September 2013 Newsletter

Why You Need a Power of Attorney and Medical Directive:

It’s late at night and you’re waiting for your husband to arrive home from a business trip. Suddenly the phone rings and the voice on the other end informs you that your husband was in a terrible car accident and has been rushed to the hospital. You arrive to find several doctors awaiting permission to operate on your unconscious husband. They ask if he has a medical directive that authorizes someone, preferably you, to make health-care decisions on your husband’s behalf.

A few days pass and your husband survives the accident, but he’s going to be laid up for several weeks or months. Household bills need to be paid, but the primary source of income is your husband’s business and you’re not named on any of the business bank accounts. The bank representative asks whether your husband has a durable power of attorney naming you as his agent for financial matters.

These are everyday examples that highlight the importance of a medical directive and a durable power of attorney. Without these documents in place, you and your family could face personal and financial disaster.

What is a medical directive?

A medical directive lets others know what medical treatment you would want, and allows someone to make medical decisions for you, in the event you can’t express your wishes yourself. There are two basic types of advanced medical directives–a durable power of attorney for health care and a living will–which generally vary by state. So be sure your documents comply with the laws of your state of residence.

A durable power of attorney for health care (known as a health-care proxy in some states) allows you to appoint a representative (health-care agent) to make medical decisions for you if you are unable to do so yourself. You can appoint almost anyone as your agent (as long as they are of legal age, usually age 18 or older). You decide how much power your representative will or won’t have.

A living will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. In most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Typically, a living will can be used to decline medical treatment that “serves only to postpone the moment of death.” In those states that do not authorize living wills, you may still want to have one to serve as an expression of your wishes.

What is a durable power of attorney?

A durable power of attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. If no one is ready to look after your financial affairs, your property may be wasted, abused, or lost. A DPOA allows you to authorize someone else to act on your behalf, so he or she can do things like pay everyday expenses, collect benefits, watch over your investments, and file taxes.

A DPOA may be effective immediately (this may be appropriate if you face a serious operation or illness), or it may only become effective upon the occurrence of an event, such as your incapacity (sometimes referred to as a springing power of attorney).

Caution: A springing power of attorney is not permitted in some states, so you’ll want to check with an attorney for its availability in your state.

Additional things to consider

When creating either a DPOA or medical directive such as a durable power of attorney for health care (HPOA), it is important that you choose an appropriate agent. While you may select the same person to serve as agent in both documents, you are not compelled to do so. And be sure the person you select as agent is aware of that fact. Also, let them know where you keep these documents (you may want to give a copy of your HPOA to your agent and primary care physician as well). Once you have these documents, review them periodically to be sure they still accomplish what you intend them to do.

It’s Time to Review Your Life Insurance Needs

Your life insurance needs may change without you even realizing it. You may have purchased life insurance years ago, and never gave it a second thought. Or, you may not have life insurance at all–and now you need it. When your life circumstances change, you have a fresh opportunity to make sure the people you love are protected.

You’re tying the knot

When you were single, you may not have thought much about life insurance. But now that you’re getting married, someone else may be depending on your income. If one of you should die, the other spouse may need to rely on life insurance benefits to meet expenses and pay off debts.

The amount of life insurance coverage you need depends on your income, your debts and assets, your financial goals, and other personal factors. Even if you have some low-cost life insurance through work, this may not be enough. To be adequately protected, you may each need to buy life insurance policies from a private insurer. The cost of an individual policy will be based on your age and health, the amount of coverage you buy, the type of policy (e.g., cash value or term insurance), and other variables.

You’ve become a parent

When you become a parent, it’s time to take another look at your life insurance needs because your family’s financial security is at stake. Married, single, and stay-at-home parents all need life insurance. Life insurance proceeds can help your family meet both their current expenses (such as a mortgage, child care, or car payments) and future expenses (such as a child’s college education). Even if you already have life insurance, it’s time to review your policy limits and beneficiary designations.

You’re contemplating divorce

During a divorce, you’ll have a number of pressing financial issues to address. Make sure that one of these is life insurance. You’ll want to think about what protection you need, and what protection your children (if any) will need in the future. For example, if you’ll be paying or receiving child support, you may want to use life insurance to ensure continuation of those payments. During a divorce, you may also need to negotiate ownership of life insurance policies. Life insurance ownership and obligations may be addressed in your divorce settlement, and state laws vary, so ask your attorney for advice and information. Finally, you’ll want to evaluate your own life insurance needs to make sure your family is protected in the event of your death.

Your children have left the nest

If having children was the reason you originally purchased life insurance, you may feel that you no longer need coverage once your children are living on their own. But this isn’t necessarily the case. Before making any decision, take a look at the types and amounts of life insurance you have to make sure your spouse is protected (if you’re married). And keep in mind that life insurance can still be an important tool to help you transfer wealth to the next generation–your children and any future grandchildren.

You’re ready to retire

As you prepare to leave the workforce, you should revisit your need for life insurance. You may find that you can do without life insurance now if you’ve paid off all of your debts and achieved financial security.

But if you’re like some retirees, your financial picture may not be so rosy. You may still be saddled with mortgage payments, tuition bills, and other obligations. You may also need protection if you haven’t accumulated sufficient assets to provide for your family. Or maybe you’re looking for a way to pay your estate tax bill or leave something to your family members or to charity. You may need to keep some of your life insurance in force or even buy a different type of coverage.

Your health has changed

If your health declines, how will it affect your life insurance? A common worry is that if your health changes, your life insurance coverage will end if your insurer finds out. But if you’ve been paying your premiums, changes to your health will not matter. In fact, you should take a closer look at your life insurance policy to find out if it offers any accelerated (living) benefits that you can access in the event of a serious or long-term illness.

It’s also possible that you’ll be able to buy additional life insurance if you need it, especially if you purchase group insurance through your employer during an open enrollment period. Purchasing an individual policy may be possible, but more difficult and more expensive.

Of course, it’s also possible that your health has changed for the better. For example, perhaps you’ve stopped smoking or lost a significant amount of weight. If so, you may want to request a reevaluation of your life insurance premium–ask your insurer for more information.


Stretch IRAs

The term “stretch IRA” has become a popular way to refer to an IRA (either traditional or Roth) with provisions that make it easier to “stretch out” the time period that funds can stay in your IRA after your death, even over several generations. It’s not a special IRA, and there’s nothing dramatic about this “stretch” language. Any IRA can include stretch provisions, but not all do.

Why is “stretching” important?

Any earnings in an IRA grow tax deferred. Over time, this tax-deferred growth can help you accumulate significant retirement funds. If you’re able to support yourself in retirement without the need to tap into your IRA, you may want to continue this tax-deferred growth for as long as possible. In fact, you may want your heirs to benefit–to the greatest extent possible–from this tax-deferred growth as well.

But funds can’t stay in your IRA forever. Required minimum distribution (RMD) rules will apply after your death (for traditional IRAs, minimum distributions are also required during your lifetime after age 70½).

The goal of a stretch IRA is to make sure your beneficiary can take distributions over the maximum period the RMD rules allow. You’ll want to check your IRA custodial or trust agreement carefully to make sure that it contains the following important stretch provisions.

Key stretch provision #1

The RMD rules let your beneficiary take distributions from an inherited IRA over a fixed period of time, based on your beneficiary’s life expectancy. For example, if your beneficiary is age 20 in the year following your death, he or she can take payments over 63 additional years (special rules apply to spousal beneficiaries).

As you can see, this rule can keep your IRA funds growing tax deferred for a very long time. But even though the RMD rules allow your beneficiary to “stretch out” payments over his or her life expectancy, your particular IRA may not. For example, your IRA might require your beneficiary to take a lump-sum payment, or receive payments within 5 years after your death. If stretching payments out over time is important to you, make sure your IRA contract lets your beneficiary take payments over his or her life expectancy.

Key stretch provision #2

What happens if your beneficiary elects to take distributions over his or her life expectancy but dies a few years later, with funds still in the inherited IRA? This is where the IRA language becomes crucial.

If, as is commonly the case, the IRA language doesn’t address what happens when your beneficiary dies, then the IRA balance is typically paid to your beneficiary’s estate.

However, IRA providers are increasingly allowing an original beneficiary to name a successor beneficiary. In this case, when your original beneficiary dies, the successor beneficiary “steps into the shoes” of your original beneficiary and can continue to take RMDs over the original beneficiary’s remaining distribution schedule.

When reviewing your IRA language, it’s important to understand that a successor beneficiary is not the same as a contingent beneficiary. Most IRA providers allow you to name a contingent beneficiary. Your contingent beneficiary becomes entitled to your IRA proceeds only if your original beneficiary dies before you.

Stretch even further …

If you name your spouse as beneficiary, your IRA can stretch even further. This is because your spouse can elect to treat your IRA as his or her own, or to transfer the IRA assets to his or her own IRA. Your spouse then becomes the owner of your IRA, rather than a beneficiary. As owner, your spouse won’t have to start taking distributions from your traditional IRA until he or she reaches age 70½ (and no lifetime RMDs are required from your Roth IRA). Plus, your spouse can name a new beneficiary to continue receiving payments after he or she dies.

What if your IRA doesn’t stretch?

If your IRA doesn’t contain the appropriate stretch provisions, don’t fret–you can always transfer your funds to an IRA that contains the desired language. In addition, upon your death, your beneficiary can transfer the IRA funds (in your name) directly to another IRA that has the appropriate stretch language.

A word of caution

While you might appreciate the value of tax-deferred growth, your beneficiary might prefer instant gratification. If so, there’s little to prevent your beneficiary from simply taking a lump-sum distribution upon inheriting the IRA, rather than “stretching out” distributions over his or her life expectancy. It’s possible, though, to name a trust as the beneficiary of your IRA to establish some control over how distributions will be taken after your death.

What is a surviving spouse’s elective share?

An elective share is the statutory right of a surviving spouse to receive a specified share of his or her deceased spouse’s estate instead of accepting the provisions in the spouse’s will. The elective share protects a surviving spouse from being disinherited by his or her spouse.

Example(s): Bob dies and leaves his wife, Ann, $10,000 in his will. Bob’s total estate is worth $500,000. The state in which Bob and Ann lived provides that a surviving spouse is entitled to one-half of the decedent’s estate. Ann elects to take against the will and receives $250,000.

The elective share is determined under state law and varies from state to state. In some states, a surviving spouse might receive one-third or one-half of the deceased spouse’s estate. In other states, the percentage a surviving spouse receives depends on the length of the marriage. For example, the spousal elective share might increase with each year of marriage, up to a maximum of 50%.

The type of property interests subject to an elective share also varies from state to state. Some states may define the estate subject to an elective share broadly to include almost everything owned by the decedent. Other states may restrict the election to probate property. In that case, property that passes outside probate, such as property held by a trust, may not be subject to an elective share.

In community property states, each spouse owns one-half of community property (in general, property acquired while the spouses are married), so there is generally no need for elective shares in community property states. Also, a surviving spouse may already have rights in the deceased spouse’s retirement plans or benefits, without the need for an elective share. An elective share election is made with the probate court, which will then generally enforce the surviving spouse’s rights.


What is a disclaimer of property? 

A disclaimer is an estate planning tool that allows you to redistribute transfers of property free from transfer taxes. A disclaimer is your refusal to accept a gift, bequest, or other form of property transfer. Once disclaimed, the property is then distributed to the next recipient. As a disclaimant, you are not regarded as having received the property, or having transferred the property. As a result, no gift, estate, or generation-skipping transfer tax is imposed on your disclaimer of the property.

After you receive a gift or bequest, you generally have up to nine months to decide whether to disclaim the property. (State law can provide a shorter period.) During that period, you may not accept any of the benefits of the property if you ultimately decide to disclaim the property. When you disclaim the property, you may not direct who is to receive the property. The property passes as if you never held an interest in it. For example, you disclaim property left to you by your spouse, and it then passes to your children under the terms of your spouse’s will.

The disclaimer must generally be in writing and be signed, and specifically identify the interest in the property being disclaimed. State law may impose other requirements, such as that the disclaimer may need to be acknowledged, witnessed, or recorded.

What are some reasons for disclaiming property?

• You already have enough property.

• You can shift income-producing property to someone in a lower income tax bracket. (However, unearned income of a child subject to the kiddie tax may be taxed at your income tax rate. The kiddie tax rules apply to (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.)

• Disclaiming the property, or an interest in the property, may enable the property to qualify for a marital or charitable deduction.

• Disclaimers can be used to make changes to an estate plan at a later time.

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