Discussing estate planning concerns with an aging parent or relative and putting affairs in order can ease the process when incapacity or death becomes a reality.
A document that should be in place is a healthcare directive that provides instructions to one or more individuals – called the attorney-in-fact – who would have authority to make choices on your parent’s behalf.
For instance, your parent’s intention of whether to withhold or withdraw life-sustaining treatment should be known to the attorney-in-fact. The document legally allows health care decisions to be made for a patient by the appointed advocate should the patient become physically or mentally incapable of making such decisions for himself or herself.
Estate financial planning will include planning for real property, investments, life insurance policies and bank accounts as well as distributing personal property, filing tax returns and dealing with actual estate administration of trusts and wills.
Planning for real property, including the residence, can involve different issues. How the real property is titled will determine the transfer of ownership once a person dies. There is tenancy by the entirety, a type of joint ownership in which the property automatically passes to the surviving spouse when one spouse dies.
Real property can be held by a parent and a child as joint tenancy with right of survivorship with each joint owner appearing on the asset’s title of deed.
There are advantages and disadvantages to adding a child’s name to the title of a residence. The parent’s intentions must be clear and consistent and be reflected in all their legal documents. The parent’s will, trust and title to the real property must reflect who they wanted to inherit the real property.
If the parent’s intention is that the child whose name is added to the title of the residence is the intended beneficiary, then it is fine to add the person to the title. The disadvantage of adding a child’s name to the title is that if the parent does not want the child to inherit the property, he or she would inherit because the asset would pass outside of the will and trust.
A better way to financially plan is to have a durable power of attorney that delegates authority from one person to another. The maker of the power of attorney, the “principal,” grants the right to act on the maker’s behalf to their attorney-in-fact or agent.
The authority granted depends on the specific language of the power of attorney. The authority could be broad or may be limited to certain specific acts. If a parent becomes incapacitated, the attorney-in-fact could sell the residence, and the proceeds could be used for the benefit of the parent. In the alternative, the parent’s will or trust can have a provision indicating who should inherit the real property.
A power of attorney may be used to give the attorney-in-fact the right to sell a car, home or other property, allow another to access bank accounts, sign a contract, handle financial transactions or sign legal documents for the principal. It may delegate the power to do almost any legal act that the maker of the power of attorney could do, including the ability to create trusts and make gifts.
For stocks and investments, a parent could sign a document with the financial institution that manages the asset designating the beneficiary who will inherit the asset upon the death of the owner. In the alternative, the parent’s will or trust could indicate who will inherit the asset. If the parent has a trust, the trust must be funded with the asset to pass according to the terms of the trust.
The name on the parent’s bank account will dictate who has authority over the asset. If the parent wants a child to inherit the account, it is fine to add the person.
But, if the parent’s intention is for the account to be inherited by other persons, the parent should not add that child’s name to the account for convenience – for instance, for writing checks to pay bills. The same legal concept applies to assets – the asset will pass to the person whose name is on the title, not pass according to the provisions of a will or trust.
The parent’s personal property can be given away during life. In some states there are statutes that allow a memorandum of personal property to be attached to a will that bequest the asset to the relative or friend.
A final 1040 tax return must be filed for a deceased person. If there is a trust involved, there may be a 1041 fiduciary return that should be filed. It is important to obtain the advice of a professional about the filing of these tax returns. Tracy A. Heider Winrow, Tax Attorney, CPA