Estate planning and retirement planning meet at a few different points. Both should contain properly prepared documents that allow someone to make medical decisions and to handle financial affairs if you become incapacitated, and who should receive your assets after you pass away. But many people go into retirement with debt, or debts are incurred during retirement. What can you do about that?
fosters.com explores this in a recent article, “What happens to your debt in estate planning?” The article reminds us that this is where estate planning is needed. An estate plan is a set of instructions that lets us designate certain individuals to act on our behalf after we die, or while we’re living but incapacitated. It provides guidance about how our assets should be distributed to beneficiaries at death, or managed for us while we are alive but unable to do so on our own.
Wills, trusts, and beneficiary forms set out our instructions as to who will receive any assets that we leave behind. Wills name an executor who is responsible for an accounting of all of our assets and liabilities at death. The executor also works with the probate court to get our creditors paid, and distribute the remaining funds to our heirs. Trusts are similar, but don’t involve oversight by the probate court. When a trust is set up to own assets during your lifetime, a successor trustee is named at your death or incapacity to manage the trust assets and then distribute them at the specified time to the named beneficiaries.
Alignment of assets with the estate plan is key. Trusts don’t have any control over accounts that have a joint owner or beneficiary designation, unless the trust has specifically been named as beneficiary. IRAs, 401(k)s, life insurance, annuity contracts, and brokerage and bank accounts can all be created with beneficiary designations that serve as the instructions to their custodians, regarding who is to receive them after death.
Durable power of attorney documents for both financial matters and health care are also important components of a retiree’s estate plan. Because IRAs, 401(k)s and other retirement accounts can’t be owned by a revocable trust, trustees can’t manage them for you nor access them in the event you become incapacitated. An agent designated in a durable power of attorney can take any actions you authorize on these sources of retirement cash flow. A durable power for health care will specify the individual you authorize to make care decisions for you and what your wishes are regarding life-sustaining treatments.
It is not unusual for those approaching retirement to either delay creating an estate plan or not to have reviewed it for many years. Because laws and relationships change over time, it is important to review estate planning documents regularly and consult with an estate planning attorney when updates are needed.
As for any debt, the goal of good planning is to eliminate this problem. However, whether or not beneficiaries or your estate are liable for the debt, depends on the type of debt and how it is owned. For example, if you and your spouse are both on the mortgage, your spouse will still be liable for the mortgage. If you co-signed a loan, the other signer will still have to pay the loan. But unsecured debt, like a credit card, will become a liability of the estate. The probate court and the executor will need to pay them from assets passing through the will. An estate planning attorney will work through all of these matters, so that you and your heirs will be prepared in advance.
Reference: fosters.com (November 22, 2017) “What happens to your debt in estate planning?”