Financial Facts
Dealing with financial affairs is much more complex today than in years past. For this reason, it’s important that older individuals have a trusted financial adviser who approaches investments conservatively.
“Parents should consult an attorney, preferably an elder-law attorney, as early as possible to see what options are available to preserve assets and income for the family and still qualify for government assistance in paying nursing home costs,” says Don Silver, an author and estate planning attorney.
Silver explains some important aspects of planning an estate:
* Durable power of attorney: Refers to the ability of an appointed individual to take care of finances and/or health-care decisions for another person, especially if that person becomes incapacitated. Individuals who want a durable power of attorney should consider whether anyone they are naming to act on their behalf may have a conflict of interest.
* $125,000 one-in-a-lifetime exclusion: People who are 55 or older and have lived in their primary residence for a certain number of years, as set by the IRS, may be able to avoid income tax on up to $125,000 on the sale of their residence. These rules can get complicated, especially with second marriages, where either or both spouse is bringing a house into the marriage. The best advice is to speak to an accountant before the remarriage. Otherwise, this special tax advantage could be lost.
* Estate taxes: Are not a concern where a parent is worth less than $600,000 (including all assets). There are no federal or California state taxes on these assets. Two parents together could leave up to a total of $1.2 million to their family without any death tax due. Or they could give up to that amount during their lifetime without having to pay federal or California gift tax. (There would not be any exemption left at death, however.) To get this tax savings at the time of death, parents will usually need to set up a will or living trust with special provisions to achieve this death tax savings.
* Gift program: These are sometimes set up to reduce an individual’s estate before death, which can minimize final taxes. By law, each parent can give $10,000 a year to as many people as he or she would like without gift tax. This means that two parents could give their two children up to $40,000 in a calendar year without using up any part of their $600,000 exemption from death tax. If parents have a living trust, they will probably want to make the gifts in two steps (from the trust to the parents and then to the children) rather than directly from the trust to the children. This will avoid disagreements with the IRS.
* Living trust (also known as a revocable trust): This acts as a substitute for a will and allows a person’s successors to possibly avoid probate court for the assets that have been transferred to the trust during his or her lifetime.
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A living trust is implemented when people are still alive. They name themselves as trustee and can still manage their property. In the event they become incapacitated, the successor trustee (who may be an adult child), can immediately step in and handle affairs. Experts say that most people with any real property, such as a house, will benefit from a living trust.
A qualified attorney must draw up a trust agreement. Even with a living trust, you still want to have a pour-over will that says that any assets outside the trust at the time of your death should follow the terms of the living trust.
For the free booklet, “Tomorrow’s Choices: Preparing Now for Future Legal, Financial, and Health Care Decisions,” write to the American Assn. of Retired Persons (AARP), 601 East St. NW, Washington, D.C., 20049. Request publication No. D13479.
To contact the National Academy of Elder Law Attorneys, call (602) 881-4005.
