Crucial Coordination

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Crucial Coordination

Sometimes we are most vulnerable in life when we do not know what we do not know. So it is with estate planning. Have you coordinated your estate planning to provide smooth sailing ahead for you, your loved ones, and your assets? In this article we will consider a few areas you may need to shore up to ensure that your estate plan is truly ship-shape.

Estate Plan Essentials

Most people mistakenly think of “estate planning” as merely a distribution plan for assets after death. While that is an important aspect of estate planning, the process really begins with life planning. With life expectancies on the increase there is a corresponding increase in the likelihood that our mental and physical abilities will not keep up with our birthdays. Consequently, future falls, strokes, or Alzheimer’s can leave us legally incapacitated. What then?

What legal arrangements have you made for your own care in the event you become incapacitated? Have you legally appointed trusted family members or friends to make your personal, health care, and financial decisions? If no, then a judge who does not know you will appoint someone for you through an expensive court process that will invade your privacy, too.

Do you still have minor children in the home? If yes, have you legally appointed guardians (i.e., backup parents) to rear them to adulthood should they be orphaned? This is one of the most fundamental responsibilities of parenthood. In the absence of proper legal planning on your part a judge may make this decision for you. Who knows the needs of your children and the best guardians for them, you, or that judge?

When it comes to the distribution of your assets, have you taken steps to protect the inheritance “from” and “for” your loved ones depending on their unique needs and circumstances? Squandering, divorces, lawsuits, or bankruptcies can quickly consume a lifetime of work represented in an inheritance. Do you have any family members with special needs or potential problems with addictions? When it comes to inheritance protection planning, remember the words of famous jurist Oliver Wendell Holmes who advised “Put not your trust in money, but put your money in trust.”

Retirement Plan Requirements

Speaking of protecting the inheritance, do you have any retirement funds? For many Americans retirement funds are a large part of their estates. Until a unanimous decision by the U.S. Supreme Court in June of 2014, the conventional estate (and income tax) planning wisdom was to designate adult children as the direct, contingent beneficiaries after one’s own spouse rather than a trust for the benefit of those adult children. This approach avoided the complexities of designating a trust as beneficiary for the adult children when seeking to maximize the opportunity to “stretch” retirement fund distributions over their respective life expectancies.

In the case of Clark v. Rameker, however, the high court ruled that, unless otherwise exempted under applicable state law, “retirement funds” are not entitled to any special asset protection treatment and would be subject to the creditors of direct beneficiaries who are individuals. (Note: If the surviving spouse rolls the inherited retirement funds into his or her own IRA, then such funds would be protected for him or her.) Consequently, if you want to protect retirement fund distributions from the potential creditors of your loved ones, then special alternative arrangements should be evaluated sooner rather than later. If you want to protect and maximize the “stretch” option for non-spousal beneficiaries, then you may want to consider creating a stand-alone IRA trust to serve as the designated beneficiary of your retirement funds.

Long-Term Care Logistics

Fortunately, you can make sure all of your “estate essentials” are in place and that you have secured protection for retirement fund distributions for your loved ones, but unless you make plans to fund your potential long-term care expenses all of your planning may be for naught. In short, there may be no “inheritance” to leave. Why?

If you or your spouse need long-term care, expect some sticker shock. According to the latest figures from 2018*, the average annual cost of a private room in a skilled nursing facility is $100,375, and $48,000 for a one-room unit in an assisted living facility. When someone first enters a long-term care facility most of their initial expenses are paid out of cash and savings. Next, their investments are liquidated and, finally, retirement funds are drawn down.

Once the monthly long-term care bills are being paid from retirement funds, the fund balance can disappear rather quickly. Every dollar withdrawn is subject to income taxation at ordinary income rates because the funds were created with pre-tax dollars and have grown tax-deferred until withdrawal.

Fortunately, you can make plans now to protect and preserve your assets from long-term care liquidation later.

One alternative is to engage an elder law attorney who can help you with legal strategies designed to help you qualify for Medicaid eligibility, if needed.

Another alternative is to acquire long-term care insurance to provide the dollars should you need them. This insurance is now available in a variety of forms that can coordinate nicely with your budget and estate planning objectives.

For example, one popular version allows you access to the cash value of the policy, pays for your long-term care if needed, and pays a life insurance death benefit to your loved ones if you do not need long-term care.

In the end the only way to protect yourself, your loved ones, and your assets is through a well-designed strategy that coordinates your estate essentials, retirement funds, and long-term care planning. Be sure to work with experienced legal counsel who can coordinate a seaworthy strategy with your financial advisor and insurance professional. This is not a DIY project.

*Genworth “Cost of Care Survey 2018”

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