There is a lot of information your heirs should know which does not necessarily fit into a Will, Trust or other component of an estate plan. The solution is a Letter of Instruction which can provide your heirs with guidance if you die or become incapacitated.

A Letter of Instruction is a legally non-binding document that gives your heirs information crucial to helping them tie up your affairs. Without such a letter, heirs can miss important items.

The following are some items which can be included in a letter:

  • A list of people to contact when you die and a list of beneficiaries of your estate plan
  • The location of important documents such as your Will, insurance policies, financial statements, deeds and birth certificates
  • A list of assets such as bank accounts, investment accounts, insurance policies, real estate holdings and military benefits
  • Passwords and PINs (personal identification numbers) for online accounts
  • The location of safe deposit boxes
  • A list of contact information for lawyers, financial planners, brokers, tax preparers and insurance agents
  • A list of credit card accounts and other debts
  • Instructions for funeral or memorial service
  • Instructions for distribution of sentimental personal items

Once the letter is written, store it in an easily accessible place and tell trusted family members about it.

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Social Security provides benefits to a worker’s spouse or ex-spouse and to a deceased worker’s surviving spouse.

Spouses are entitled to benefits if the marriage lasted at least 10 years. A spouse is entitled to an amount equal to one-half of the worker’s full retirement benefit. To receive this benefit, the spouse must be at his full retirement age or caring for a child who is under 16 years of age. In addition, the spouse must file for Social Security benefits even if he is not receiving them.

If you could receive more from Social Security based on your own earnings record than through the spousal benefit, the Social Security Administration will automatically provide you with the larger benefit. If you have reached your full retirement age, you may also elect to receive spousal benefits and delay taking your benefits, allowing your own delayed retirement credits to accrue, and switch to your own benefits at a later date. You cannot elect to receive spousal benefits below your retirement age and later switch to your own benefits.

An ex-spouse is also entitled to receive one-half of the worker’s full retirement benefit so long as the marriage lasted at least 10 years. Unlike a current spouse, a divorced spouse can begin receiving benefits even before the worker has applied for benefits. The worker must be at least 62 years old and the divorce must have been final for at least two years.

If you are a surviving spouse at full retirement age, you are entitled to the worker’s full retirement benefits. If the worker delayed retirement, the survivor’s benefit will be higher. Survivors are entitled to benefits even if they are divorced as long as they had been married for at least 10 years. If you file for benefits after you are over age 60 but below full retirement age, you will receive a reduced percentage of the worker’s benefits. Surviving spouses who are younger than 60 receive benefits only in limited circumstances, such as cases of disability or caring for a disabled child.

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As she points out in her article titled, Estate Planning for Your Eighteen Year Old: What You Need to do Now May Surprise You, Lauren Keenan Rote points out that becoming an adult comes with certain privacy rights and independence under the law.

An eighteen year old has rights under HIPAA (Health Insurance Portability and Accountability Act) and medical professionals will require a release to be signed by your child before sharing his health care information or records with you.

In the event your child is incapacitated, even temporarily, he will be unable to consent to you accessing his vital health records or authorize you to make decisions on his behalf. Without Medical Powers of Attorney and General Durable Powers of Attorney for Property, you will likely find that you are unable to act on your child’s behalf and that court intervention is required for you to do so.

There are two critical documents any individual over the age of eighteen should have:

  1. Medical Power of Attorney – This document appoints an agent to make health care decisions, including end-of-life care decisions, on your child’s behalf. This document should include a HIPAA release authorizing the agent to access important health records.
  2. General Durable Power of Attorney for Property – This document appoints an agent to handle financial transactions on your child’s behalf. This includes transactions involving bank accounts, scholarship funds from school and rental agreements.

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In his article, Estate Planning 101: Don’t forget the Digital Assets, Eric McWhinnie points out the need to consider intangible property when creating your estate plan.

The internet is increasingly becoming the main storage of an individual’s financial life. A survey from Pew Research shows that 51% of American adults bank online and 32% bank using their mobile phones. Nine out of 10 Americans use the Internet.

“Digital assets hold both financial and sentimental value to family and friends that should be addressed in the estate planning process”, said James Lamm, an estate planning and tax attorney. “The first challenges are finding that person’s digital property and identifying which digital property is valuable or significant. Additional obstacles with digital property are passwords, encryption, computer crime law and data privacy laws. Any one of them can make it practically impossible to do anything with the digital property unless you’ve planned ahead.” Continue reading

Eight of the most common estate planning objectives which influence a couple’s estate plan are set forth in an article by Lewis Saret in Forbes magazine.

  1. PROVIDE FOR LOVED ONES  The most important estate planning objective for most married couples is to ensure that their loved ones are provided for if one or both spouses become incapacitated or die. The loved ones are the surviving spouse, children (especially minor children), relatives and pets.
  2. MINIMIZE TAXES  Another important objective is to minimize taxes. This includes federal estate taxes and state estate taxes.
  3. PROTECT ASSETS PASSING TO SURVIVING SPOUSES AND HEIRS  Married couples want to protect their assets which should pass to their surviving spouses and their children from going to creditors and future spouses in the case of divorce.
  4. SIMPLE AND INEXPENSIVE  Couples want their plans to be as straight forward and of the lowest cost possible.
  5. PRIVACY  Couples prefer their finances remain private to protect the surviving spouse from being targeted by fraudulent schemes and solicitations.
  6. CONTROL OVER ASSETS  Many couples prefer to retain control over their assets so the assets are not subject to the claims of their children’s creditors. Couples with significant amounts of wealth which they have created themselves, not inherited, express concern about the impact of the wealth on their children.
  7. INCAPACITY  Couples take steps to deal with incapacity by putting in place durable powers of attorney for property and health care.
  8. ASSET MANAGEMENT  Couples want in place a system which manages their assets when they are no longer able to do so.

All of these objectives can be attained by consulting with an estate planning attorney.

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Keeping beneficiary designations up to date is important as Jason Zweig points out in his article, When Your 401(k) Has a Bad Heir Day.

He cites the example of three adult children of a wealthy telemarketing executive who died suddenly. His Will states that all of his assets are to go to his children. Most of his assets were in a 401(k) account which named his wife, married only two months earlier, as the beneficiary of the account.

The executive should have asked his wife to sign a waiver and then name his children as the beneficiaries of the 401(k). It is important to remember that a beneficiary designation overrides the provisions of a Will. Continue reading

It is common for spouses to name each other as the beneficiary of their IRA and their children as the successor beneficiary if they are the second spouse to die. But as Sandra Block points out in her article, “Getting the Most From Inherited IRAs”, although your children will still inherit the money, they will be required to take all of the money out of the IRA by the end of the fifth year after your death if you die before you turn 70 1/2. If you die after 70 1/2, the required payments can be based on your life expectancy which will be at most about 15 years.

A way around this problem is to name your children as the beneficiaries, not your trust. This gives your children a lot more flexibility because once they transfer the funds to an inherited IRA, they can take annual distributions based on their own life expectancies. A 50 year old heir could stretch distributions (and the life of the tax shelter) over the next 34 years. For example, a 50 year old beneficiary of a $100,000 IRA would be required to take a first year distribution of about $2900, which is about half of the amount he would be required to take if his father died at age 72 and left the IRA to the estate.

Be careful about transferring the funds. They should be transferred directly from your IRA to their inherited IRAs. There is no 60 day window to deposit the money in new accounts as there is for other rollovers. Continue reading

In general, IRAs, 401(k)s and pensions are exempt from the account owner’s creditors under Illinois law. They cannot be seized or garnished by creditors. In an article by Bruce E. Bell, Protecting Retirement Plan Assets from Creditors, he points out that assets passing to beneficiaries of the deceased plan owner are also in many cases exempt from claims of creditors. Exceptions include divorcing spouses, child support obligations and some Federal tax obligations.

Regarding bankruptcy, IRAs are exempt subject to a statutory cap which is currently $1,283,025. IRA owners can avoid this cap by creating a trust to hold the owner’s retirement assets at the owner’s death. With this trust in place, the beneficiaries of the IRA owner are protected in the event a beneficiary declares bankruptcy.

It is important not to comingle conventional IRA assets with funds rolled over from qualified retirement plans. The qualified retirement plan funds should be rolled into a separate IRA containing only funds which originated from qualified retirement plans. This segregating will allow all qualified retirement plan funds to be exempt from bankruptcy. Continue reading

When planning for a special needs child, sometimes traditional planning ideas which work well for a family that is not addressing these issues do not work well for a family which is. In a recent article in Kiplinger’s magazine titled “Making a Plan for a Special-Needs Child”, it is pointed out that a Will should be in place which designates a guardian. This guardian should be clear about the guardian’s responsibilities and the parents’ expectations.

The parents should write a list stating the names of the child’s doctors, what the parents want for the child in the long term and the child’s likes and dislikes even as specific as the type of music the child likes.

Life insurance on both parents should be considered even if one parent does not work outside of the home but is the child’s caregiver.

A Third Party Special Needs Trust can be put in place to hold money for the child without counting as an asset for qualifying for Supplemental Security Income and Medicaid. The money in the Special Needs Trust can be used for services not covered by government programs or for extra things to improve the child’s quality of life like vacations, home furnishings and almost anything else except for food and rent. The Special Needs Trust can be the beneficiary of the parents’ life insurance policies and retirement plans. Friends and relatives can make gifts to the Special Needs Trust for the child’s birthday and other holidays. Continue reading

A decision by the Supreme Court of Montana, In the Matter of the Estate of Marilyn Hendrick, overturned a lower court running concerning a joint will.

The facts of the case are as follows: Marilyn and Stanley Hendrick executed a joint will. Each had three children from a previous marriages. Stanley died in 1995. In 1996, Marilyn transferred much of her property to her trust. Marilyn’s three daughters and one of Stanley’s children were the beneficiaries of the trust.

Marilyn died in 2012. Under the terms of the joint will, the residue of Marilyn’s estate was to be divided equally among the six children. The residue consisted of assets totaling about $235,000. Those same assets comprising the residue were transferred in 1996 by Marilyn to her trust.

One of the children from Stanley’s marriage who was not a beneficiary under Marilyn’s trust filed a petition objecting to the distribution of the trust assets according to the terms of the trust which did not include her as a beneficiary.

The lower court ruled in favor of the child and ordered that the trust assets were to be distributed equally among the six children.

On appeal, the Supreme Court of Montana reversed the lower court’s decision holding that because the joint will left to the surviving spouse (Marilyn) the “entire residue” of the property owned by the deceased spouse (Stanley) at the time of his death, the will plainly left the entire residue of Stanley’s estate to Marilyn. The only explicit restriction on this devise was that Marilyn was not allowed to alter, amend or revoke the will.

The Supreme Court went on to state that it may not construe the general purpose of the will in a way that alters its specific provisions by imposing further restrictions on Marilyn’s inheritance or granting additional rights to the children.

Joint wills are an invitation to litigation. It is almost always best for each spouse to have his own will. The same applies to joint trusts. The cost of putting in place a second will or trust for the other spouse is miniscule compared to the cost of litigation. Pennywise and pound foolish is the appropriate analogy.

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