Estate planning has traditionally focused on minimizing estate taxes and directing the disposition of your assets after death. Yet, in today’s modern world, managing your affairs has become even more complicated as issues involving health care and personal finances, which can arise during your lifetime, have become increasingly more important.
Consider what would happen if you were to suffer a catastrophic illness or become incapable of managing your own affairs. This situation could occur either through a long, gradual process, such as a deteriorating medical condition, or through a sudden and unexpected accident or illness. If such an event were to happen, who would make your important legal, financial, and health care decisions? On what authority would this individual act?
Fortunately, there are some estate planning tools called advance directives that can help in dealing with these contingencies.
Legal and Financial Decisions durable power of attorney grants authority to another person to make legal and financial decisions on your behalf in the event of mental incapacity. The powers granted can be broad or limited in scope. Some decisions a durable power of attorney can assist you with include: your personal finances, insurance policies, government benefits, estate plans, retirement plans, and business interests.
Health Care Decisions
In the area of health care decision-making, you may recall the Karen Ann Quinlan case. In 1979, the New Jersey Supreme Court granted permission to her family to disconnect Karen’s respirator, which her doctors believed was prolonging her life in a vegetative state. The case led to the enactment by various states of Natural Death Act Declarations (i.e., living wills).
A living will generally allows you to state your preferences, prior to incompetency, regarding the giving or withholding of life-sustaining medical treatment. In most states, you must have a “terminal condition,” be in a “persistent vegetative state,” or be “permanently unconscious” before life-support can be withdrawn. The definition of these terms and the medical conditions covered may vary from state to state.
A health care proxy allows you to appoint an agent to make health care decisions on your behalf in the event of incapacity. These medical decisions are not limited to those regarding artificial life-support.
Advance directives by durable power of attorney, living will, or health care proxy are usually inexpensive and simple to implement; they should be considered essential estate planning tools for all individuals, regardless of age. In the absence of such documents, court intervention involving a great deal of time, expense, and possible stress to your family, may be necessary to carry out your legal, financial, and health care wishes at precisely the moment when timeliness and ease of action are of the greatest importance.
Consider Inflation When Developing Your Insurance Plan
When Cathy and John Barton purchased their life insurance policies 20 years ago, they thought they did things the right way. They assessed their insurance needs, taking into account their home mortgage, the projected college education costs of their children, and their living expenses.
Recently, however, as they contemplated retirement, the Bartons reevaluated their insurance needs and were surprised to discover their insurance coverage is inadequate. How could this be? The answer, in a word, is inflation.
Because inflation affects purchasing power, it may also affect life insurance needs. For couples like the Bartons, inflation means that life insurance coverage, adequate years ago, may now be insufficient. With this in mind, consider three of the more common uses for life insurance proceeds that may be affected by inflation.
Paying Off Your Mortgage
Until recently, it seemed that many people who bought houses lived in them for their entire lives. Today, Americans are increasingly mobile. Changing job markets and dual incomes have altered the dynamics of family finances. In many cases, a family or retired couple can now afford to pay a mortgage on a lot more “house” than at any time in the past. Does this trend minimize the reality of inflation and the rising costs of homeownership? Not at all. The fact is that escalating real estate prices have translated into larger mortgage loans. Therefore, if you have recently upgraded your home, you may need to consider increasing your life insurance to help cover your new mortgage.
Funding Future College Expenses
With many individuals retiring at younger ages, it may be common to bearing or in retirement while you still have children waiting to attend college. If so, you are probably concerned about the rising costs of higher education. For the 2007 academic year, tuition and fees were up close to six percent from the previous year at both private and public 4-year colleges and universities (The College Board, 2007).
To be prepared, factor inflation into your college savings strategies. Make sure you have a contingency plan in the form of adequate life insurance to help provide protection in the event of an untimely death. Review your plan periodically and consider increasing your life insurance coverage to reflect the anticipated future cost of higher education.
Maintaining Your Standard of Living
Over time, the costs associated with the normal expenses of everyday life, as well as the special pleasures most people look forward to in retirement, like traveling, visiting children and grandchildren, engaging in favorite hobbies and leisure time activities, are affected by inflation.
As a result, the lifestyle you hope to enjoy in retirement could be affected, too. By basing your life insurance coverage on yesterday’s income and cost of goods and services, you are potentially shortchanging your future standard of living and that of your spouse. Factoring inflation into your life insurance plan can help you maintain your current lifestyle throughout your retirement years
Determining current life insurance needs is one thing, but, figuring out how much coverage you`ll need in the future requires you to pay careful attention to inflation, and how it can affect your lifestyle. Regular reviews of your insurance coverage can be helpful. Plan to set aside some time at least once each year to help ensure your life insurance plan is keeping up with inflation.