Planning Your Estate

Are you prepared for the unpredictable and inevitable?

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By Robert Brokamp and David Braze

You've spent your life saving, and now you're ready to start spending. That's right, Fool -- it's time to kiss the boss good-bye. Some call it retirement, but you call it "payday!"

You've already started moving your money around (after that refresher course on asset allocation). No surprises await (so you think) on the costs front (here's some brush-up reading, just to be sure).

But do not go hastily into that good life. You have a few important decisions to make before you head off to Bermuda. Here are some of the biggies.

Where will you live?

Your home is more than four walls and a roof. (Yes! We forgot the floor!) The home, especially when it's paid for, represents security. It's also a big investment -- probably one of your biggest. As such, it represents an asset from which you may obtain needed capital if and when that becomes necessary.

Longtime homeowners know that their homes have increased in value since their original purchase. Often, that equity represents a princely sum that, if accessed, could yield an even greater return invested elsewhere. One scenario would be to sell your current home, use the proceeds to purchase a lower-priced home, and invest the difference. You can sell your home and receive gains of up to $250,000 ($500,000 for a couple) totally tax-free, assuming you follow the rules.

Maybe you don't want the hassle of home ownership again. Instead, you plan to sell, invest the cash, and rent. Will that work? It could. It depends on how much rent you will pay in retirement. A home mortgage tends to be relatively stable through the years, whereas rent has a nasty habit of increasing every 12 months. If you can invest your money to pay for those ever-increasing rent payments, then a lease may be an option worth considering.

Another option frequently used by Rule Your Retirement members is selling their residence to their children, taking the tax savings, and then renting their home back.

Many retirees want the security of not having to pay rent or a mortgage. There is nothing wrong with that. When needed, you can still get at the equity tied up in your home through one of two ways in most states:

  • A home equity loan (HEL) is nothing more than a loan secured by using your home as collateral. Repayment starts immediately, usually in the form of a monthly payment based on a 15-year amortization schedule. For emergency cash, a HEL is a good vehicle. As a means of regular income, it is not the route to take. If you need the loan as income, then chances are you can't repay it. Failure to repay the debt will result in a foreclosure on your home.

  • A reverse mortgage is a means of receiving a regular, untaxed income as a loan against the equity you have in your home. The total loan amount is usually fixed, and may be paid as a lump sum or in monthly installments over a fixed period or for life. Unlike the HEL, though, this loan doesn't have to be repaid until you die or sell your home. Then you or your estate repays all loan proceeds with interest. Your legal obligation for repayment is limited to the value of the home at that time. If the home declines in value, you will never owe more than your equity in the home on its sale.

Should you go back to work?

You've retired from the rat race and you're enjoying the good life. You're sipping your Mai Tai and contemplating the mysteries of your navel. You're on the verge of developing that One True Theory of Lint. Suddenly, a wild thought intrudes on your meditations. Is it possible that you could (gasp!) re-enter the workforce? But why would you want to? Here are some possibilities:

  • You want to feel more productive.
  • You desire some "mad" money.
  • You enjoy the personal contact with others.
  • You want to turn your pastime into a full-time -- i.e., you want to turn your hobby into income.
  • You need time away from your spouse.
  • The stock market ate your nest egg.

Many retirees do work at least part-time. But what does it mean financially when they return to work?

The financial impact of a second career depends largely on the age at which you resume work. For those younger than age 62, a job serves to increase the ultimate benefit you'll receive when you take Social Security. In computing that benefit, the system looks at a person's entire working life. The computations are complicated and use the best 35 of the 40 highest years' earnings. If you have a lot of zero-income years, that will lessen your ultimate benefit.

Working after you've begun receiving Social Security might result in lower benefits, if you've not yet reached the Social Security "full retirement age" (65 and older, depending on when you were born). The amount of your benefit reduction will depend on your age and how much you make.

Finally, we can't forget about taxes (Uncle Sam won't let us). Social Security benefits received at any age become partially taxable once your income exceeds a certain level (the specific amount is adjusted annually).

The good thing about working after retirement (we know, it sounds like an oxymoron) is that you have other resources to fall back on, so you can go for job satisfaction first. Just recognize the impact such work has on your Social Security benefits. Your endeavors may increase what you get from the system -- or reduce the check you currently receive.

Have you prepared for the unpredictable, and inevitable?

It is likely that seven out of 10 people who are reading this article do not have a will. Let's face it, Fools: The chances of dying are pretty much 100%.

There are certain things you must do to protect your family and your wealth. Rule Your Retirement subscribers are probably sick of us hounding them to get the four critical documents up to snuff. But you, dear reader, may not have heard the brief lecture. So here goes:

Are you adequately prepared for that final road trip of life? If not, when you die you create needless heartache and loss for loved ones left behind. Estate planning is appropriate at any stage of life. It's particularly appropriate when you've got retirement realities on the mind. Here are four essential considerations:

  • Every adult needs a will. Die without one, and the state decides what happens to your property. Rarely will the state's mandate follow what you would do if you had the opportunity to act. See an attorney to complete a will. It isn't that expensive, and ensures your property will be distributed in accordance with your wishes. After you complete the will, review it every few years to verify its validity and conformance with state law.

  • Be aware of what counts as an estate asset for tax purposes when you die. Basically, that's everything you own, including the face value of life insurance policies and the current value of all your retirement plans. You may pass an estate of unlimited value to your spouse at death with no tax consequences. When that spouse dies, though, there may be some heavy taxes that cause your children to receive far less than they should. If your estate is worth at least $1 million, consult an estate-planning attorney.

  • What if you become incapacitated, either mentally or physically? You might want to look into a durable power of attorney granted to someone you trust, such as your spouse or an adult child. You may also want to add a medical power of attorney. Both will allow the person you select to make decisions on your behalf. Without those documents, your family will be forced to hire an attorney, go to court, and have someone appointed as your conservator and/or guardian to make decisions and conduct business on your behalf. That's a needless, time-consuming, and costly process that can be avoided with one or two inexpensive documents that an attorney can prepare today.

  • Lastly, you may want to execute a living will. It's a silly name for a document that really says you want the right to die a natural death free of all costly, extraordinary efforts to maintain your life when that life can only be sustained by artificial means. This document is free in virtually every hospital in the nation. It makes such decisions easier on the doctor, the hospital, and your family.

Estate planning encompasses much more than a will. It may be true that you can't live with lawyers, but you certainly can't die without them. Every month in our Rule Your Retirement newsletter we show readers how to use a pro's talents to ensure things work the way you want.

The sooner you take care of this stuff, the faster you'll be out on the links.

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