If you are like most of us, you are reluctant to think about growing old and facing death or a debilitating physical or mental impairment that many consider to be worse than death. Doing something about it is difficult, but there are simple things that can be done to alleviate common problems that can occur in the face of actual or pending death and disability. You may be surprised to learn that many people derive great satisfaction and peace of mind from facing and addressing these difficult issues. Here are some common mistakes that are made and some things that can be done to avoid them.

■ Putting it Off. A large percentage of people in the United States die without having a valid Will in place. That means that state law will determine who receives your assets. The government’s plan may differ from what you would choose for yourself.

■ Not Naming a Guardian for Minor Children. Young people who have not accumulated significant assets often think a Will is unnecessary. However, one of the most important provisions of the Will names the guardian of your minor children. In the absence of a Will, the court will appoint a guardian without knowing who you would have chosen.

■ Using Simple “I Love You” Wills. An “I Love You” Will simply leaves all assets to the surviving spouse or loved one. It is true that the marital deduction can shelter significant assets from tax when the first spouse dies, but this arrangement can result in a heavy tax bite when the surviving spouse then dies or if the survivor is not your spouse in the first place. One solution is a program of planned gifting to gradually transfer assets from one generation to the next. Another is the use of a “By Pass or Credit Shelter Trust”, or other forms of trusts or a Family Limited Partnership to shelter assets or reduce exposure to estate taxes that could otherwise consume the estate or force a liquidation of assets. Such devices always incorporate provisions for lifetime support of the surviving spouse.

■ Improper Form of Asset Ownership. Assets must be titled correctly in order to take advantage of many of the devices that are available. The most common error of this type is when spouses jointly own major assets such as the residence. Since joint property passes automatically to the surviving joint owner, it cannot be passed by your Will to a trust or other beneficiary. This can be corrected by changing the form of ownership of your assets. Similarly, joint bank and brokerage accounts can be separated into individually owned accounts so that each spouse has enough assets to fund the trust or other asset preservation device that is available in the event of that spouse’s death.

■ Assuming Your Will Covers All Your Assets. Many significant assets are not controlled by your Will. For example, beneficiaries of life insurance policies, retirement plans and IRAs are not named by a Will. Instead the beneficiary designation under the policy, plan or IRA trumps the Will. A common example involves divorced individuals who change their Will to eliminate the ex-spouse but do not change the designation of the ex-spouse as beneficiary under their pension plans and insurance policies.

■ Owning Life Insurance Yourself. Life insurance proceeds are included in your taxable estate for estate tax purposes if you had any “incident of ownership” over the policy. Inclusion of life insurance proceeds could turn a non-taxable estate into a taxable one. Life insurance is by definition designed to benefit your beneficiaries after your death, not you during your lifetime. You can avoid holding any incident of ownership by establishing an irrevocable life insurance trust to own the policy. This will insure that y our beneficiaries receive the full amount of life insurance benefits unreduced by federal estate tax.

■ Not Taking Advantage of the Annual Gift Tax Exclusion. The federal estate and gift tax law allows each individual to make a gift of $11,000 (2002 and 2003) per year to any individual without any gift tax consequences. These gifts can reduce your estate subject to estate tax, or perhaps even eliminate the potential estate tax. What’s more, the appreciation of the gifted asset is also excluded from your taxable estate. The amount of the gift in excess of the annual exclusion applies against the lifetime exemption (or is subject to gift tax if you have already exceeded the lifetime exemption amount). But such gifting must be carefully planned as to both amount and timing for effective estate planning that takes into consideration highly complex federal and state Medicaid laws and regulations.

■ No Business Succession Plan. Family-owned businesses are said to have only a 40% percent chance of surviving when passed from the first to the second generation. That survival rate drops precipitously when we look at family business passed to the third and fourth generation. The failure of these businesses to survive being passed to successive generations can be explained by both tax and non-tax considerations, but the odds can be dramatically improved by careful planning.

■ Not Planning for Incapacity. Estate planning usually includes preparation for the eventuality of death and the possibility that you may become incapable of making medical and financial decisions for yourself. You should sign documents authorizing someone else to act on your behalf in the event of your need or general incapacity. Without these documents in place before incapacity occurs, court proceedings to name a guardian may be required no matter how costly and unpleasant for all concerned.

Most of us realize that life is a bit of a gamble, but we can improve the odds. No one can see the future to know if you will need a “skilled nursing care facility” as you grow older and more incapacitated. If you do, planning is critical because the annual cost of such care now exceeds $60,000 on average in Pennsylvania. Government programs, such as medicare, may pay a small portion of that cost, but often it is only in the first few months. With the aid of a knowledgeable and experienced medicaid planing attorney, even in these dire circumstances, you can provide for yourself and provide a legacy for your loved ones that likely would otherwise be consumed in the Medicaid “spend down” process.

Ralph L. Montgomery, Jr. - Member American Academy of ElderLaw Attorneys.
DALE WOODARD LAW FIRM
1030 Liberty St.
Franklin, PA 16323
Phone 814-432-2181
Fax 814-437-3212
www.dalewoodard.com
montgomerylaw@csonline.net
 

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