MAKING CENTS: Estate plans do more than avoid tax hit

Many people equate estate planning to death tax savings or avoidance, and because most people have less than $5.25 million in assets, they assume that estate planning isn’t for them. Nothing could be further than the truth.

An estate plan is a plan that takes care of you, your family and your assets, both money and stuff when you are either incapacitated or dead. It centers on legal documents, the core of which may not be your will. A will for example, doesn’t help if you are severely disabled or incapable of making your own financial decisions. For incapacity, a durable power of attorney or owning your assets in a trust where a co- or successor-trustee is appointed at the time you sign the trust may serve you better than a will.

For most people, the core of their estate plan should be a living trust. This means that you would own most of your assets in your trust now, with you in control as trustee and beneficiary. Beyond the living trust, a pour over will which would then direct anything that you forgot to title in the trust over to the trust after your passing. The pour over will works, but it will also cause your estate to go through the probate process.

Two other necessary documents include a durable power of attorney and a living will or health care proxy. The durable power of attorney allows your appointee to act on your behalf for everything financial. A live and potentially risky document; only give this power to someone in whom you have immense faith and trust. Everyone over age 18 should have a separate document for selecting an agent to direct health care decisions in the event you are unable to decide for yourself.

Even if your estate is less than $5.25 million, other taxes can clip the value of your inheritance. Depending on where you live, a state death tax may be involved. Any estates larger than $1 million in Massachusetts will pay approximately 10 percent in state tax on the amounts over $1 million.

There may also be income taxes due from a retirement account, such as a 401K or IRA, and from the inheritance of any annuities.

Other significant reasons for an estate plan are: provisions to prevent a 22-year-old beneficiary from blowing it all, provisions for divorce-proofing assets for future generations and protecting assets from health care, creditors or other unforeseen problems.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

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