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Apache is functioning normally

Apache is functioning normally

People inherit less than you might expect. In fact, most people think they’ll inherit far more than they really will.

If you do inherit money, it most likely won’t be subject to federal estate taxes. In 2023, those apply only to estates worth more than $12.92 million. But very few households have that level of wealth and most people inherit nothing at all. Here’s what the inheritance landscape looks like, according to the Federal Reserve’s most recent Survey of Consumer Finances from 2016 to 2019. If you need help with your estate plan or have received an inheritance, consider working with a financial advisor.

Why the Average Inheritance is Misleading

On average, American households inherit $46,200, according to the Federal Reserve data. But this figure is inflated by top-tier wealth and belies the fact that many households inherit no money at all.

Of those that do receive a bequest, most receive a small fraction of the average. The top 1% and 10% of households by wealth receive so much that their estates pull the average up. This creates the impression that many, if not most, households receive a comfortable nest egg. Very few actually do.

While less than a third of all households inherit any money, between 70% and 80% of households receive no inheritance at all.

Average Inheritance By Wealth Level

A consistent reality with inheritance is that almost all households who receive an inheritance expect more than they get. This may have to do with the prominence of estate taxes in the national debate, which creates the impression that inheritance and estates are a matter for ordinary Americans. Here’s a look at how much households with varying levels of wealth inherit.

Top 1%

Average inheritance: $719,000
Expected inheritance: $941,100

Measured by wealth, the top 1% of households receive overwhelmingly more than any other group measured. This is what causes such dramatically skewed data when it comes to measuring averages. This group receives more than four times as much as the next wealthiest cohort.

Next 9%

Average inheritance: $174,200
Expected inheritance: $266,600

The average inheritance for the remainder of the top 10% of households is significantly less than those at the very top but still considerable: $174,200. Then again, these households end up inheriting 35% less money than they expect to receive.

Next 40%

Average inheritance: $45,900
Expected inheritance: $60,100

On average, the next 40% of households receive an inheritance that’s closest to the national average. These households are also the most realistic in their expectations. All other cohorts expect vastly larger inheritances than they will receive. This swath of the population overestimates its inheritances by a relatively modest amount.

Bottom 50%

Average inheritance: $9,700
Expected inheritance: $29,400

A national average of $46,200 does nothing to communicate the fact that about half of all households who do receive an inheritance will get less than $10,000. In fact, this cohort expects to receive nearly three times what they will actually get.

The bottom half of households is the cohort that’s also least likely to receive any inheritance at all. With lower rates of college education and lower earnings, these households should not expect to share wealth among generations.

Do You Have to Pay Taxes on Inheritance?

Chances are that you won’t have to pay any taxes on money or property you inherit.
In 2023, the federal estate tax only applies to estates that transfer more than $12.92 million to beneficiaries. Keep in mind that it’s the responsibility of the decedent estate’s to pay this tax, not the person or entity that receives an inheritance.

The tax is only applied to property that exceeds the $12.92 million threshold. So if an estate is worth $13 million, only $800,000 would be subject to the federal estate tax in 2023.

Some states also charge their own estate taxes on top of the federal levy. However, a few states also tax those who receive inheritances. These levies are known as inheritance taxes and the following states have them:

  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania
  • Iowa*

* Iowa is phasing out its inheritance tax by 2025

Bottom Line

While the average inheritance is $46,200, only a small percentage of households end up actually inheriting money. For households that do receive inheritances, the size of those windfalls can vary greatly for those in the top 1% of households compared to those in the bottom half.

Estate Planning Tips

  • Many people want to make sure they leave something behind for the next generation. If that’s you, make sure to avoid these five common estate planning mistakes.
  • A financial advisor with estate planning expertise can help guide you through the sometimes complicated process of building an estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/Georgijevic, ©iStock.com/stocknshares, ©iStock.com/eyetoeyePIX

Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

Inheriting a house with a mortgage requires making some decisions about what to do with the property. One option is to sell the home and pay off the loan with the sale proceeds. If you keep the home, you can assume the existing mortgage or refinance the loan. If you keep the home, you can live in it or rent it out. Your choices may be limited by the laws where you live. If the ownership of the house is split between one or more other heirs, you’ll have to consider their wishes. A financial advisor can help develop a plan to reach your personal financial goals.

Home Inheritance Basics

After someone passes away, a will can be used to bequeath property such as a private residence to a loved one. In the absence of a will, state laws may dictate where the property goes.

Often property or other assets inherited in this way goes through probate. When that happens, any debts owed by the estate must be paid off before assets are distributed to heirs. This means the mortgage has to be dealt with in some manner before the estate can be settled. State inheritance laws vary, so local requirements may limit your options.

Mortgage Inheritance Options

When you inherit a home with a mortgage, you’ll have two basic choices: sell it or keep it. Here are the pros and cons of each.

  1. If you sell the home, you can use the proceeds to pay off the loan. If there is any money left after satisfying the lender, you can keep the cash as part of your inheritance.

Selling and paying off the loan relieves of you any responsibility to make future mortgage payments and keep up the property. And selling may be the only option if you share ownership of it with another beneficiary who wants cash. Taxes represent a potential complication. You may owe capital gains taxes on the money you receive after paying off the mortgage.

  1. If you keep the home, you can assume the mortgage and start making payments. A federal law called the Garn-St. Germain Act generally requires lenders to let someone who has inherited a house assume an existing mortgage without getting credit approval or paying closing costs on a new loan. This can let you move into a place more desirable than you could buy on your own, in addition to possibly having pleasant memories associated with it.

Keeping the home gives you more options. You can live in the home if its location and other features meet your needs. Alternatively, you can rent it to tenants and, if the rent is more than the mortgage, collect passive income plus potential gains from price appreciation.

A major downside of keeping the property is that you have to make the mortgage payments, in addition to covering the taxes, insurance and other expenses. If you want to and can get approved for a new loan, however, you may be able to refinance the loan. Refinancing can let you take advantage of lower interest rates and possibly reduce the payments or, if you prefer, take cash out of the equity.

Potential Pitfalls

A lot of things can go right if you inherit a house with a mortgage. Some potential pitfalls to be aware of include these:

  • Negative Equity: If the house is underwater, meaning the outstanding balance of the mortgage is more than the property’s value, you won’t be able to sell it for enough to pay off the loan. Unless you can get the lender to agree to a short sale, you’ll still be responsible for the remaining balance.
  • Tax liability: Selling an inherited property and realizing a gain on it after settling the mortgage could create a tax obligation. The gain could even push you into a higher tax bracket so you’ll owe more on the other income you generate from work or investments.
  • Ownership costs: Repairs, maintenance, property taxes and homeowner association fees are some of the costs that can go with owning a home you inherit. Account for these costs before you decide what to do with the property.
  • Selling costs: Even if you sell the property, you’ll still have to pay a number of costs. These often include real estate agent commissions, closing costs and possibly repairs, among others. These costs will reduce the amount left after the transaction and can make the sale less appealing and worthwhile.

Picking the Right Approach

Deciding what to do when you’ve inherited a house with a mortgage involves balancing several considerations, including:

  • Your finances: Ask yourself whether you have the resources to keep making mortgage payments and maintaining the property.
  • Living situation: If you need a place to live and the inherited property suits your needs, it might make sense to assume the mortgage and move in.
  • Market factors: The real estate market in your area may suggest that it’s better to sell or rent than to keep the property and live in it.
  • Nostalgia: A family home could have pleasant memories or, for a variety of reasons, be someplace you’d prefer not to live.
  • Legal issues: If multiple heirs are involved, they might disagree about what to do with the property.

The Bottom Line

Inheriting a house with a mortgage presents options that need careful consideration. Selling the home and paying off the loan can relieve you of mortgage responsibilities. Alternatively, you can keep the home, assume the mortgage and either live in it or rent it out for passive income. State laws and the wishes of other heirs may limit your choices. Your finances, living situation, market conditions, emotions and legal issues will be part of the final decision.

Tips for Investing

  • Consider talking to a financial advisor before making any decisions about what to do with a home you have inherited. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you decide to sell an inherited home and pocket the cash, you may wonder what would happen if you invested the funds. SmartAsset’s Investment Return & Growth Calculator can give you an answer. Input the amount you’ll invest, how much and how often you’ll make additional contributions to your initial capital, the anticipated rate of return and your investment time horizon in years. The calculator will tell you what your portfolio will likely be worth at the end of that period.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/mapo, ©iStock.com/courtneyk

Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

If your heir dies, what happens next? This is an issue that comes up in estate law. If not frequent, it is certainly not rare. After you write your will, what happens if your heirs die before they can inherit? The answers here depend entirely on your state’s laws. Below we discuss the most common outcomes, although readers should note that estate and property are two of the most state-specific areas of the law. Make sure to consult an attorney or financial advisor before making any decisions about your specific needs.

What Happens If You Die Intestate?

First, while a question regarding beneficiaries necessarily discusses a written will, there is the issue of dying intestate. This means that you die without a will and your estate is distributed based on the laws of your state rather than your stated wishes. In most states this means that your assets will be split evenly among your closest next of kin, typically traveling to a spouse, then to children, then to siblings and so on.

Under most, if not all, state laws, intestate inheritance is based on surviving family members. That is to say, the court essentially combs your family tree looking for the next closest relative currently alive. If you had a closer relative, but they have since died, neither their estate nor their heirs have any rights.

For example, say that your state distributes assets first to a spouse, then to children. If your spouse predeceases you, neither their heirs nor their family has any claim to your estate. Instead, if you have children, the estate would pass to them.

Lapsed Gifts in a Will

When your will leaves assets to a beneficiary who is, themselves, dead it is called a “lapsed devise.” Since they’re dead, your named beneficiary cannot inherit. From here, state law dictates who takes these unclaimed assets. This leads to two common outcomes that depend on the specific laws of your state and the circumstances of the inheritance.

Trail of Estate

In many states, the assets will become part of the deceased beneficiary’s estate. This is based on what are called “anti-lapse” laws, meaning laws that specifically address the issue of a lapsed devise. The assets which would go to your beneficiary instead go to their heirs based on the terms of their will or (if they died intestate) state law.

This can occasionally lead to a domino effect if the beneficiary’s heirs have, themselves, died. In that case, the inheritance will continue to pass along as state law and will terms required until the assets reach a living person.

However, the details of anti-lapse laws vary widely. In some states, the assets pass fully to your beneficiary’s estate no matter who they are. In others, anti-lapse laws only apply if the deceased beneficiary was a blood relative or even someone as close as a child or sibling. Still, others may restrict who can inherit from the deceased beneficiary in turn.

The general rule of thumb for anti-lapse laws is this: If the beneficiary is dead and anti-lapse laws apply, the beneficiary’s heirs inherit the assets. The specific application of these laws, however, can be entirely different from state to state.

Residuary Distribution

If no anti-lapse laws apply, then the assets revert back to the estate. They then pass as a standard residuary. This means that the assets have no clear heir under your will, the same as if you had not named a beneficiary at all. From there, the property will typically move in two ways.

First, your residual beneficiary will inherit if you have one. A residual beneficiary is the person or persons you named to inherit any unclaimed assets in your will. In most wills, it’s a good idea to have one and naming a residual beneficiary can be as simple as just adding “all else to this individual.” At the end of the will’s distributions, if there are any remaining assets, this person claims them.

Second, if you have no legitimate or living residual beneficiary, state law applies. When a will has residual benefits and no heir to claim them or if the residual beneficiary themselves has died, typically states distribute the property under their intestacy laws. This means that those specific assets pass to your heirs as defined by state law just as if you had no will at all.

Alternates, Survivorship And Joint Inheritance

There are several exceptions to these rules. The three most common are alternate heirs, survivorship and joint inheritance.

Alternate Heirs

In your will, you can name alternate heirs to receive the property if the primary beneficiary cannot. For example, you might leave a bequest along the lines of “Sally inherited my house. If she cannot inherit, then the house will pass to Richard.” In this case, as the primary beneficiary, Sally inherits your house. However, if Sally dies before she could inherit, then Richard would inherit the house. If he also dies, then lapse and residuary laws would apply and would follow the primary beneficiary (here, Sally).

Survivorship

A survivorship requirement states that the beneficiary of a will cannot inherit unless they survive the deceased for a minimum amount of time. For example, a survivorship requirement might say that a beneficiary cannot inherit unless they outlive the deceased by at least 30 days. A survivorship requirement can delay the close of probate since an estate cannot close until it has distributed all of its assets.

If the beneficiary dies before meeting the terms of a survivorship requirement it is treated as though they died before inheriting. The same rules apply, meaning that the assets would pass first to any alternates, then to any lapsed devise or residual heirs and finally through state inheritance law. Survivorship requirements can be applied by state law or by the terms of the will itself.

Joint Inheritance

Finally, assets in a will can be left to multiple beneficiaries as a group. For example, you might say that a pool of money is to be split equally among your children or you might leave a single house for three family members to share.

When assets are left to a group and one member of that group dies, the matter is decided by the wording of the will. If the will leaves its assets to a generally defined group, for example, “my children” or “my siblings,” then if one member of that group dies remaining heirs will split the assets among themselves.

However, if the will leaves its assets to specifically named members of a group, for example “to Alex, Robert and Julie,” then if one member of the group dies the assets will be treated as a specific inheritance with a beneficiary’s death. In this example, if Alex dies before inheriting, then the analysis will follow the same process as discussed above, with the law first looking for a named alternate, then reviewing the state’s laws on lapsed devices and finally distributing Alex’s share based on the state’s intestacy laws.

The Bottom Line

If a beneficiary to a will dies before they can inherit, the results can range widely. The assets might travel to the beneficiary’s heirs in a chain of inheritance, they might proceed to the will’s residual heir, or the state might handle them as intestate assets. It depends entirely on the circumstances of the will and the laws of the individual state.

Estate Planning Tips

  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The best way to avoid these issues is by writing your will thoroughly and with care. Here’s how you can do exactly that.

Photo credit: ©iStock.com/Ridofranz, ©iStock.com/JodiJacobson, ©iStock.com/PeopleImages

Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

You may not always know it if you have an inheritance coming. And in some cases, you may not even know the individual has passed on. This is particularly common with intestacy, if a relatively distant family member dies and you are the next closest living relative. It falls to the estate’s executor or administrator to notify all heirs of their inheritance and any steps they must take to claim those assets. Every state has very different rules on this subject. While it’s common to notify beneficiaries within 45 to 90 days from the start of probate, this is not an area with significant overlap among states. Here’s what you need to know.

A financial advisor can help you create an estate plan to protect the interests of your heirs.

Estate Laws Are Highly State-Specific

Estate and property law are two of the most state-specific fields in all of law, arguably even more so than criminal statutes. Every state has its own rules for how it handles inheritances and how it manages property rights, and often those rules conflict with the laws of other states.

You should note that the process for notifying heirs under a will can differ in any given state. So make sure to consult a lawyer before making any specific plans regarding your own assets.

How Long After Death Until Probate Is Filed?

When someone dies, the total amount of their property, cash, debts and all other assets and liabilities collectively are known as their “estate.” The process of distributing this estate is known as probate, and this process is overseen by a probate court.

If the deceased had a will, then their estate is handled by an executor who was ideally named in the text of the will. If the deceased died intestate, meaning without a will, then their estate is handled by an administrator appointed by the court. The main difference between these positions is their title. In both cases, the individual pays the estate’s debts and distributes its assets to named and/or legal heirs until nothing remains in the deceased’s name.

There is little, if any, consistency in when the probate process must start. Some states require that the executor, heirs and interested parties must file for probate within 30 days of death. Others give you as long as three years.

In all cases, however, heirs cannot be formally notified of their inheritance until the probate process starts and the executor or administrator begins their work.

How Long After Probate Are Heirs Notified?

Once probate has begun, the executor or administrator must notify all heirs and potential heirs of their inheritance.

For estates with a will, the most common rule is that the executor must notify all known and named beneficiaries within 90 days of the start of probate. That said, this is a very loose standard. States range widely, with some requiring notice within 15 business days of the first hearing date and others giving the executor up to a calendar year or more to notify heirs.

To the extent that an executor must notify beneficiaries, these rules also apply only to known beneficiaries. As the executor manages the estate they may discover new or unresolved inheritance issues, and heirs will then be notified as they are identified.

For estates without a will, the rules are somewhat different. First, the administrator must identify potential beneficiaries based on state law and existing family records. Often, the only source for this information is family members who have come forward to identify themselves. Then, typically, the administrator must make a public notice of the deceased so that any unknown heirs have an opportunity to come forward. This is generally handled by running an advertisement in a local newspaper. This notice must run for a minimum amount of time, with that period varying from state to state.

Once the administrator has satisfied the court that they have made a diligent search for all potential heirs, they must notify the heirs of their inheritance. Again, typically they have between 90 days and a year to do this.

After the executor or administrator has notified the estate’s heirs, a waiting period may apply to any distributions. These are particularly common for real estate and other high-value assets. When state law requires a waiting period it typically will last for at least six months between when the heirs are notified and when they can receive the assets. This is to allow time for anyone to contest the inheritance as appropriate.

Finally, after notice and any applicable waiting periods have elapsed, the executor or administrator may make distributions.

Bottom Line

There is no standard to when the beneficiaries and heirs to an estate must be notified of their inheritance. States require notice to begin anywhere from 15 days to a full year after the process of probate has begun, terms which vary widely based on when and how heirs are identified.

Estate Planning Tips

Photo credit: ©iStock.com/FatCamera, ©iStock.com/TwilightShow, ©iStock.com/Moyo Studio

Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

If you die without naming a beneficiary for your 401(k) account, the rules for your retirement plan will likely require that funds in the account be considered part of your estate and have to go through probate. The probate process is governed by state laws that vary significantly, but can often add considerable cost and delay to settling your estate. You can avoid this by naming beneficiaries, including both primary and secondary ones, and reviewing your selections periodically or when major life events occur. You can plan your estate with the help of a financial advisor.

401(k) Beneficiaries

A 401(k) plan is a tax-advantaged way to save for retirement that many employers offer as a benefit. Plans often allow you to select how funds in the account will be invested, and all allow and encourage if not require you to name one or more beneficiaries.

The beneficiary can be almost anyone you want to be able to control and benefit from the assets in your 401(k) plan after your death. A beneficiary can be a person, such as a spouse or child, as well as a nonprofit charity, religious or educational institution or even a business or other legal entity.

Typically, 401(k) plans will ask you to name beneficiaries when you open these accounts. If you don’t, your plan may remind you from time to do this. It is to your benefit to do so because it enables easy and cost-free transfer of control of assets after your death.

Naming a beneficiary or beneficiaries helps ensure your assets will quickly and efficiently go to provide for family members or support favorite causes. When you name a beneficiary to your 401(k), that person or entity acquires a partial right of ownership to the account. On your death, that partial right becomes full ownership.

This process generally happens automatically on your death. One possible exception occurs when you name a beneficiary other than your spouse. In that case, some plans may require a letter of approval from your spouse before another beneficiary can take control of the account.

A beneficiary has a strong position when it comes to taking control of assets naming that person as beneficiary. For instance, if your will directs an asset to one person while the asset account lists another person as beneficiary, the account goes to the one named on the account, not the one named in the will.

You can name multiple beneficiaries, splitting assets in the accounts in any way you like. You can also name backup beneficiaries in case the person or persons named aren’t able or willing to take control of the 401(k). It’s a good idea to review the beneficiaries you have named from time to time or after major life events such as marriage, divorce or birth of a child, and possibly update them. Otherwise, you run the risk of someone such as an ex-spouse receiving assets you would rather direct elsewhere.

401(k) Without Beneficiaries

If you don’t name anyone as beneficiary to your 401(k), what happens to the assets in the account is determined by the rules on default beneficiaries set out in the documents controlling your retirement plan. These vary depending on the plan, but usually the spouse is the first default beneficiary, followed by any children and, finally, your estate.

If the default beneficiary comes into play, the process is different than if you had named a beneficiary. A named beneficiary gains control of the 401(k) automatically on your death without any delay or cost. However, a default beneficiary can take ownership of the account it generally will have to go through probate.

Probate is an estate-settlement process governed by state laws that vary widely. Sometimes probate can take years to complete and require paying significant fees and other costs. While this is going on, assets in your estate may be frozen so your surviving family members can’t access them.

A person named as beneficiary to your 401(k) may, at their option, be able to roll over the assets in to an IRA. This can help reduce taxes, among other advantages. However, if you don’t name a beneficiary and the plan directs the assets to a default beneficiary, a rollover may not be possible. That can lead the default beneficiary to have to pay more taxes on the transfer than otherwise.

Bottom Line

If you don’t name a beneficiary for your 401(k) plan, your plan’s rules will likely direct the assets to a default beneficiary, such as your spouse or children. Before a default beneficiary can gain control of the account, however, it will likely have to go through probate, adding time and cost to the process of settling your estate. You can avoid this by naming one or more beneficiaries, as well as backup beneficiaries, either when you establish the account or later on.

Retirement Tips for Beginners

  • You can get help saving for retirement from a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s Retirement Calculator can help you turn a few data points including your location, age, income, current savings and amount and frequency of future contributions, into a forecast of how much money you’ll have when you are ready to retire.

Photo credit: ©iStock.com/JackF, ©iStock.com/William_Potter, ©iStock.com/FG Trade

Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

Source: smartasset.com

Apache is functioning normally

Part of estate planning is preparing for when you are incapacitated or other cases when you might still be physically present but have mentally declined. Hopefully, that will not happen. Many people remain sharp and present throughout their entire life, but for many others, very old age is a period of mental weakness. They get less capable of making clear choices as they age and may often be physically unable to make those choices. In that case, you often need someone else to help you make crucial decisions. Two of the most common options for this are the healthcare proxy and power of attorney. Here’s what you need to know. You may also want to talk to a financial advisor to make sure your individual situation is fully taken care of. 

What Is a Healthcare Proxy?

A healthcare proxy refers to when you name someone to make any necessary healthcare decisions on your behalf if you are unable to do so. This individual is also referred to as your “agent” or, in some jurisdictions, your “health care agent” or “health care power of attorney.”

You typically name your agent in a living will, a document that establishes any rules and requirements that you have if you are physically or mentally incapacitated. You can also fill out a form that is itself called a “health care proxy,” in which you name your agent. However you name them, in this same form, you will also give instructions for how you want your agent to make healthcare decisions on your behalf.

These instructions are extremely important. In general, a healthcare proxy gives the agent the same scope of medical decision-making power that you have. You have, effectively, authorized this person to act in your stead for the purposes of your health. This authority is only limited by the instructions that you leave in your healthcare proxy form or living will. If you want them to make certain decisions in certain ways, you need to make that clear in their authorization.

A healthcare proxy can only act if you are incapacitated, either mentally or physically and their authority only lasts for the duration of your incapacitation. For example, say that you are in a car crash and knocked unconscious. The hospital would look to your healthcare proxy and the agent that it names, to make any decisions on your behalf until you woke up.

A healthcare proxy can also take effect due to mental decline. In these cases, it’s possible for the grant of authority to become long-term or effectively permanent. If a doctor or court (depending on the rules of the jurisdiction) rules that you are not mentally competent to make your own decisions, your healthcare proxy will kick in and the hospital will look to your agent to make all necessary decisions on your behalf.

In all cases, however, a healthcare proxy has a very specifically defined role. Your agent can only make decisions regarding your healthcare and they can only do so if you are medically incapacitated. It’s important to note that this is an area generally dominated by state law. There are few if any, federal laws that apply here.

What Is a Power of Attorney?

A power of attorney refers to when you name someone to make any necessary legal or financial decisions on your behalf. This individual can be referred to as your agent or your power of attorney, which can get slightly confusing as the form appointing them is also referred to as a power of attorney.

The format for naming a power of attorney is different across jurisdictions, but it typically requires a notarized statement granting someone this authority. You can do this in several different formats such as a specific letter granting someone power of attorney or in a living will. Similar to a healthcare proxy, in the form of naming your power of attorney you also give instructions for what authority you want them to have and how you want them to make decisions on your behalf.

As above, these instructions are extremely important. A power of attorney has the authority to make almost any legal or financial decision on your behalf as though you had made it personally. This includes but is not limited to, signing contracts, conducting business, making financial transactions, filing taxes, employing agents, assuming legal and financial liabilities and more. For example, if they sign a contract, it has the same authority as if you had signed that document.

This is true even if you do not specifically authorize a given transaction. As long as your power of attorney is acting within the scope of their authority it will be legally binding.

Instructions can narrow this grant of authority. When you name your power of attorney, you can assign them a specific scope of authority. For example, you can give someone power of attorney to sign the paperwork on a specific real estate deal or to file your 2023 taxes. If this person then tries to go and sell a bunch of your stocks, the transaction would be illegal because you didn’t give them the authority to do that.

Unless you specify otherwise, a power of attorney can apply whether you are incapacitated or not. In fact, it’s common for people to have a power of attorney for when they are perfectly healthy, just unable to attend a given transaction. When and under what conditions the agent has authority is another matter that you can specify in the form granting them power of attorney.

There are four basic types of power of attorney:

  1. Durable: With a durable power of attorney, you give someone an indefinite grant of authority. This authority lasts until you either revoke it or until you die. It is relatively uncommon to give someone an unlimited, durable power of attorney.
  2. Limited: With a limited power of attorney, you give someone a specific grant of authority. This authority applies only to specific situations and/or only lasts until its terms expire. For example, it’s common to give your accountant power of attorney to file your taxes or to conduct specific transactions when you can’t be present.
  3. Springing: With a springing power of attorney, you give someone a grant of authority that only begins under certain circumstances. It is common, for example, to name a springing power of attorney that only takes effect if you are incapacitated.
  4. Conditional: With a conditional power of attorney you give someone authority that ends or only lasts under certain circumstances. For example, you might give someone power of attorney that automatically begins if you are incapacitated and that automatically ends when you wake up.

You can combine different types of power of attorney. For example, a springing, durable power of attorney is a common feature of living wills. In that case, the power of attorney would give someone an indefinite grant of authority, but only if you become permanently incapacitated.

The Key Differences Between Healthcare Proxies and Power of Attorney

Healthcare proxies and power of attorney each play a different role in estate planning, but each is critical. The most important differences are:

Scope

  • A healthcare proxy can make decisions regarding your healthcare and nothing else
  • A power of attorney cannot make decisions regarding your healthcare, but they can make decisions about almost all other legal and financial matters

Conditions

  • A healthcare proxy can only act if you are incapacitated and is automatically triggered by your incapacitation
  • A power of attorney can act under any circumstances based on the terms you set, but it is only automatically triggered if you define the conditions in advance

Duration

  • A healthcare proxy’s authority ends once you are no longer incapacitated but can become permanent if your incapacitation is permanent
  • A power of attorney’s authority ends when you say it does and can be temporary or permanent based on your instructions

Revocability

  • A healthcare proxy’s authority is automatically revoked once you are awake and mentally competent
  • A power of attorney’s authority can be revoked at any time at your instruction

The Bottom Line

A healthcare proxy makes decisions related to healthcare on your behalf and can only act if you are medically or legally incapacitated. A power of attorney makes legal and financial decisions on your behalf and acts based on the scope of authority and under the conditions you have given them. It’s important to plan out your entire estate planning with an advisor.

Power of Attorney Tips

  • When do you need power of attorney? That’s an excellent question for the professionals. Consider working with a financial advisor who can help you plan out your entire estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you want to assign a power of attorney or a healthcare proxy, it’s absolutely essential to do this right. Otherwise, someone might challenge their authority when you aren’t able to clarify matters on your own behalf.

Photo credit: ©iStock.com/Sladic, ©iStock.com/RichLegg, ©iStock.com/Daisy-Daisy

Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com

Apache is functioning normally

There is no power of attorney after death. Power of attorney is what’s known as a principal/agent relationship. This means that the individual who holds power of attorney serves as the agent for the individual who assigned it to them, the principal. The role is based entirely on this relationship. When the principal dies, the relationship ends and so does the power of attorney. Here’s what you need to know. You can also consult with a financial advisor to help you make the right decisions for your situation.

What Is a Power of Attorney?

Power of attorney refers to the authority someone has to act on your behalf regarding legal and financial transactions. For the duration and scope of this assignment, this person will act with your full authority. This means, for example, that he or she can sign contracts, sell property, conduct business or authorize financial transactions as though you did it yourself.

The term “power of attorney” refers to both the document that you use to assign this authority and the individual who assumes it. The individual is also referred to as your agent.

There are a few limits on someone who acts as your power of attorney. Most importantly, they cannot contradict you directly. Unless you have been declared legally incompetent, you always have the authority to revoke someone’s power of attorney and they cannot directly disobey your instructions. That said, they are free to undo choices you have made unless you have clearly told them to do otherwise. There are also a few areas where they do not have authority. For example, a power of attorney cannot enroll you in the military or steal from you.

Types of Power of Attorney

People use a power of attorney for many different purposes. It’s common to assign someone power of attorney to conduct a specific type of business. For example, many clients will give their accountants power of attorney for the purposes of filing their taxes. Other people will use the power of attorney when they are physically unable to conduct their own business. For example, many soldiers may assign someone power of attorney to manage their financial affairs while they’re on deployment.

It is also very common to assign someone power of attorney while you are incapacitated. This lets someone handle your financial and legal needs if you are physically or mentally unable to make those decisions for yourself.

There are many different types of power of attorney based on how you set the terms of this assignment. A few of the most common examples include:

  • General Power of Attorney: In this case, you have assigned someone power of attorney with no specific scope or limits. This person can conduct almost all legal and financial transactions on your behalf with the same authority as you, personally.
  • Durable Power of Attorney: This is a form of power of attorney that continues indefinitely, including if you are incapacitated. It only ends when you specifically revoke it.
  • Limited Power of Attorney: This grant of authority only applies to certain circumstances or actions. For example, you may assign someone power of attorney for the purposes of conducting a specific piece of business or managing a certain issue.
  • Springing Power of Attorney: This is a form of power of attorney that only applies when certain conditions are met. The most common form of this is to name a power of attorney who will step in if you are incapacitated, with that authority ending when you are able to make decisions again.

Power of Attorney After Death

Power of attorney does not survive the death of the principal. Once you have died, your power of attorney has no authority whatsoever. The agent cannot make decisions or take actions on your behalf and to knowingly do so would be generally considered a form of fraud.

The reason for this is the nature of power of attorney. This authority is based on the relationship between you (the principal) and your power of attorney (the agent). You invest your agent with a measure of your authority, letting this person act on your behalf and make the decisions that you have a legal right to.

But when you’re dead, you no longer have any authority. Since you no longer have the legal right to make any decisions, neither does your agent. At the same time, the relationship itself has ended since you no longer exist to have a relationship with. There is only your estate, which is managed by your executor (if you left a will) or your administrator (if you did not).

Alternatives to Power of Attorney After Death

Power of attorney is someone who has the authority to make decisions on your behalf and manage your assets, subject to your instructions and wishes. Once you die, this job transfers to whoever holds the role of executor or administrator of your estate. They will manage assets, make payments and make decisions based on the combination of their own judgment, the terms of your will and the inheritance laws of your local jurisdiction.

As a result, the best way to manage power of attorney after your own death is to name an executor to your estate. Write a will with clear terms and a named executor. They will take over making decisions in conjunction with the probate court. This executor can be the person who held your power of attorney in life, although it’s generally wise not to have them involved with the process of writing the will in order to avoid conflicts of interest.

The Bottom Line

Power of attorney is what’s known as a principal-agent relationship. This means that the authority is based entirely on the relationship between you and your power of attorney. Once you are dead this relationship no longer exists, which means the power of attorney no longer exists either.

Power of Attorney Tips

  • No matter who makes your decisions in the future, you can still make the best possible choices today. Working with a financial advisor can unlock a resource to help you properly prepare your estate and manage all of your financial needs for whatever may come. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Power of attorney is a complicated and very important issue when it comes to estate and financial planning.

Photo credit: ©iStock.com/djedzura, ©iStock.com/SrdjanPav, ©iStock.com/Daisy-Daisy

Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com

Apache is functioning normally

Paying for a nursing home can seriously deplete your retirement savings. The government-funded Medicaid program can pay some or all nursing home costs, but it’s restricted to people of very limited financial means. You may be able to qualify for government assistance with nursing home costs, even if you control substantial wealth if you transfer nearly all your assets into an irrevocable trust. An irrevocable trust can protect your money from nursing home costs, but they have costs and drawbacks of their own, including permanently losing direct control of your assets. Talk to a financial advisor to learn about options for paying for long-term care.

Irrevocable Trust Basics

A trust is a legal entity many people create as part of an estate plan. The trust acts as a container for assets transferred into it by the grantor. A trustee is appointed to manage the assets in the trust for the benefit of one or more beneficiaries.

A trust can be revocable or irrevocable. You can make changes to a revocable trust after establishing it, including removing assets from the trust. Irrevocable trusts, however, cannot be changed after establishment. That means transferring assets to the trust is a one-way process. Once in, assets cannot be removed from an irrevocable trust.

Irrevocable Medicaid Trusts

Irrevocable trusts come in several varieties and can help with many different estate planning and other personal finance tasks. Medicaid trusts are the kind used to help reduce the impact of nursing home costs.

More specifically, Medicaid trusts are designed to help people qualify for Medicaid, the government health insurance program. Unlike Medicare, which is not means-tested, Medicaid is only available to people of limited financial means.

The program is administered by states, which determine their own Medicaid eligibility requirements in a variety of ways. In most, the annual income limit is $29,160 or less. This cap includes Social Security and pension benefits as well as wages and investment income. Financial resources such as bank accounts, investments, revocable trusts and real estate typically can’t total more than $2,000. People who have more income and more assets may have to spend their own assets to pay for nursing home care until their assets have declined to the point they meet the Medicaid caps.

An irrevocable Medicaid trust is designed to help someone qualify for Medicaid without having to deplete their own assets. After creating the trust, they can transfer in enough assets to bring them below Medicaid’s caps. Once they have done that, assuming they have followed the rules, Medicaid will pay some or all of their nursing home costs. In this way, an irrevocable trust can protect assets from nursing home costs.

Keep in mind that some people say it’s unethical to use trusts to shield your assets from Medicaid. Others believe it’s perfectly fine, considering the rules and laws set up around Medicaid. Ultimately, whether you use an irrevocable trust to protect your assets from nursing home costs will be based on your financial situation, as well as your thoughts and feelings on the ethics.

Limits of Irrevocable Trusts

Irrevocable trusts have a number of limitations that anyone planning to use one will want to keep in mind. These include:

  • One-way transfer. Assets placed in the trust can’t be taken out of the trust for as long as the grantor of the trust is alive.
  • Five-year limit. Assets must be transferred into the trust at least five years before the grantor seeks to acquire Medicaid eligibility. Irrevocable trusts can’t help at the last minute.
  • Medicaid doesn’t always pay all costs. A Medicaid patient in a nursing home still has to use their own income to pay for most nursing home costs. Medicaid will often pay for most and sometimes all of the costs, but patients usually shoulder some of the financial burden.
  • Not all nursing homes qualify. Medicaid only pays for care in certain approved nursing homes.

Other Ways to Protect Assets from Nursing Home Costs

An irrevocable trust is not the only tool available to help with nursing home costs. Here are some of the alternatives:

  • Long-term care insurance can cover some or all nursing home costs without having to consider Medicaid eligibility.
  • Medicaid-compliant annuities can be used to generate income that isn’t included in Medicaid’s income assessment.
  • A life estate transfers ownership of assets in your estate to a spouse, removing them from consideration when determining Medicaid eligibility.
  • Financial gifts to family members can reduce your net worth enough to meet Medicaid’s guidelines.

Bottom Line

An irrevocable trust can help you avoid having to use your own assets to pay for nursing home care by making you eligible for Medicaid. Medicaid can pay some or all of your costs, but only if you meet strict financial guidelines for income and assets. Transferring assets into an irrevocable trust, called a Medicaid trust, can help even people with significant assets meet these guidelines, But once assets are transferred to an irrevocable trust, they can’t be retrieved from the trust.

Tips for Long-Term Care Planning

  • A financial advisor can help you design a strategy for covering long-term care costs using an irrevocable trust, if appropriate, as well as other methods. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Whether you are retired or still working, keeping a budget is a basic tool to help you for prepare for future needs such as paying for a nursing home. SmartAsset’s Budget Calculator can tell you how your spending stacks up to other people in your area.
  • If you thinking about purchasing long-term care insurance, be sure to review our picks for the top long-term care insurance providers of 2023.

Photo credit: ©iStock.com/Nes, ©iStock.com/designer491, ©iStock.com/Dean Mitchell

Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

Source: smartasset.com