Posted On: April 11th 2018
No one wants to contemplate their own mortality or that of a loved one. It’s one of the reasons people tend to procrastinate when it comes to estate planning. And for people whose life expectancies are short — because they’re terminally ill or advanced in age — planning can be even more difficult. But while money matters may be the last thing you want to think about when time is limited, a little planning can offer you and your family financial peace of mind.
Here are some (but by no means all) of the steps you should take if you or a loved one has a short life expectancy:
Review all estate planning documents, including your:
Make sure these documents are up to date and continue to meet your estate planning objectives. Modify them as appropriate.
Catalog all your assets and liabilities, estimate their value, and determine how assets are titled to ensure that they’ll pass to their intended recipients. For example, do you own assets jointly with your ex-spouse? If so, title will pass to your ex-spouse on your death. There may be steps you can take to separate your interest in the property and dispose of it as you see fit.
If you have a safe deposit box, make sure someone is authorized to open it. If you have a personal safe, be sure that someone you trust knows its location and combination.
Take another look at beneficiary designations in your IRAs, pension plans, 401(k) plans and other retirement accounts, insurance policies, annuities, deferred compensation plans and other assets. Make sure a beneficiary is named and that the designation continues to meet your wishes. For example, you may find that your ex-spouse is still named as beneficiary of your life insurance policy.
Ensure that your family or representatives will have access to digital assets, such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, social media accounts, websites, domain names, and cloud-based documents. You can do this by creating a list of usernames and passwords or by making arrangements with the custodians of these assets to provide access to your authorized representatives.
There are many strategies you can employ to reduce the tax burden on you and your family. For example, suppose your children or other heirs are in a higher tax bracket than you. Counterintuitively, it may make sense to increase your income. Depending on your income you may be able to take a traditional IRA distribution without increasing your tax liability. This strategy may be particularly advantageous if you have significant deductions for medical or other expenses that would otherwise go unused.
For example, suppose that, based on your projection, you know that your itemized deductions will exceed your income and that you’ll have negative taxable income for the year. For illustrative purposes, let’s say that the projection shows that your deductions and exemptions will exceed your income by $10,000. In that case, your tax liability would be zero. Further suppose that, if you took an extra $10,000 from your IRA, your tax liability would still be zero. Now, instead of the funds sitting in your IRA they’re sitting in a non-IRA account.
When your family inherits that $10,000, they’re better off from a tax perspective. Why? Because instead of receiving those funds in the IRA, where they’d be subject to income tax upon distribution, they could instead receive the assets income-tax free. If your children are in, say, the 35% income tax bracket, then for each $10,000 received via the IRA, they’d be liable for income tax of $3,500. By moving the money out of your IRA (and paying no tax to do so), then, as a family, you’ll have $3,500 more than you otherwise would.
These are just a few of the many steps you can take to shore up your estate plan when time is short. Although facing your own mortality can be difficult, great peace of mind can come from ensuring that your estate plan fulfills your wishes and minimizes the tax burden on your family.
© 2018
Estate planning when time is short