Knowing what to do when a loved one becomes ill can alleviate some of the uncertainty and anxiety that normally follows. Oftentimes, people panic and start making changes to their estate plan without first consulting with an experienced attorney or tax advisor. Family, friends, and others who want to help, tend to give well-meaning advice. They may suggest putting assets into the name of the well spouse alone, transferring assets, and/or adding or changing beneficiaries to accounts. Following such advice without considering the tax and other consequences can have unintended, adverse consequences. One should not begin to make changes to bank accounts and other investments unless and until all of the tax implications have been examined.
One of the first steps one should take when a spouse becomes ill is to visit with an attorney experienced in the areas of estate planning, tax and elder law, to make sure that you have all of the legal documents which you may need. For example, a health care proxy/living will and power of attorney are essential legal instruments. Making a detailed list of all of the assets owned by you and your spouse, and locating important financial information is also essential, so that tax planning can be properly undertaken. If one has a safe deposit box, it may make sense to consider emptying the box in advance, if the illness is severe, or at least making sure a deputy is appointed and has access to the box.
In the event of death, surviving spouses should not begin to collect life insurance proceeds or the decedent’s IRA or other retirement funds, nor should the spouse begin to remove the decedent’s name from assets, until legal advice from an estate planning attorney has been obtained. If a potential estate tax problem exists, a surviving spouse may want to “renounce” his or her interest in certain assets (i.e., not accept them), thus allowing the assets to pass to children or into a credit shelter trust created under the decedent’s will. One may not renounce if one has already exerted some control over an asset; thus, it is very important not to take any action with respect to assets until one is certain that a renunciation is not beneficial. In order to be valid, a renunciation must be done within nine (9) months of death.
In short, there is much to do when faced with the illness and/or death of a loved one. Knowing what to do during these difficult times can reduce stress and uncertainty and provide some comfort to the family.
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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.