Making Final Choices While They're Yours
By Tom Lauricella
Wall Street Journal, October 29, 2006
After decades of working hard and saving, many people think of retirement planning as a way to reward themselves. But unfortunately, it's just as important to plan for the inevitable: Nobody lives forever, and as you age, the risk grows that you won't be able to make your own financial and medical decisions.
These are topics no one enjoys thinking about. But just as it's critical to make sure your finances are squared away as retirement approaches, it's important to make sure your legal house is in order.
For some people, there may not be much to do. For example, if you don't own a home and you have limited savings, there's no need for complicated estate planning. But in an era where many retirees have multiple retirement accounts and homes that have appreciated considerably in value, there often needs to be a well-thought-out plan for how these assets will be handled at death.
And no matter what your net worth, it's vital to give someone you trust the power to make financial and health-care decisions for you if you become incapacitated.
By making these arrangements ahead of time, you'll spare your family and friends emotional anguish, minimize the time they'll spend with lawyers or in court, and protect the assets you worked so hard to accumulate. If anything, knowing that these matters are taken care of should help you enjoy retirement that much more.
For many people, these tasks are daunting because they involve legal issues and complex documents. That makes it a must to work with an attorney, and one familiar with your state's laws. In addition, while most lawyers can handle basic documents, such as a will, it can pay to seek out an attorney who specializes in estate planning or so-called elder law.
Planning should start with what would happen should you become severely ill and can't manage your own affairs. "If you do become incapacitated, even for a short period of time, the world doesn't stop spinning," says New York attorney Bernard Krooks. "You need someone to make sure your bills are paid, investments and real estate are managed."
The solution is to give someone "durable power of attorney" to handle such matters. Typically, power of attorney is given to a spouse if you are married, but it's important to choose at least one backup (in case, for example, you're in a car accident with your spouse). Increasingly, some people are giving power of attorney to a professional, such as an accountant or attorney. In that case, spell out ahead of time exactly what services will be provided and at what cost.
Most power-of-attorney documents list in general terms the actions that can be taken on your behalf. But some states have specific requirements about which powers need to be spelled out, such as handling retirement-account designations or filing tax returns, says Stuart Zimring, a North Hollywood, Calif., attorney.
Note that Social Security doesn't recognize a "power of attorney" document. It has its own process for appointing what it calls a "representative payee" once someone can't manage his or her own Social Security benefits.
Health-Care Documents
Next on the checklist: a living will and health-care proxy. A living will spells out the types of medical care you want -- or don't want -- if you become incapacitated or terminally ill. A health-care proxy, similar to a power of attorney, grants someone the power to make medical decisions on your behalf. It's important to discuss your wishes with family members and whoever is being named health-care proxy.
"You need to have a comfort level that, even if they don't agree with your decisions, they will honor them," says Mr. Zimring.
Make sure your chosen representatives have signed originals of the health-care documents and of the durable power of attorney.
A Will, Of Course
For many people, a will is something that was drawn up when children were born, then shoved in a safe-deposit box and forgotten. But a will should be updated whenever there are significant changes in life. For example, if a spouse enters a nursing home, it may be smart to remove that person as a direct heir as a way of protecting an inheritance from claims by the nursing facility.
As you head into retirement, re-examine whether more advanced steps are needed for tax planning or other reasons. "Trusts are no longer just for the rich and famous," says Mr. Krooks. "A trust can protect money from creditors, bankruptcy filings, litigation or an ex-spouse."
Be sure to tell family or friends where you have stashed your will if there isn't a copy securely stored with your attorney. Note that safe-deposit boxes typically get sealed upon the death of a holder, delaying access.
Check Your Beneficiaries
A will won't cover all your assets, however. Money from retirement accounts and insurance policies will instead go to whomever you have designated as a beneficiary -- mostly likely when you opened the account or took out the policy.
When pulling together your finances for retirement-planning purposes, check the beneficiaries on any accounts and policies. If you can't locate that information, call the companies.
If for some reason there isn't a named beneficiary on record, the estate is usually the default. That's bad news. If your retirement accounts end up being part of your estate, creditors have access to that money before your family -- an especially troublesome issue if there are big medical bills.
"If you die and you have a bunch of debts, your creditors get the money first," says Martin Finn, an attorney in New York.
Another problem is that your heirs will lose certain tax benefits if retirement accounts become part of your estate. If a spouse is named a beneficiary of a retirement plan -- such as a 401(k) -- or an individual retirement account, he or she can roll the money into his or her own individual retirement account without paying taxes.
If children or other non-spouses are named as IRA beneficiaries, they can draw down the money slowly over their entire lifetime if they wish, only paying tax as the cash comes out. Starting in January, non-spouse beneficiaries of retirement plans like a 401(k) will get the same privilege, thanks to a law change this year.
However, if the accounts pass to the estate, the money has to be withdrawn within five years, forcing your heirs to take a tax hit they could otherwise delay.