What You need To Know About Estate Planning

Traditionally, "estate planning" has referred to the legal documents and decisions that provide for distributing property and assets after a person's death. More recently, however, the increasing popularity of "elder law" as a legal specialty has shifted the focus. Now estate planning can involve maintaining quality of life during one's final years and executing documents that authorize someone else to make medical and financial decisions for you in the event of incapacity.

1. What is a durable healthcare power of attorney?

2. What is a living will?

3. What is an advance medical directive?

4. If I grant my power of attorney to someone else, can he or she make medical and financial decisions on my behalf?

5. Can I distribute all my assets after my death through a will?

6. What happens to my property that is not covered by my will?

7. What is a living trust?

8. What other documents will I need with a trust?

9. Whom should I choose as the trustee of my living trust?

10. Will my heirs have to pay estate taxes when I die?

1. What is a durable healthcare power of attorney?
Adults of any age should take the time to think about what life-sustaining efforts they would want taken--or not taken--in the event they become seriously ill or injured. A durable healthcare power of attorney, also known as a healthcare proxy, is a legal document that is recognized in every state. It allows you to designate someone to have legal authority to grant or rescind permission for any kind of medical treatment on your behalf. The power of attorney can be very specific as to what type of treatment your agent may approve or refuse, or it can rely on your agent's discretion. Such a power is revocable and amendable at any time.

2. What is a living will?
A living will is a statement of your preferences about medical care in the event of a terminal illness. Also known as a healthcare declaration, it describes how far you want your physicians to go in providing care when death would otherwise be imminent. It also provides for carrying out your wishes about relief from pain. Unlike the healthcare power of attorney, which is in effect anytime you cannot express your own wishes, a living will applies only in a terminal illness.

3. What is an advance medical directive?
Together these two documents--a durable healthcare power of attorney and a living will--are referred to as an advance medical directive. You should sign both. Preprinted forms are available for both documents, but they tend to be very general in nature. An attorney can personalize the documents to reflect your needs and wishes and ensure that they are legal in your state. Once the documents are drafted, it is important to give copies to your agent (and an alternate, if you appoint one) and to make sure that others know the document exists and where to find it.

4. If I grant my power of attorney to someone else, can he or she make medical and financial decisions on my behalf?
Not unless that person is specifically named as your agent for both purposes. You need to draw up separate powers of attorney--one for healthcare decisions described above and another for financial decisions. A durable power of attorney for financial responsibilities is created while you are competent. It authorizes someone to make financial decisions on your behalf when you are unable to do so.

5. Can I distribute all my assets after my death through a will?
A will is a legal document traditionally used to give instructions about how you want your property to be disbursed after your death. A will affects the distribution only of certain property, called "probate property," including any property you titled in your name only, property you own jointly without right of survivorship (also called tenants in common), and life insurance policies payable to your estate, not to another person or institution.

6. What happens to my property that is not covered by my will?
Property that does not pass through probate, known as "nonprobate property," includes property you own in a "joint tenancy with right of survivorship." Such jointly owned property passes automatically to the surviving co-owner. Married couples frequently own their homes jointly with a right of survivorship. Nonprobate property also includes life insurance and retirement benefits paid directly to others, property held in trust, and bank accounts that are payable upon death to a named survivor.

7. What is a living trust?
This legal document has become increasingly popular as a way to pass on assets and property after death. Property held in trust passes directly to named beneficiaries without going through probate. A living trust also allows the holder to control how property will be managed after his or her death. And if the person becomes incapacitated by an illness or accident, a living trust allows a trustee to handle the financial matters related to the trust property, avoiding the need for a court-appointed guardian or conservator. The creator of a "revocable" trust may change the terms of the document at any time during his or her life.

A trust is usually more expensive to set up than a will, but trusts avoid the costs and delays associated with probate after death. However, to be effective, all covered property must be retitled in the name of the trust, a time-consuming process that can involve a lot of paperwork. Consequently, many people who take steps to draw up trust documents never fund them, effectively rendering them worthless.

8. What other documents will I need with a trust?
It's a good idea to write a "pour-over will" when you create a trust. If you leave property outside your trust, intentionally or by mistake, it may pass through probate. A pour-over will directs your property into the trust after probate is completed. Many lawyers also provide a pour-over will when they create a living trust. Assuming the majority of your assets--real estate, stocks, bonds, bank accounts, and vehicles--have been included in your trust, any of your remaining assets may qualify for a quicker, less expensive form of probate designed for small estates.

9. Whom should I choose as the trustee of my living trust?
When you create a living trust, you select both an initial trustee and a successor trustee. Often a trust creator names himself or herself to serve as the initial trustee. This allows the creator to keep complete control over the trust property during his or her lifetime. Or the creator can select another person or an institution such as a bank to be the trustee to manage the trust property. The creator may change the terms of the trust during his or her lifetime or revoke it completely. But the terms of the trust cannot be changed after the creator's death.

10. Will my heirs have to pay estate taxes when I die?
It depends on the value of your estate. The federal government currently assesses taxes on estates valued at $600,000 or more. Most estates are worth less than this amount and avoid the hefty federal estate tax which begins at 37 percent and can go as high as 55 percent depending on the value of the assets involved. But many middle-class families may be surprised to learn that their property exceeds the $600,000 threshold, which is not hard to do if you own a home, car, life insurance policies, and some investments. When one spouse dies, he or she can leave all of his or her assets to the survivor tax free, but that can create tax problems for the surviving spouse if his or her estate exceeds the $600,000 threshold. Attorneys can advise clients how best to minimize or avoid estate taxes by transferring ownership of certain assets and through planned gifting to family members, trusts, and charities.

Beginning in 1998, the threshold for imposing federal estate taxes will increase to $625,000 and gradually rise to $1 million by the year 2006. For closely held small businesses and family farms, the $1 million threshold for taxing estates will take effect in 1998.

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