User:Fyre4ce/Facing end of life

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When facing the end of life (perhaps due to age, medical condition, or other reasons), this article describes prudent steps investors can take to improve their financial picture while still alive, have their wishes best-reflected after they're gone, and streamline and maximize the value of their estate for their heirs.

Although other aspects of the end of life - medical, family and interpersonal, spiritual, etc. - are probably more important and deserve primary attention, this article focuses on the financial aspect, and is intended as a concise guide on the financial steps to consider.

This article is intended for those who have a life expectancy of roughly five years or less, though some of the advice applies to other situations as well.

Summary

 * Put an appropriate estate plan in place
 * Make sure all beneficiaries are up-to-date and consistent with the estate plan
 * Simplify and automate finances as much as practical
 * Document all assets, including valuable physical property
 * Avoid selling appreciated taxable assets on which capital gains tax would be owed; they will get a step-up in basis
 * Convert pre-tax retirement money to Roth as long as the marginal tax rate on the conversion is less than your heirs' expected marginal tax rate
 * Take qualified HSA withdrawals for expenses for which you've saved receipts, if the HSA is being left to a non-spouse
 * Give money away to heirs, up to the annual gift tax exclusion, if you will likely face federal or state estate taxes

Estate planning
When facing the end of life, a top financial priority is to put in place a comprehensive estate plan, or make sure an existing plan is up-to-date with the present circumstances. A good estate plan will ensure your wishes are reflected both before and after your death, and also streamline the estate process and maximize the value of your bequest for your heirs. Most estate laws are state-specific, and in almost all cases, it is essential to consult an estate planning attorney in your state. Below are the main areas of estate planning and the steps to consider.

Simplify and document finances
While it is always a good idea to keep your financial life as simple as possible, it is especially important when dealing with medical issues or facing the end of your life. You will want to free up the maximum amount of time to be devoted toward your health, family, and other matters. Others will need to take over your finances after your death, and possibly before as well. Consider the following:


 * Automate as much as possible. Set bills on auto-pay and payments on direct deposit.
 * Consolidate accounts to the minimum number necessary, for example, by combining several like-kind accounts (for example, savings, brokerage) into one, rolling out money from a former employer's 401k into an IRA, and paying off small debts.
 * Simplify investments as much as practical without realizing capital gains, for example, by consolidating several similar mutual funds into one, trading a set of individual stocks for a single mutual fund, etc. Even if you enjoy managing money or even trading stocks as a hobby, your priorities will likely shift, and even if you still have interest in these activities now, your Power of Attorney probably does not.
 * Compile a list of accounts, assets, and debts, including name of the custodian, account number, and approximate value.

Durable Power of Attorney
A Durable Power of Attorney (DPOA) is a legal document that authorizes someone else on your behalf. The "durable" modifier means that the agent retains their power even if you are incapacitated or mentally incompetent, which is appropriate for this situation. Typically there are two types of DPOAs - medical and financial. A medical power of attorney authorizes someone to communicate with healthcare providers and make medical decisions on your behalf, if you are unable to do it yourself, either temporarily or permanently. A financial power of attorney can act on your behalf to buy and sell property, pay bills, file tax returns, and handle many other transactions. You should have both of these documents in place, and it is entirely possible, or even preferable, to have different people acting in each role. As long as you are mentally competent, you can change or revoke your Powers of Attorney at any time.

If you do not have a Power of Attorney in place and become incapacitated, your family will have to go to court and apply to have you declared incompetent, and have a conservator or guardian appointed by the court. Laws for this are state-specific. This process is expensive, time-consuming, and emotionally difficult. There is no guarantee the court will appoint the person or people you would prefer for this role. And, if you regain competency, it is very difficult to dissolve a conservatorship. That is why it is very important to have these documents in place, even if you have limited assets.

Many financial institutions have their own Power of Attorney forms that they prefer you to fill out, in addition to a generic Power of Attorney form. For accounts that are likely to have activity (for example, main checking and investment accounts), it is probably a good idea to file the institution-specific forms as well, to avoid challenges and make it easier on your agent.

Advance healthcare directive
An Advance Healthcare Directive (also known as a Living Will) is a document that specifies your medical wishes...

Designated beneficiaries
Many types of accounts can have designated beneficiaries, so that ownership passes directly to heirs at death, rather than first going to the estate and then distributed through probate, which takes time and money, and creates a public record of your assets. Another advantage of designating beneficiaries is that retirement accounts get a 10-year stretch, whereas they only get a 5-year stretch if left to an estate or trust. However, designating beneficiaries can have some drawbacks, such as if the estate will need the money for estate taxes or other expenses, and doing so precludes leaving the assets in trust.

Review designated beneficiaries on all your accounts and make sure they are up-to-date with your current wishes, and your overall estate plan.

Estate taxes
As of 2023, the Federal estate tax exemption is $12.92M for a single individual, and $25.84M for a married couple. Several states have lower exemptions. Due to this high limit, only a very small percentage of taxpayers will owe estate tax. For those who will possibly or likely owe estate tax, additional planning is necessary. Estate tax planning typically has two goals: minimizing the tax owed, and ensuring any tax owed can be paid easily.

The most common estate tax avoidance strategy is to gift money while you are alive. The federal gift tax exclusion is $17,000 per person as of 2023, meaning gifts of up to this amount per year are not reportable or taxable. When the giver is married, this amount doubles, because both spouses get their own limit, and when the recipient is married, the amount doubles again because gifts can be given to both spouses. Tuition or medical expenses paid directly to the institution or provider are also exempt from gift taxes regardless of the amount. Beyond simple gifts, a competent estate planning attorney with experience planning for estate taxes in your state may be able to suggest additional, more complex, strategies to avoid estate tax.

If you will owe estate tax, make sure there is enough cash inside your estate to pay the bill. For example, if most of your assets are taxable investments and retirement accounts, and these are left directly to beneficiaries, your executor may need to recover some of these assets from your beneficiaries to pay the estate tax. If your beneficiaries do not cooperate, your executor will need to sue them to recover money, creating expense and hassle for all parties. If you do not have enough assets that will be left directly to your estate to pay the estate tax, you can designate your estate to be a partial or total beneficiary of taxable accounts and/or life insurance policies. Retirement accounts left directly to beneficiaries get a 10-year stretch, so these should be a lower priority than taxable assets and life insurance, but they can be partly left to the estate if necessary.

Investing plan
When facing the end of your life, you should switch your investment plan from investing for your own life, to that of your heirs. For example, if you are a retiree with a conservative portfolio heavy in bonds, but your heirs are much younger with decades to retirement and stock-heavy portfolios, you should switch your asset allocation to more closely align with theirs.

Taxable assets
Upon the owner's death, taxable assets (assets held outside tax-advantaged accounts) get a step-up in basis, meaning that the basis (sometimes called the cost basis) of the asset, on which capital gains taxes are calculated, gets set to the market value of the asset on the date of the owner's death. This can be very valuable for assets with large unrealized gains. As such, it is usually best to avoid selling appreciated assets near the end of your life, even if they are not ideal - for example, individual stocks, actively managed mutual funds, real estate you no longer wish to own, etc. If you need to access the value of the asset, it is usually better to borrow against it, for example with a margin loan or Home Equity Line of Credit, than to sell the asset and incur the capital gains tax. Your estate or heirs can pay the loan off by selling the asset after it gets the step-up in basis.

The step-up in basis can also be a step-down in basis, if your basis is less than the market value of the asset. If you own assets that are worth less than their basis, it is usually best to sell them and use the losses to offset offset other gains.

Capital loss carryovers are lost at death, so if you have carryover losses, you can realize gains up to that amount for no net tax cost compared to not realizing the gains. This could be useful, for example, to restructure taxable investments or to liquidate investments to raise needed cash.

Real estate
Real estate, if owned outside tax-advantaged accounts, gets a step-up in basis like other taxable assets, and you should similarly avoid realizing capital gains on real estate. Under current tax law, a primary residence gets up to a $250,000 (single) or $500,000 (married) capital gains exclusion, so this can reduce or eliminate the value of the step-up in basis for this asset.

Retirement accounts
Retirement accounts come in many forms - IRAs, 401(k)s, 403(b)s, 457(b)s, and others, and most of these are available in pre-tax (also called "traditional" or "tax-deferred") or Roth tax structures. Retirement account tax planning strategies focus on when to make pre-tax vs. Roth contributions, and when to do Roth conversions, usually based on a comparison of current marginal tax rate to predicted future marginal tax rate at withdrawal. When facing the end of life, the strategies shift to comparing to heirs' predicted future marginal tax rates. Following the passage of the SECURE Act in 2019, non-spouse heirs get 10 or 11 years to withdraw funds, so an ideal tax strategy would consider all heirs' expected tax situations within this time period after your death. See Post-SECURE Act strategies for owners for a list of tax-planning strategies.

Roth conversions
Roth conversions can be a powerful planning tool for end-of-life tax planning. If you can convert pre-tax money to Roth at a lower rate than you expect your heirs to withdraw the money, it will increase the after-tax value of your bequest. Consider also that the SECURE Act requires non-spouse heirs to distribute retirement accounts within 10 or 11 years, so leaving a large pre-tax account per heir can raise their marginal tax rate much higher than it is now.

For example, consider if you have a $2M pre-tax IRA and a single heir with an $80,000 income in the 22% bracket. If the heir expects 5% real growth and can withdraw the funds over 11 years, per the level withdrawal table that would add $228,400 (=$2,000,000 x 11.42%) of taxable income, raising them into the 35% bracket. That would suggest some Roth conversions at 24%, 32%, and even 35% (if the taxes can be paid with other taxable assets) could be beneficial. However, if the IRA were worth $200,000, or the same $2M IRA were left to ten heirs in similar tax situations in equal amounts, the $22,840 income would not affect their marginal tax rate, and the decision can be made based on the heirs' marginal tax rates today.

Roth conversions where the taxes can be paid from funds outside the conversion are even more beneficial than when the taxes are paid with converted funds, as the analysis here shows. The time to withdrawal can be taken to be the owner's life expectancy plus the ten year distribution period. However, realizing capital gains on taxable assets to raise the funds needed to pay the tax is probably not optimal, as those assets should receive a step-up in basis. A large Roth conversion in your final year of life could be beneficial, as heirs could pay the taxes with taxable assets after they receive the step-up in basis.

Health Savings Accounts (HSAs)
A common tax strategy is to forego withdrawing money from an HSA when medical expenses are incurred, and rather saving the receipts and planning to withdraw at a later date, for the purposes of getting more tax-deferred or tax-free investment growth. There is no time limit for when funds can be withdrawn after an expense is incurred. Upon your death, if you leave the HSA to your spouse, s/he will be able to withdraw funds from the HSA using your past medical receipts. However, if leaving your HSA to a non-spouse, these accrued medical expenses are lost, and the entire amount of the HSA becomes taxable. Therefore, if leaving your HSA to a non-spouse, it is wise to plan to spend down the HSA before you die, including making any withdrawals for past medical expenses. This can be a difficult or uncomfortable task, so as an alternative, if you are charitably inclined, leave your HSA to a charity.

Insurance policies
If you currently have a term life insurance policy, make absolutely sure to keep paying the premiums so that the policy will pay out. If you have a permanent life insurance policy (such as whole life, indexed universal life, etc.), it is probably a good idea to keep paying the premiums too, although there may be more flexibility, especially if the policy has accumulated significant cash value. For all life insurance policies, make sure the beneficiaries are up-to-date and fit into your overall estate plan.

If you are presently working and have a disability insurance policy in force, consult with your physician on whether your medical condition will now, or likely will in the future, qualify you for disability.

Social Security
For someone with average life expectancy, Social Security retirement benefits are actuarially neutral with respect to the age to file, which can be anytime between age 62 and 70. For someone with below-average life expectancy, it is usually better to file as soon as possible.

Social Security disability benefits may be available if you are no longer able to work.

Social Security survivor benefits may be available to your spouse and dependent-age children. Look into whether your surviving family will be eligible for survivor benefits, and ensure the income is included in their financial plan.

Physical assets
If you have any valuable physical assets (such as cash, precious metals, jewelry, art, collectibles, etc.), locate them and prepare a list, including a description, location, and approximate value.

Debts
Most debts are not discharged at death, and any non-dischargable debts still existing after your death will need to be paid off by your estate. For each debt, decide whether it makes sense to pay it off now or to leave it:


 * As a general rule, avoid selling appreciated taxable assets (for example, investments, real estate) to pay off a debt, because of the step-up in basis.
 * Small "nuisance" debts should be paid off in the name of simplicity.
 * High-interest debts should also be paid off quickly regardless of your life expectancy, but it is especially important when facing serious medical issues and/or the end of your life, because it will take some time for a POA to take over your finances, and for an executor to be appointed and take over your estate, and interest will continue to accrue at a high rate during this time.
 * Low-interest debts that made sense to keep before should probably continue to be kept, especially if they are secured by property that has appreciated (for example, a low-interest mortgage on an appreciated house, or a margin loan on investments).
 * If you leave any debts for your estate, make sure your estate has enough liquid assets to pay them off. This is especially important for unsecured (that is, no collateral) debts.
 * If you have any undocumented or poorly documented loans, for example, personal loans to family or friends, either document these debts or pay them off.
 * Federal student loans, including Parent PLUS loans, are discharged at death, so avoid paying on these loans as much as possible.
 * If the net value of your estate is negative (that is, you expect your debts to exceed your assets at death), it is probably also a good idea to not pay any more on debts than necessary.

Estate planning
Estate planning is the branch of financial planning dealing with preparing for your own death and the associated distribution of assets, and also planning for your own incapacity. Major goals of estate planning usually include:
 * Ensuring that your financial affairs are managed the way you want them to, in the event you become temporarily or permanently incapacitated
 * Ensuring that medical decisions are made in accordance with your wishes, if you are not able to make them yourself
 * Ensuring that your assets are distributed the way you want after you die
 * Avoiding probate, which is expensive, time-consuming, and creates a public record of your assets
 * Minimizing taxes (income tax, estate tax, gift tax, inheritance tax, capital gains tax, etc.). As of 2022, the estate tax exemption is $12.06M for individuals and $24.12M for married couples; assets above these levels will probably require additional planning.
 * Arranging for guardians for any dependents in the event of your death or incapacity

Trusts are common in estate planning, especially when large amounts of money are involved. A trust is a legal entity where assets maintained within the trust are managed and disbursed by the trustee for the benefit of the trust's beneficiary, according to the terms of the trust. Trusts can have a very wide variety of purposes and structures. Appropriate uses of trusts include:
 * Requiring assets willed to a beneficiary to be spent in a particular way that aligns with your values, for example, allowing trust funds to be spent only on higher education and certain other expenses
 * Distributing assets over a long period of time, rather than all at once, for example, to reduce the chance of mismanagement for a younger child or an heir without the capacity to manage a large amount of money
 * Avoiding estate tax, for example, with an Irrevocable Life Insurance Trust (ILIT). A-B trusts were also commonly used for this purpose before the estate tax exemption became portable between spouses.

Estate laws are state-specific, so consult an attorney in your state who specializes in estate planning. A good estate planning attorney will work with you to determine your needs in all these different areas, and create the documents and trusts you need to execute your estate plan.