013 that amount is $5.25 million. The balance of your wealth will be transferred to a surviving spouse. In this way there will be no estate tax due at the death of the first spouse. The amount going to the surviving spouse can either be distributed outright or held in a marital trust.

There are two minimum requirements for a marital trust to qualify for the marital deduction. First, the spouse must receive all of the income from the trust at least annually. And second, the surviving spouse can be the only beneficiary of the trust during his or her lifetime. By using a marital trust rather than an outright distribution to the surviving spouse, you gain greater assurance that amounts not spent during the surviving spouse’s lifetime go to your children. This can occur if the surviving spouse re-marries or if the surviving spouse loses capacity when they get older and make some bad decisions.

The next two documents are the power of attorney for property and the power of attorney for healthcare. The power of attorney for property names an agent who can control your property in the event you are unable to do so yourself. In most cases the agent merely transfers the property that is not currently in your trust into your revocable living trust. The power of attorney for healthcare, which has different names in different states, appoints an agent to make decisions regarding your end of life healthcare in the event you are unable to do so yourself. In the power of attorney for healthcare you will designate the level of care that you want and instruct your agent to follow your wishes when those determinations must be made. You always want to choose an agent that will follow your wishes and not use their own personal feelings in making the decisions.

The final documents are your beneficiary designations. These would include beneficiary designations for life insurance proceeds and for beneficiaries of your qualified plans such as your 401k plans and IRA accounts. Insurance should be left to your revocable trust in most cases. Qualified plans are usually left directly to the surviving spouse because the surviving spouse is able to roll over the qualified plans into their own IRA accounts. Contingent beneficiaries would either be children or your trust. If you have charitable intent, naming charities as beneficiaries of qualified plans is an excellent tax saving strategy. That is because charities will not pay income tax upon distribution of the plan whereby individuals would otherwise pay taxes. Thank you for joining me today. I hope you will be able to join me on my next  podcast where I will be discussing in more detail trust provisions that will help empower your children to become better stewards of wealth rather than enable your children to just sit back and live off their trust funds. Thank you again.