There’s always an excuse that keeps you from getting this done. But it’s important to put at least a will in place. If you don’t have any documents, start by going to www.lawyers.com and find an estate attorney in your area. Look under “Trusts and Estates” where you can see more about law firms and lawyers specializing in this area.
Make a list of your assets and liabilities to take with you when you meet with the attorney. If your estate is under $2 million, you won’t owe estate tax. But remember your house, your life insurance proceeds, and all of your other assets make up your gross estate. Lots of you will be over the $2 million mark.
Think about who you want to be guardians for the kids. Choose at least two people—a primary guardian and a successor should something happen to your first choice. You’ll also need to choose somebody to be your executor. That person needs to make sure your will is followed and that all administrative matters are completed.
Be sure to think about the care of your pets. Who will care for them when you’re gone? For good information on planning for your four-legged family members, go to this link
. But don’t get stuck agonizing over these decisions. Pick up the phone, make an appointment with an estate attorney, and give yourself a deadline to get this done.
If you already have estate documents, go dig them out of the safe deposit box (or wherever you keep them). Force yourself to read them (I know you don’t really want to do that!), and see if there’s anything you need to change. Get it done before year-end. Don’t wait until the last week in December to call your attorney because chances are he or she will already be booked or on vacation.
Fund Living Trusts
Lots of you may have set up living trusts, but never really funded them. It’s typical for an attorney to attach a schedule to your trust document that says the trust is funded with $1.
If you want your trust to act the way you’ve planned, you’ll need to re-title your brokerage accounts in the name of the trustee of your trust. It’s not hard—it’s just tedious filling out that paperwork. But better that then paying all that money for a great estate plan and then blowing it by never funding your trust.
Update Beneficiary Designations
Speaking of blowing it, don’t forget to update your beneficiary designations on IRAs, company retirement plans, stock options, insurance policies, and so forth. You can even set up beneficiaries on taxable accounts by adding “Transfer on Death” (TOD) or “Payable on Death” (POD) instructions. Ask your bank or brokerage firm to send you the paperwork to set these up.
Typically you’ll want retirement accounts to name a person as beneficiary, while stock options or insurance policies may be paid out to the trustee of your living trust. That’s because a person is able to “stretch out” the value of an IRA or retirement account by taking minimum distributions over their lifetimes.
Naming your estate or even your trust (there are exceptions) can end the tax deferral and make everything taxable. With stock options or Morningstar PracticalFinance December 2006 5
insurance policies there is no tax deferral, so you want these assets to pay out to your trust, which will control how your estate is distributed.
Update Cost Basis Records
Keeping your investment cost basis records up to date is important not only for when you sell an investment, but to see if you have a current gain or loss (called an “unrealized loss”). Your cost basis is calculated by taking the purchase price of the investment and adding in any reinvested dividends, interest, or capital gains. Use year-end documentation to help update your records. For example, you should get a year-end brokerage statement that summarizes all transactions for the year.
If you’ve made major upgrades to your home, you may also want to update that cost basis. Your home’s cost basis is important when you sell it. The difference between the price you’re paid at the sale and the cost basis is your capital gain (or loss). The IRS won’t tax the first $500,000 (married filing jointly) or $250,000 (single). But if you have more than that amount, you’ll owe tax. So it pays to keep your home’s cost basis up to date. See IRS Publication 523 for more on what types of renovations will qualify as capital improvements (which will increase your basis).
Complete a Home Inventory
This one trips me up all of the time. You really need to keep a running record of your belongings for insurance purposes. If you have stuff with serial numbers, you should be keeping track of those, too.
There are a number of software or online programs that can help you do this, but the biggest barrier is just finding the time to get it done. If you have some time off over the holidays, make this one of your priorities.
Organize Financial Records
While you’re carving out time, use some of that to clean up your files and records. Throw out what you don’t need to keep. For a quick look at what to keep and what to toss, read “Throw Out Unnecessary Financial Papers”
This article originally appeared in Morningstar Practical Finance.