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10/19/10: It’s Never Too Early To Plan For Retirement And Inheritance

Housing Counsel

By Benny L. Kass

Q. We are in our early sixties, and are starting to plan for retirement. We just filed our tax returns. Having to “wade through” all of our books and records in preparation of those returns made us wonder what we should be doing now to make sure there will be no surprises that can affect our future or the inheritance of our children.

Do you have any comments or suggestions?

A. I could write a book on this subject. Too many of us live active lives, and do not even begin to concern ourselves with future problems. Often, it is only when tragedy occurs do we suddenly realize we have no long range plans. In fact, too many people do not even have a complete net worth statement, which would show a picture of their current assets and liabilities.

But if we take the time to think about these matters, we begin to understand that careful planning is needed for the future.

Here are but a few ideas for you to consider. Clearly, you should discuss all of these matters with your family and your legal, tax and financial advisers.

Do you have adequate life insurance coverage? Many of us took out insurance policies years ago, and have not reviewed the coverage to make sure it is adequate for the needs of our survivors.

More importantly, where beneficiaries change (because of divorce or death) the policy must be corrected to reflect the appropriate beneficiary. The insurance policy you purchased twenty years ago may not fit your current needs. In fact, you should confirm that all your insurance policies are, in fact, still in effect.

Indeed, as we get older, and our children become self-sufficient, we may consider reducing the level of insurance. You should discuss all of these matters with your insurance adviser.

Is your house insurance adequate? Many insurance policies have automatic escalator provisions that periodically boost the coverage.

Make sure the replacement value of your house meets industry standards, so you will not suffer a financial loss if your house is destroyed.

Some people purchase mortgage life insurance, so in the event of death, your mortgage will be paid off in full. I do not believe such a policy makes sense. Usually, you are required to pay an annual (or monthly) premium on the full amount of the original mortgage, when in fact the mortgage amount decreases each year. Additionally, from experience we have learned that many individuals do not stay in the house after their spouse dies. Thus, when the house is sold, the mortgage will be paid out of the sales proceeds. In my opinion, there are better investment opportunities than having to pay the premiums for mortgage life insurance. At the very least, you can use that money to buy additional life insurance — and will no doubt get more coverage.

Do you each have a Will? If you do not have one, you are strongly advised to have one prepared now. Keep in mind that if you die without a Will (called intestate) a probate court judge will have to make decisions on how your property is to be distributed. Wouldn’t you rather have your property disposed of as you so desire?

And even if you have a Will, if it was written years ago, your legal and tax advisers must be consulted to make sure that the new tax laws will not adversely affect your Estate. There have been numerous changes in the laws and you want to make sure that your will tracks current law.

Here’s an interesting fact that people usually do not understand. Let’s say that husband and new wife own title as tenants by the entirety. But the husband wants to make sure that on his death, the house will go to his children, and specifically specifies that in his Will. Unfortunately, that won’t work. On his death, by operation of law (based on the way that title to the property is held), his wife will own the entire property. If the husband wants his Will to be followed, he will have to change the title to at least tenants in common. This way, on his death, his half of the property will go to his children.

Additionally, you should have a Living Will and Durable Powers of Attorney to cover situations where you may be in an accident and are not be able to handle your own affairs.

The Courts – and the hospitals – have made it clear that if you are medically diagnosed as totally “brain dead,” and you want the doctor to “pull the plug,” you must make your intentions quite clear — preferably in writing — so as to give guidance to the doctors. This is known as a “Living Will” or a “Declaration,” and will be necessary if you have to go into a hospital.

If you do not want to be artificially maintained by life-support equipment in the event of an accident, you should prepare a Living Will declaring your intentions while you are able to do so. Your attorney can assist you with this, but you can also find sample documents on the web at such sites as www.

But what it you become incapable of handling your own affairs, and cannot write checks to pay your mortgage or other bills. Here is where a document known as a durable power of attorney comes into play. That document will spell out your intentions, and provide for a smooth transition between you and your representatives. Otherwise, lengthy (and costly) court proceedings may be required.

Some people use a combined durable power of attorney for both health and financial issues. While that is permissible, if – for example – you want one family member to handle your financial matters and another to deal with your health issues, you should arrange to have two separate documents: one durable power of attorney for health and one for financial matters.

You should also understand that there are two kinds of powers of attorney. One becomes effective immediately, even if you are not incapacitated. The other is known as a “springing” power that only becomes valid after one (or two) doctors certify that you are not capable of making decisions on your own.

Discuss these differences with your legal and financial advisors. You may not want to authorize someone now to act as your attorney in fact, since there is always the possibility that you could be taken advantage of – even by a close friend or relative. Your lawyer can draft the document that best suits your needs.

Finally, if you die or are seriously incapacitated, will your family be able to find all of your legal documents and papers? Often, one party in the household handles the books and records. The other spouse has no idea where things are.

Both of you should sit down one weekend and make a comprehensive list of your assets and liabilities. If you have stock certificates, certificates of deposit, life insurance policies, or other valuable documents, make a list of where they are, so that your family will not have to suffer more under the circumstances. You should also make a list of people who should be contacted in the event of a problem.

This list should include at the very least the names and addresses of your attorney, accountant, insurance adviser, executor of your Will and administrators of any pension plans.

Where should you keep your documents? Some people prefer to put everything in a bank safe deposit box. That’s probably the safest place, but when you die, your personal representative will probably have to get court order to have access to your documents. One solution: open up a safe deposit box and have the person designated in your Will to be added as a signatory to that box.

Alternatively, put copies of your documents in your box, with a notation on each indicating the location of the original.

Many people have small safes at home, so that in the event of a fire, the documents will not be destroyed.

Life has become quite complex. If you do not put your own “house in order,” the courts and the tax authorities may make decisions on your behalf (or on behalf of the Estate) which may not be in anyone’s best interest. These decisions may also be contrary to your own desires. Careful planning now can save considerable aggravation, frustration and expense for your family in the long run.