Sound advice and a good financial plan can help any of us navigate our life’s journey with greater clarity and confidence. This includes planning for the end of the journey. I know this can be an uncomfortable topic for many, but there are a few simple actions you can take now that will help protect you and those you love.
First, make sure that you have your basic estate planning documents in place. At the very least, you should have a will and an Advance Health Care Directive. A trusted attorney can help make sure these documents fully reflect your desires. The California Attorney General’s website also has an excellent fill-in-the-blank Advance Health Care Directive form. The web address for the form is too long to include here, but a web search will take you right to it.
The Advance Health Care Directive allows you to do two things. First, it allows you to name a person to make health care decisions on your behalf should you become incapacitated. This decision-making authority is known as a Power of Attorney for Health Care and the person receiving the authority is known as your agent.
Depending on how the form is written, the agent will have broad authority, including the ability to consent to or refuse medical treatment, surgical procedures, and artificial nutrition or hydration. If you want to place specific limitations on the power of attorney, I recommend getting an attorney to help you draft the document.
The form also allows you to leave instructions for your health care. For example, you can specify whether or not you want to be resuscitated, have your life prolonged artificially, of if you want treatment to alleviate pain even if it hastens your death. You can also specify if you want to be an organ or tissue donor and for what purpose (transplant, therapy, research or education). Again, if you want to limit your instructions in any specific way, you should have an attorney draft your health care instructions.
You may also want to establish a living trust if the value of your estate is greater than the California small estate threshold of $184,500. Unless you use a properly designed and funded revocable living trust, an estate worth more than $184,500 will be subject to probate—a costly, lengthy and public process. Estates worth less than $184,500 can usually avoid probate. The small estate threshold was changed on April 1, 2022 and is updated every three years for inflation.
As a California resident, you can exclude several types of assets when calculating the size of your probate estate: real estate outside California; joint tenancy property; property that passes outright to a surviving spouse; assets that pass outside of probate to named beneficiaries (IRAs, retirement plans, etc.); multiple party accounts or pay on death accounts; any registered manufactured or mobile homes, or vehicles; any numbered vessel; or assets owned in trust, including a revocable trust.
While you are calculating the value of the estate, take time to do a full inventory of your various accounts, including where they are held and how they are titled. Carefully review the named beneficiaries on IRA’s, retirement plans, and life insurance policies. Sometimes, account beneficiaries are not properly updated as life’s circumstances change. Mistakes on beneficiary designations can cause tremendous problems when your estate is settled after your death.
If you are getting older, you may also want to name someone you trust as a joint owner on a checking account. Having a joint owner will allow your estate greater flexibility to settle outstanding obligations once you pass. Keep the balance in this account to a minimum. Note that a financial power of attorney will not work in this case because it will lapse upon your death.
Be careful not to name your heirs as joint owners on accounts with significant value—especially accounts with low-cost basis investments. If they are joint owners, they will not get the benefit of a step-up in cost basis when you die.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.