Estate planning: More than preparing your will

I got a call from a reader named Tom who said he had prepared his will and was glad to have his estate planning done. Unfortunately, preparing a will is only part of the process of estate planning, and only one of the tasks that need to be completed. There are several other issues that need to be addressed in the estate planning process. Some of them are discussed in this article.

Key Points

• You should have an advanced health care directive and a durable power of attorney.

• Consider having children or a trust to be owners of your life insurance policies.

• Beneficiary designations of IRAs, pension plans should be part of planning.

Advanced health care directive

Everyone, including young adults, should execute an “advanced health care directive.” Advanced health care directives give directions as to how you want to be cared for when you are unable to make your wishes known because of a serious illness or accident.

An advanced health care directive should address the Health Insurance and Portability and Accountability Act. HIPPA restricts medical personnel from giving out medical information to those who need to make medical decisions for the incapacitated person. A properly drafted advanced health care directive should authorize medical personnel to disclose medical information to those who will be making medical decisions.

Durable power of attorney

In addition to empowering someone to make medical decisions for them in the event they are incapacitated, individuals should also prepare a “durable power of attorney.” A power of attorney is durable if it goes into effect when the individual is incapacitated.

A durable power of attorney, in addition to appointing someone to handle the financial affairs of the incapacitated person, will specify what powers and restrictions the power of attorney will have.

For example, Tom’s document may allow his power of attorney to manage his farm, but restrict him from selling his real estate.

Ownership of life insurance

If a life insurance policy is owned by the deceased, the proceeds, which are the face value of the life insurance paid at death, become part of his or her estate. This means that the face value will potentially increase estate taxes.

If the surviving spouse is the owner and beneficiary of the deceased’s policy, those proceeds, if not spent prior to the survivor’s death, will increase the survivor’s estate.

To prevent those problems, the policy can be owned by the generation below the insured.

The children can own the policy, or a trust, with the children as beneficiaries, can be created to own the policy.

Beneficiaries retirement plans

All IRAs and qualified retirement plans, such as a Keogh or 401(k) plan, have beneficiaries designated by the owner of the plan.

If the beneficiary is a person, rather than an estate, the distribution rules are generally much more flexible and allow for a longer distribution time that is based on the life expectancy of the beneficiary.

For example, if Tom dies at age 50, his son Bill, who is his only living heir, will inherit his IRA. If Bill is designated as Tom’s beneficiary, he can spread distributions of the IRA over his life expectancy. If Tom’s estate is the beneficiary, Bill will still inherit the IRA, but will have to take distribution of the entire IRA within five years of Tom’s death.

Tangible personal property list

Often, one of the most contentious parts of settling estates involves the distribution of the deceased’s personal property.

There are many methods that have been devised to accomplish this distribution fairly, but one method is for the deceased to complete a list of important personal items and to designate which items should go to which heirs.

To be most effective, this list should be referenced in the deceased person’s will.

As always, consult with an attorney before proceeding.

Anderson is a farm financial management consultant in Redwood Falls. E-mail him at bob@farmfinancialsolutions.com.

This article published in the July, 2010 edition of THE FARMER.

All rights reserved. Copyright Farm Progress Cos. 2010.