NEW YORK (TheStreet) -- For many baby boomers, tax season isn't nearly as daunting as attempting to reconcile estate plans, but it's a great reminder that procrastination isn't a viable option. Failure to properly plan your retirement and estate comes at a high cost. Complete strangers may decide what happens to your money, property, assets and even your life in ways you don't want.
Failure to plan also means fewer dollars, wasted time and effort, and a public record of your affairs for many to experience.
By spending a few hours, you can avoid many of the typical, costly pitfalls others face.
Consider the seven rules below as guide posts for your tax and estate planning. But also remember to take a holistic approach. You want to ensure that you don't overlook a key element, particularly if it involves a productive, tax-free use of your money.
Do not rely on just a will: Many people are lulled into a false sense of security that if they have a will, they're planning is complete. A will only nominates a guardian for your minor children and tells the court how to distribute your assets after death. It's still a public, legal process that can be lengthy and expensive.
A secret many attorneys won't tell you, and a primary reason lawyers advertize to write wills cheaply, is they're hoping to make a lot more through the probate process. Attorneys have learned that the one who writes the will is most likely to get a call (and the business) for probate work.
Probate work is worth a lot more in fees, often 4%-5% of an estate. It's easy to see why an attorney will help you draft a will for $200 for someone with an estate worth $500,000. They're in first place to get $15,000 or more in fees later.
By removing assets from your estate, less money will go toward paying attorney fees. One strategy to minimize probate is using the next rule.
Establish a revocable living trust: Shift your assets from your estate by using legal and revocable living trusts. A revocable living trust is a legal document that, like a will, includes instructions for what you want to happen to your assets after you pass away. But, unlike a will, a revocable living trust can avoid probate at death. It can prevent the court from controlling your assets if you become incapacitated. A living trust enables you to remain in charge so you can leave more to your children and grandchildren.
For many, a living trust isn't about saving money from taxes and attorney fees; rather, it's a desire for control while also remaining private. You don't have to be rich to want to keep your family affairs within the family.
Probate is a public process, and a living trust keeps certain relatives, the media and nosy neighbors out of your business.
Plan for the possibility you're unable to plan: No one wants to think about Alzheimer's or other forms of dementia. But if you're male and have made it to 65, you're expected to live to about 83 years old. If you're female, you can reasonably expect to see 84 candles on a birthday cake.
Couple that with a 50-50 chance of getting dementia after turning 80, and you quickly realize that you're likely to require someone else to make decisions for you before you pass.
The strategy to remain in control after you're no longer able to make decisions is through financial power of attorney, a HIPAA authorization, and a living will (also called a Health Care Directive in some states). Absent the tools in place beforehand, your spouse or other trusted person will have to first go to court and request they're made guardian and conservator.
During a time of stress, do you really want to send a loved one down to the courthouse to tell a judge you can't make decisions, and they need to do so for you? Of course not, and it's an easy landmine to avoid for those that take the time to plan ahead. Even your spouse doesn't have access to your medical records, so don't assume anything before talking to a pofessional. You may have a strong opinion on what measures should be taken in the case of life support, but you'll need to express your wishes in writing to ensure they're followed. A living will is an essential vehicle to speak for you when you're unable.
Do it and review it. According to Edward Matthews, a leading estate law professor, over 80% of couples entering retirement have failed to adequately plan for their retirement and estate.
The most important thing is to get your estate plan in place. It's a failure to even start that catches most people off guard. Make your family the exception and take responsibility for the decision-making process while it's easy.
You can always adjust as your situation changes. Wills are fluid and revocable, and amendments to trusts are possible. We may not know when we'll die, but we can know what we'll pass on and to whom. Don't let the state decide for you. Once in place, review your estate plan at least every three years.
Another great reminder that your plan should be reviewed is upon the birth of a grandchild. Unless you intend to leave the new bundle of joy out of your estate, the birth of a grandchild signals the time for another review.
Estate planning is not a do-it-yourself project: Unless you're the type of person that enjoys reaching over dollars to pick up nickels, don't burden your loved ones with the task of repairing, interrupting and executing your self-made scheme. Tax and estate law is incredibly complex. Don't bargain shop.
You want an attorney to assist you in creating a custom plan and not just any general practice attorney who defends DWI's in the morning and creates wills in the afternoon.
That said, a great book to get you started thinking about requirements and questions to ask when meeting with one or more professionals is "New Rules for Estate Retirement and Tax Planning." It's written by estate attorneys and financial planners. Use it as your next step to learn more, but don't make the mistake of trying to create your own legal documents. A book is no substitute for years of training and experience.
Hire an attorney who specializes in estate planning: You wouldn't have your general practitioner to perform heart surgery, and you shouldn't go to a general practice attorney to work on your estate plan. Hire someone who specializes in tax and estate work.
Even better, hire an attorney that is also a certified public accountant (CPA). Attorney CPAs are best equipped to understand how your estate and retirement numbers and tax-law come together, and they're able to offer attorney-client privilege. Your typical CPA or financial planner isn't able to offer you the same degree of protection.
The ability to offer attorney-client privilege is an important distinction. Anyone who's ever dealt with a taxing authority knows that you don't have to be guilty of anything nefarious to wind up paying a whole lot more in penalties, interest and taxes than they want to. A CPA who is also an attorney can help safeguard that taxing authorities don't receive anything beyond what you're required to disclose. They can halt a taxman's fishing expeditions before the boat leaves the dock.
Leverage and build a moat - Many couples will have CDs earning less than one percent interest before taxes that they never intend to use. They generally have other assets to support their retirement, and if it weren't for gifting limitations, they would have already passed it to their children or other beneficiaries.
At the same time, the typical couple over 65 years old has a more than 70% chance of at least one member needing long-term care. The average cost of a private room in a nursing home can easily top $100,000 per year. If you're like many, you think you'll never need nursing home care, regardless of the statistics.
And here's a secret that even many financial planners and elder-care attorneys fail to understand. While you may not need nursing home care, this may not be your greatest financial risk. Few people when given a choice will opt for a nursing home instead of remaining at home.
Indeed, long-term care insurance isn't usually used to pay for nursing homes. It's more often used to pay for other services including adult day care, hospice care, respite care, assisted living facilities, skilled, home nursing care and other in-home services. These services can be costly.
If you're planning on cashing in CDs and other bank accounts for long-term care services, there are other, better choices. The use-it-or-lose-it downside to traditional policies is no longer your only option.
Newer, tax-advantaged vehicles can be exploited to fund long-term care needs if required, pay a beneficiary if you don't, or can be fully cashed in if you want to use the money for something else. But there's a catch: You still have to pass a health exam, and the younger you are, the greater the leverage.
For example, (and you should not consider the example numbers indicative of your situation because age, health, riders and other factors influence benefits) take a 60-year-old couple in typical health. They can use $100,000 sitting in a bank account they don't intend to use to buy a joint life policy that pays a death benefit of $230,000 or pays for long-term care needs, reducing the death benefit dollar-for-dollar. Forget about surrender charges. There are carriers that offer all your money back if you change your mind.
It doesn't matter if the money is directed for long-term care or not, the money is leveraged in a way that's not possible through a bank deposit. From a financial perspective, taking $100,000 and turning it into $230,000 for needed care without paying capital gains is one of the best deals available if you qualify.
The new hybrid life with long-term care benefit policies offer an after-tax upside that's unbeatable after adjusting for risk. In light of the ever-changing tax landscape, every retiring couple needs to consider the appropriateness of their asset allocations and estate plan.