Effective for 2011 and 2012, Congress provided affluent taxpayers an extraordinary opportunity to transfer wealth by eliminating estate and gift tax on assets worth less than $5 million, or $10 million for a married couple. This great news, however, only affects a small percentage of the population.
Regardless of wealth, all of us need fundamental estate planning, which includes a Power of Attorney, Medical Directive, and a Will. The Power of Attorney and Medical Directive name an agent in the event you are incapacitated or unavailable to handle financial and health matters, respectively. The Power of Attorney and Medical Directive apply during life and terminate upon death. Absent a Power of Attorney or Medical Directive, a judge may appoint a guardian to handle those affairs.
In many states the Living Will is incorporated within the Medical Directive or it may be a separate document. The Living Will provides that, in the event your life is over and you have no cognitive ability, it is your desire that you not be artificially prolonged on life support. Without a Living Will, there is a presumption that you want to be kept alive on life support. In a couple of well publicized cases over the last several years, where there was no Living Will, the government was involved in determining whether or not the family was allowed to remove an individual from life support. Thus, it is important to make your wishes known one way or the other.
Your Will disposes of your assets upon death. Absent a Will, state law will determine how your assets are distributed. Not only will state law determine the beneficiaries, but there would be considerably more confusion and expense in determining how the assets are distributed and who is in charge as the fiduciary to oversee the estate. Additional problems can result without a Will. For example, assets may be distributed outright to beneficiaries where a Trust is necessary. Trusts are necessary to protect beneficiaries who are minors, spendthrifts, have special needs, and may get divorced or sued.
Lifetime trusts oftentimes are the fourth important estate planning tool. I have written extensively on using Revocable Living Trusts to avoid probate, so I will not repeat those comments here.
Besides having the necessary documents in place, you need to ensure your family members know where you keep the original documents. It is difficult to prove that copies of documents are the last signed documents if the originals are lost. Further, you should keep an updated list of assets so your family knows your financial structure.
In sum, federal estate and gift savings for 2011 and 2012 affect the wealthy. But there are important reasons why everyone would benefit from a Will, Power of Attorney and Medical Directive, and in many cases, a Revocable Living Trust. These essential documents apply regardless of net worth.