Estate planning 101

A comprehensive estate planning covers both phase of your life: incapacity and death. We tend to focus on the arrangement for handling important matters when we die. As we grow older, many of us enter into a period of time where we are no longer mentally or physically competent to make a reasonable judgment for our daily life. Your estate planning must consider such time as well as your final moment, death.

Here are items a holistic estate planning must cover:

1. Prepare for incapacity

　　a. Health care directive = power of attorney for your health care

　　b. Durable power of attorney = power of attorney for your finances

2. Prepare for death

　　a. Avoid probate

　　b. Avoid taxation

1. Prepare for incapacity

If your health deteriorates and you become unable to make medical or financial decisions, another adult may have the legal authority to make these for you. If you do not have any arrangement in advance, a judge will appoint someone (i.e., conservator, guardian, custodian, etc) to make decisions for you. To avoid this possibly time-consuming process, you need two legal documents in place.

　　a. Health care directive

You appoint a person who makes health care decision for you. This documents basically takes effect only when you are diagnosed with a terminal condition or are in a permanent coma. Your documents do not come into play if you are able to communicate your wishes in any way or are only temporarily unconscious, in general. You retain the original document in a place where the appointed person easily can reach when needed and could give a copy to a primary medical doctor, close family member, etc.

　　b. Durable power of attorney

A durable power of attorney for finances allows you to name someone to handle your finances when you no longer can. If there is no durable power of attorney, your spouse, child, or close family member may have to request a court for authority to manage your financial matters. This process is called a conservatorship or guardianship and is time-consuming and expensive.

2. Prepare for death

You keep in mind two things to avoid: probate and tax.

　　a. Probate

For the majority of your assets, you can avoid probate if an appropriate document takes in place. Here are some examples.

- Financial assets (i.e., bank account, etc): You designate someone to receive the balance of the account in the event of your death. The person designated to receive the funds after your death is called a beneficiary. Each financial institution establishes own policy as to the administrative procedure, restriction of designation, etc.

- Real estate: If the title of your real estate has only your name, you may file a deed with survivorship with a local county office.

- Automotive: If the title of your car has only your name, you may update your title to joint tenants with the right of survivorship.

Please note that the above process might trigger a gift tax issue. Please contact me before making any decision.

　　b. Tax

Your estate is highly unlikely to be liable for payment of any federal estate tax because federal estate tax offers generous and variety of exemptions. (Non-citizen spouse may have a limitation.) In contrast, a threshold of the state estate tax is low. For instance, District of Columbia and Oregon State set forth its threshold for the state estate tax $1 million. If you reside or hold real estates in states with inheritance taxes or estate taxes, you may need further estate planning to avoid state inheritance taxes or estate taxes. The instruments to avoid these taxes include drafting a will, setting various trusts, etc.

This article only offers a very high-level overview of estate planning. Please reach me or an attorney to discuss your own situation.