Keep Your Wealth in the Family

Editor's note: This article appears in Kiplinger's special issue Success With Your Money.

Deciding how to leave assets to your heirs can be difficult even for the most agreeable of spouses, as Bud and Jacqui Reinfeld can testify. The Reinfelds have several nieces and nephews they would like to provide for, and when they got down to planning their estates after 35 years of marriage, they figured it would be easy.

And it was, for the most part. Both wanted to make the division as equitable as possible. But when it turned out that Jacqui had already promised their house to one of their nieces, that presented a problem.

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To work things out, the Reinfelds, who live in Los Angeles, sought help from Michael Eisenberg, a certified public accountant and financial planner. He helped them draw up a formula that takes into account a possible increase or decrease in the value of the house. “People are amazed at what they don’t know about estate planning,” says Eisenberg. “Once they learn about what they can do, they loosen up a bit.”

Says Bud Reinfeld, “You have to be able to talk to someone who can help you work through the issues.”

Pieces of the plan

As the Reinfelds discovered, an estate plan should be customized to fit your specific goals and circumstances. But every well-crafted plan should include the following pieces:

A will. Nearly 60% of Americans don’t have a will, according to a survey by Lawyers.com, an online database of lawyers from legal publishers LexisNexis Martindale-Hubbell. A will lets you distribute your assets as you choose. The person you name to be your executor or personal representative will gather your assets after your death, handle any probate proceedings and ultimately distribute your assets to your heirs or trustees.

A durable power of attorney for financial matters. Only 26% of those surveyed by Lawyers.com have this valuable document, which names someone to handle your financial affairs if you are unable to do so. A durable power of attorney can go into effect as soon as it is signed. But most states permit a “springing” power that takes effect only if you become incapacitated.

A living will and a durable power of attorney for health care. A health-care power of attorney names someone to make health-care decisions on your behalf if you can’t. It applies even if you’re temporarily incapacitated, by an auto accident, for example. A living will spells out your wishes regarding life-sustaining treatment. It generally takes effect only if you become terminally ill and can’t speak for yourself, or if you are in a persistent vegetative state.

Despite the publicity generated by the case of Terri Schiavo, the Florida woman whose husband and family battled over her treatment after she had been in a persistent vegetative state for 13 years, fewer than 30% of Americans have drafted these documents.

A review of beneficiary designations. Beneficiary designations on assets such as life-insurance policies and IRAs can foil a great estate plan if they contradict other provisions in the plan. Beneficiary designations always take precedence.

Some estate plans include additional documents, such as a revocable living trust. You create a living trust and transfer ownership of your assets to it during your lifetime. You can generally be your own trustee and name a successor to take over if you can’t manage your own affairs. Because the trust is revocable, you have the option of changing or even ending it at any time.

You still need a will, however, to name a guardian for minor children or to direct that any of your assets that did not get transferred to the trust during your lifetime be “poured over” into it after your death.

All of the assets you put in a living trust before your death avoid probate, which is the legal process for gathering your assets after death, paying your debts and distributing the property to your heirs. But a living trust does not help you save on income taxes; you continue to pay income tax on the trust’s earnings on your personal Form 1040. The assets are also part of your taxable estate.

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Midlife checkup

Although everyone should have a basic estate plan that includes a will, specific issues take on special importance at certain points in your life. In particular, midlife couples should:

Pin down durable powers of attorney for financial matters and health care, plus living wills. Create an emergency plan in case a caregiver spouse becomes ill.

Review your pension plan to make sure your spouse understands all of the provisions.

If you own a vacation home in another state, consider putting it into a revocable living trust so that your heirs can avoid probate in that state.

Look into buying long-term-care insurance.

Speak up

Whatever provisions you make in your estate plan, it’s best to tell family members your intentions. It’s better to prepare them now than to surprise them later, especially if you don’t plan to divide your assets equally among members of your family.

And it’s important to update your estate plan to reflect changes in your family’s circumstances. When Carolyn Roberts got divorced 30 years ago, she wrote a will specifying that all of her assets were to be put in trust for her three children, then ages 7, 5 and 3, until they reached age 21, with her brother as trustee.

Twenty years later, she remarried. Her new husband, Laurence Roberts, also had three grown children. At the time, Larry had built up savings and was close to paying off the house he had owned for 17 years. Carolyn had little savings and little equity in her co-op apartment. When they wrote their wills, Larry left his assets to his children, and Carolyn left her property to her kids.

Because of Carolyn’s unhappy experience in her first marriage, she and Larry specified that should any of their children die before they did, the inheritance would go to the grandchildren rather than to the child’s spouse. One of Carolyn’s children would be co-executor with Larry if anything happened to her; one of Larry’s children would be co-executor with Carolyn if anything happened to him.

After Carolyn and Larry were married for a decade, they decided to redo their wills. They have built up savings together and recently bought a bigger house, which Carolyn renovated to include a huge basement playroom for their grandchildren, in Livonia, Mich. This time they decided to split things evenly among all of their children. But even though their children are now grown, Carolyn and Larry attached strings to their plan. “If somebody is in financial trouble, is being sued or has drug or alcohol problems, the executors will hold off on giving them their inheritance,” says Carolyn.

Hire a lawyer?

If your needs are simple, a do-it-yourself software program, such as Quicken WillMaker Plus 2007 ($50 on CD, $40 as a download from www.nolo.com), may be all you need. However, if you have children from more than one marriage, have a spouse or child who is disabled, own a business, are a partner in an unmarried couple or have enough assets to run afoul of the federal estate tax, you should get expert help from a lawyer who specializes in estate planning.

Fees vary widely, depending on your situation and where you live. Relatively simple wills for a married couple—including trusts for children, durable powers of attorney, a living will and a review of all beneficiary designations—might cost less than $500. Drafting a separate revocable living trust might add $1,000 to $1,500 to the tab, and planning to minimize the estate tax is likely to cost even more.

You can find an estate-planning lawyer through the American College of Trust and Estate Counsel (www.actec.org) or at www.lawyers.com.