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How to create a bulletproof estate plan

Creating an estate plan is a lot like getting into better shape. We all know we should do it, but most of us never make the first move because the task seems daunting.

You will have to look elsewhere for a diet and exercise plan. But if you need an estate plan, you can be sure that the seven easy steps outlined below will help you, with an assist from an attorney. (If you're wondering whether you really need a lawyer’s help, read "The Trouble With DIY Estate Planning," below.)

Let’s face it: We all know that a will is important. You need one to ensure that your chosen heirs will get the assets that you want to leave to them. In your will, you name an executor who will have the power and responsibility to pay your debts and distribute the remainder of your estate according to your wishes. If you die without a will, your property will pass to your survivors based on your state’s laws of intestacy. In most states, that means that your spouse and your children will split your legacy. If you are single, your assets will go to blood relatives even if you would have preferred a friend to inherit them. Yet only 43 percent of adults in the U.S. have a will, according to a 2011 Harris Interactive survey.

You can also use a revocable living trust to pass property to your heirs after your death. Unlike wills, living trusts avoid probate, the process by which a court determines that a will is valid. In some states probate is costly and time-consuming. But even if you create a living trust, a will should still be the cornerstone of your estate plan if you have minor children, because you also use it to name a guardian for them. If you die without a will, a judge will decide with whom your children will live after you’re gone.

You should also safeguard the assets that you leave minor children by creating a trust for their benefit in your will. In it you name a trustee who will follow your instructions for managing the assets that you leave to your kids. The trustee can be a relative, friend, or professional such as a banker or lawyer. If you fail to establish a trust in your will for your minor children, a court will name a guardian to oversee the property they inherit.

It is important to understand that not all of your assets will pass to your survivors through your will, because some types of property do not go through probate. For instance, if you own a house jointly and your spouse has the right of survivorship (a type of ownership that is spelled out in your house deed), he or she will get your share of the home when you die. If you open a payable-on-death savings or brokerage account, the cash and securities in those accounts will go directly to the beneficiary that you name on the bank or brokerage house’s forms. Moreover, your 401(k), individual retirement accounts, and life-insurance policies will pass to beneficiaries you designate in those documents.

If you work with an attorney on your estate plan, show him or her the beneficiary forms that you have filled out in the past; you might find some surprises. Paul D. Hunt, an estate-planning lawyer in Alameda, Calif., once asked a client why he had listed someone whom he had never mentioned during the planning process as the beneficiary of an account. Hunt recalls: “I called the client and he said, ‘Oh, that’s my brother. I haven’t seen him in 26 years and since then I’ve been married and have had four kids, so we’d better change that.’ ”

A vast majority of Americans do not have to fret about federal estate tax. Only about one-half of 1 percent of estates will owe federal estate tax under the current law, which Congress passed on Jan. 1 of this year.

The federal estate and gift-tax exemption is now $5.25 million and will increase with inflation each year. Spouses may combine their exemptions, so married couples can leave or give away $10.5 million without owing any federal estate tax. Say, for example, that a husband and wife each have $3 million in assets. If the husband dies first and leaves everything to his wife, no estate tax is due. When the wife dies, leaving $6 million to their children, no tax is due because her estate can use a portion of the husband’s unused exemption.

But to use this strategy, the wife must file an estate tax return for the husband’s estate even if no tax is due. The deadline is nine months after the date of death, but the estate’s executor may ask for a six-month extension. But you should still discuss the topic with your attorney, because 15 states and the District of Columbia impose their own estate tax, some on estates that are too small to owe the federal tax.

Sometimes everything you want to tell your survivors does not belong in your will. If you want to describe what type of funeral arrangements you desire, for example, you can do so in a separate letter. You can also use the letter to list items of sentimental value that you want certain heirs to inherit. Give the letter to a trusted relative, friend, or your attorney. Some states do not recognize such letters as legal documents, but your family members and other loved ones are likely to respect your wishes.

Estate planning is not only about taking care of your survivors. A complete estate plan should also insure that your wishes regarding your money and your health care prevail even if you become too sick to make your own decisions. Create a durable power of attorney (DPA) so someone can manage your money if you are ever too sick to do so. In this document, you name a trusted relative or friend to take charge of your finances when you cannot. Unlike an ordinary power of attorney, a DPA remains in effect after you can no longer manage your own affairs. If you do not have a DPA and become incapacitated, a relative or friend will have to ask a judge to appoint a conservator or guardian to manage your assets and pay your bills.

Choosing the person who will serve as your financial proxy is often a difficult decision, and sometimes a relative is not the best choice. Consider the case of the socialite and philanthropist Brooke Astor, who gave her son, Anthony D. Marshall, her power of attorney. She died at age 105. Two years later a Manhattan jury convicted her octogenarian son of stealing millions of dollars from her when she was alive. “I feel sorry for Mrs. Astor,” said Deborah Jacobs, an estate-planning attorney in New York City and author of “Estate Planning Smarts” (DJWorking Unlimited, 2011). “She had one son and she wanted to trust him, but she was wrong to do so.”

One possible solution: Name co-trustees, perhaps a relative and a professional such as a lawyer or financial adviser. Be warned that some financial institutions have their own DPA forms and may be skittish about accepting a document that your attorney prepares. To head off a potential hassle, talk with your bank’s manager while you are still healthy. Ask him or her to keep the DPA that your attorney draws up on file and fill out the bank’s form if your banker insists.

To maintain control over the type of medical care you receive when you are near death, you should sign a living will and a DPA for health care. (In some states, a health care directive combines the two documents.) With a living will, you state the type of medical procedures that you do or do not want. In a DPA for health care, you name a health care agent or proxy who makes sure that doctors and other medical professionals carry out your wishes if you are too sick to speak for yourself.

Your attorney should also prepare a so-called HIPAA release form. Without it, privacy regulations in the federal Health Insurance Portability and Accountability Act of 1996 may prevent health care personnel from releasing your medical records to your health care proxy. Also make sure that your lawyer includes a clause in your living will and health care DPA stating that you give your health care agent the right to receive information about your health status and medical care under HIPAA rules.

If you have not given much thought to what type of medical care you want, the American Bar Association’s “Consumer’s Toolkit for Health Care Advance Planning,” is a useful guide.

Your executor will remember you more fondly if you organize your estate-planning paperwork and financial records, and store them in a safe yet accessible place. Keep the original documents in your lawyer’s vault or in a bank safe-deposit box or home safe. Be aware that if your spouse or someone else is not the co-owner of your safe-deposit box, your executor may have to file a petition with the court for permission to open it.

Pull together any of the documents your executor will need, such as the deed to your burial plot; insurance policies; statements from your bank, brokerage house, and mutual-fund accounts; and pension and other employee-benefit information. Maintain an up-to-date list of your assets, the names and telephone numbers of your legal and financial advisers, and an inventory of the items in your safe-deposit box. Store such documents at home in a locked, waterproof, and fireproof metal box, file cabinet, or safe.

Do not forget about your digital assets, such as an online stock-trading account. “Keep a separate list of your accounts and passwords and put it in a safe-deposit box or a vault, or give it to a person you trust,” David A. Shulman, an estate-planning attorney in Fort Lauderdale, Fla., said.

And finally, review your estate plan at least every five years. Make sure all of your documents still reflect your desires, and that your beneficiaries and financial and health care proxies are still willing and able to serve. In addition, you should revisit your estate plan if Congress revises the estate-tax law or whenever there is a major change in your life, such as a birth, death, marriage, or divorce.

The trouble with DIY estate planning

Some people who pay professionals to fill out their tax returns, mow their lawns, or color their hair cannot bring themselves to pay a lawyer to prepare an estate plan for them. They do not want to spend thousands of dollars on something that they think they can do themselves with will-writing software that sells for less than $100. It’s possible to get a very basic estate plan for $1,200 to $2,000 if you shop around, says Deborah Jacobs, a lawyer in New York City.

An experienced attorney can use legal software more efficiently than you can. More important, he or she can offer customized solutions if your situation is complicated. Your needs are too complex for a do-it-yourself estate plan if you must provide for a disabled child, you owe estate taxes, or you own a business. Consumer Reports tested three will-writing products in 2011 with the help of a law professor specializing in estates and trusts. We concluded that all were inadequate unless a very simple plan was required, such as one that leaves everything to a spouse, with no other provisions.

Jacobs suggests a compromise. “I encourage consumers to seek the help of a lawyer and I also tell them to shop aggressively on price,” she said. “You can go out and get multiple bids, just as you would if you were getting your house painted.”

Start by getting referrals to lawyers with expertise in estate planning from your accountant or financial planner, or check the websites of the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys for estate-planning specialists in your area.

Then call a few and ask how much they will charge, if anything, to meet with you for an hour and discuss your estate planning needs. After your consultation, some attorneys will quote a flat fee for an estate plan; others bill by the hour and will estimate how much time it will take to draft the legal documents you need. Concentrate on negotiating the lowest price you can with the lawyers you like the best.

This article appeared in the November 2013 issue of Consumer Reports Money Adviser.

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