A host of experts are predicting what the future will bring. Ken Dychtwald, a leading “age wave” expert, characterized the 10 physical, social, spiritual, economic, and political crises we will face as we age in the 21st century in the following list. (You can learn more at www.agewave.com.)

1. A Pandemic of Chronic Disease
2. Mass Dementia
3. The Caregiving Crunch
4. Coping With Death and Dying
5. “Gerassic Park”
6. An Inhospitable Marketplace
7. Changing Markers of Old Age
8. Financial Insecurity
9. Age Wars
10. Elder Wasteland

Let’s hear what Dr. Dychtwald has to say about one of these issues, #5. What about “Gerassic Park”? As Dychtwald writes,

All future-oriented public policy in America, including policy regarding Social Security and Medicare, is based on the assumption that there will be no meaningful breakthroughs that will affect longevity or biological aging. So what happens if we wake up tomorrow morning and there is a breakthrough?

Might it be a “Gerassic Park” in which, instead of cloning entire humans, we find a way to clone organs? What if we learn to manipulate the body’s immune system to increase longevity? Can we imagine a future without cancer, a world without Alzheimer’s or heart disease? It is possible…. The biotechnology century is coming; we should expect the unexpected.

–Dr. Ken Dychtwald, “THE 10 PHYSICAL, SOCIAL, SPIRITUAL, ECONOMIC, AND POLITICAL CRISES THE BOOMERS WILL FACE AS THEY AGE IN THE 21ST CENTURY,” American Society on Aging (www.asaging.org)

I see medical breakthroughs each day. That is why, as a Certified Financial Planner, I am bound to do planning for my clients assuming a life expectancy of 120 years.

You may think that living 120 years is far-fetched. When I was in my early teen years, as my grandfather retired at age 65, it was expected he would be dead by age 70. Over the past 50 years, with medical advances, the Insurance Institute states that a married couple reaching age 65 can expect one of the spouses will easily live to the age of 95.

Better plan for at least 30-40 years of retirement funding.

Discipline or regret!

Currently, 49% of LTC recipients are relying on Medicaid, but keep in mind, while some in this group come from our nation’s poor, many in this group start out paying out-of-pocket then go on Medicaid after their assets are exhausted. Only 7% of people are actually paying for long-term care with private insurance coverage they have purchased. The government took a step to reduce Medicaid roles with the passage of the DRA, making Medicaid eligibility more difficult. The three-year look back is gone. Under the new law, the look-back period is five years for all transfers, and the beginning date for the penalty period is now the later of the date the person enters a nursing home or the date the person applies for Medicaid.

What this boils down to is the penalty period will not begin until the nursing home resident is virtually destitute.

Gifts made by seniors in the most innocent manner could jeopardize their eligibility for Medicaid even if it is legitimately needed. For example, a grandparent making a monetary gift to a grandchild for a wedding or college graduation could end up delaying their Medicaid eligibility.

Also, watch out for filial responsibility. Filial responsibility laws derive from England’s Elizabethan Poor Relief Act of 1601. This law required grandparents, parents and children, to the extent they were able, to support family members who could not care for themselves. Currently, 28 states have filial responsibility laws. Pennsylvania has re-enacted its law making children liable for support of their indigent parents, and other states are likely to follow suit.

The DRA of 2005 also affects the exemption of a person’s home, the use of interest-only annuities and the forgiving of loans.
• A person’s home, formerly exempt from Medicaid eligibility limits, will be counted as an asset if the equity in that home exceeds $500,000. States are allowed the option to increase that amount to $750,000.
• Some advantages in using interest-only annuities have also been eliminated. These annuities provided a small income during life and left the original investment to heirs upon the senior’s death. Under the new rules, the state must be named beneficiary of any leftover funds in the annuity for at least the amount of the medical assistance paid on behalf of the annuitant.
• A senior can no longer loan money to their children to get it out of their estate, then, forgive the loan. In order not to be considered a transfer of assets, the repayment of a loan or mortgage must be actuarially sound and cannot be forgiven or cancelled upon the death of the lender.

Projected growth in the senior population has caused states to seriously review Medicaid programs.

For a reasonable cost, life insurance with a long-term care rider can be purchased. This plan will provide funds for the insured should they need long-term care, protecting the loss of other assets they have worked so hard to accumulate. However, in the event no long-term care is ever needed, the insured has a death benefit to leave to heirs, enhancing even further the legacy they will be able to leave their loved ones.

This process includes risk management and a review of all your insurance coverage — life, disability, liability, long-term care. Also reviewed are tax planning, cash flow analysis, and much more.

You should not just look at your own life, but, you must consider the possible caring for elderly parents, multi-generational relationships, and other personal planning issues.

Most people think that simply drafting a Will solves all these problems. Far from it. Wills are not the best vehicle for carrying out one’s wishes.

In addition, one should do at least an annual estate review with their advisor to make sure that beneficiary designations are current and intended distributions match your current intentions.

With your advisor you should discuss how you want your finances handled if you cannot function or after you pass away.

To most people their estate is simple, but, I have seen fortunes wasted by people who do not understand what the laws are and how they can and will affect your loved ones. Let me give you an example…. If you are married with children, and, you do NOT have a Will…where do your assets go? Most people think all of it goes directly to the surviving spouse…. AH-OO-GA! Wrong Answer! See your advisor for the answer!

New laws have significantly changed the estate tax which is back after a one-year repeal in 2010. Under the new 2011 law, the first $5 million of an estate is tax-exempt, and amounts in excess of that limit are subject to a maximum 35% tax. The 2011 law, which is scheduled to expire at the end of 2012, also changed the rules governing gift and generation-skipping transfer taxes.

Does the new legislation affect estates that were processed during 2010, when there was no estate tax?
Executors of estates of individuals who died last year can elect either the 2010 law or the new 2011 law. The 2010 law has no estate tax, but estate assets are subject to “carryover basis”: Beneficiaries must pay capital gains tax on any appreciation in excess of $1.3 million when inherited assets are sold. Under the 2011 law, beneficiaries are not subject to carryover basis. However, the estate will pay up to 35% estate tax on the amounts inherited in the estate above $5 million.

Executors of estates worth less than $5 million generally should choose the 2011 law. But higher-value estates might be better served by the 2010 rules, because the tax on appreciation might be lower than the estate tax.

Under the new law, a surviving spouse inherits any unused portion of the deceased partner’s $5 million exemption, making up to $10 million of the couple’s estate tax-exempt. How might this new provision, known as “portability,” affect couples’ estate plans?
A couple with a large estate previously had to create a trust on the death of the first to die to take full advantage of each spouse’s estate-tax exemption. The portability provision eliminates the need for trusts for some couples; i.e., the surviving spouse can simply add the unused portion of the deceased’s exemption to his or her own, provided the law is still valid at the time of the surviving partner’s death, but only if a federal estate-tax return is filed when the first spouse dies. Like the rest of the legislation package, this provision is set to expire at the end of 2012, so it remains to be seen whether the portability clause will become permanent.

How does the new law change gift and generation-skipping taxes?
There are three components to the transfer-tax system. (1) A gift tax for transfers during life; (2) an estate tax for transfers after death; and (3) a generation-skipping transfer tax for gifts to individuals who are two or more generations younger than the donor, such as grandchildren or great-nieces/nephews. In previous years, the exemptions varied for the three components, which made gift planning complex. Under the new law, all three components have a tax-exemption limit of $5 million, with a 35% maximum tax rate for transfers in excess of that amount.

How might people proceed with their estate planning in light of these changes?
It’s impossible to predict whether the law will expire in 2013 as scheduled or will be made permanent. I generally encourage clients to review their estate plans every three to five years, but with the laws constantly changing, people need to pay even closer attention, and update wills and other estate documents any time there is a change in legislation.

The proposal for 2013 is to reduce the exemption amount back down to $1 million.

Visit with your Financial Advisor and Estate Attorney to decide on the appropriate strategy for you.

If you do not prepare a will, the state will draw one for you, and chances are very good that your survivors will not like the provisions. The legal term for dying without a will is “intestacy,” and the distribution of your property will be based on the intestacy laws of the state in which you reside at the time of death.

In the absence of a will, the Probate Court will appoint an administrator, such as a family member or local attorney. Then after a complicated procedure, all of your assets will be distributed according to the state’s formula.

Your estate consists of personal property (furniture, jewelry, clothes, automobiles), investments (cash, savings, securities), real estate, employee benefits (group insurance, retirement or profit sharing) and other items such as the proceeds of a lawsuit against someone who accidentally caused your death.

You cannot rely on joint property title as a substitute for a will because it does not solve problems arising with the second death. Some forms of joint title do not pass entirely to the surviving spouse.

Having a will drawn can prevent family disputes, and will give you the opportunity to be certain that your property will be distributed promptly to the parties designated as beneficiaries.

Your will should designate an Executor to carry out your bequests efficiently and promptly and with less expense than if there had been no will. The will should also provide for flexibility in the administration of your estate. You may also wish to provide special bequests to non-profit organizations.

Having a will prepared will also help establish a relationship with an attorney, which could be extremely valuable in the future. Naturally, a will should be periodically reviewed and updated to reflect changing personal circumstances and new tax laws.

The federal estate tax may or may not become history after 2009; Congress is debating its fate. Meanwhile, it remains a subject worth tackling because no matter what your age or who is in charge of Congress several years hence, it’s better to be ready than to be caught unprepared.

All plans to minimize estate taxes revolve around a few basic rules:

• All property that passes from you to your spouse is shielded from the estate tax by the marital deduction
• Every estate is currently entitled to an exemption of $2 million from the tax
• Property you inherit comes to you with the new tax basis, equal to its value at the date of the descendant’s death
• Where property has been held in a married couple’s joint name (“with the right of survivorship” or by the entirety”) so that it belongs to the survivor automatically, only half its values is deemed to have been inherited by the survivor and acquires a new basis. (An exemption for property you may have bought in joint name before 1977 gives the surviving owner new tax basis for 100% of the property)

The $2 million exemption makes it possible, with some planning, for a married couple to leave $4 million free of tax to their inheritors. Here’s how it’s done.

Assume John leaves his entire $5 million estate to Mary, his wife, who, thanks to the marital deduction, gets it clear of taxes. The rub: When Mary leaves the property to the children, they face taxes shielded only by the $2 million exemption, with the balance exposed to tax rates that run up to 46%.

Our couple could have done better. Suppose John had left $2 million to a trust that will pay Mary the income (plus as much of the principal as she might need to maintain her accustomed lifestyle) during her lifetime, after which any remaining assets of the trust would be paid to the children. The balance of John’s estate could be left to Mary outright. No tax would be due from John’s estate, the marital deduction shields the $3 million left to Mary, and the exemption covers the $2 million trust.

The payoff on the plan is realized on Mary’s death, when the trust fund “bypasses” her estate and goes directly to the children. The trust is not considered part of her estate simply because she didn’t own it. So Mary’s estate amounts to $3 million, of which $2 million is insulated by her own exemption. Thus only $1 million (compared with $3 million in the earlier example) of John’s $5 million estate is hit by the tax, which could mean that close to $1 million will be left to divvy up among the children.

If our imaginary couple had sufficient wealth for Mary (still assuming she’s the surviving spouse) to forego the income from the tax exempt $2 million trust fund, they might consider skipping the trust, then, John could leave that $2 million to children or other heirs.

For many couples, estate planning consists of keeping all their property in joint name. As a form of ownership, it is simple, it avoids the cost of having wills prepared as well as the expenses of probate and estate administration, and since the whole fortune goes to the spouse, estate taxes don’t enter the picture.

But the above “plan” passes the estate tax problem on to be reckoned with at a future date in Mary’s estate, which will include $2 million that could have been exempt by a provision in John’s will. Hundreds of thousands of dollars might be thrown away along with the available exemption.

Another opportunity forfeited in this example involves the basis step up from inherited property. Let’s say the couples jointly held property, worth $5 million, that has a $1 million tax basis. When Mary, as the surviving owner, comes into the $5 million of assets, $2.5 million is deemed to have belonged to her originally, and retains its $500,000 basis; the balance is stepped up to its $2.5 million value at John’s death. Mary now has $5 million in securities or other property with a $3 million tax basis- the sale of which would mean taxes on a $2 million recognized gain.

Note that any gain realized by the surviving joint owner on a sale of the family home could be offset by the $250,000 exemption.

The point is that joint ownership of the couple’s assets is not the most tax-effective way to go. However, since any amount of property can be transferred between husband and wife free of gift tax, it is a simple matter to allocate their holdings so that they can be disposed of by will. If it appears that a particular spouse is not likely to be the survivor, the bulk of the couple’s property (or at least enough to fund the $2 million exemption), should be a held in his or her name.

While this may be of little concern while markets are rising, the basis according to inherited property (its fair market value at the date of death) is not necessarily “stepped up”. Paper losses on securities held by the decedent will mean a reduced basis to the new owner, wiping out any income tax benefit the decedent could have by realizing the loss. So take your losses- don’t leave them to your heirs.

Finally, think twice before making gifts large enough (above the $1 million lifetime exemption) to incur a gift tax, before the fate of the big estate tax has been determined. Any gift tax you pay will have been wasted if the estate tax expires.

Note by Paul Ferraresi: An easier alternative to the above examples is to set up a Living Trust. More on that later…

• The will names an executor and, if you have children under 18, is essential for naming a guardian. A will is not the best document to use. The time delays and probate costs hurt the family almost as much as the departed loved one. If you have gross asset values (no deductions for liens or encumbrances) in excess of $100,000 it makes economic, business and emotional sense to have a Living Trust drafted (Revocable Intervivos Trust).
• Items to include are a net worth statement, contact list of relevant parties, last wishes, valuables list and a key documents reference for originals.
• Arrange for a financial institution to hold them. This will keep assets from being overlooked when the estate is settled.
• Another option is to set up an investment account with pay-on-death designation to the executor.
• Ethical wills can tell a family history, share values, explain estate planning decisions or express feelings toward family members. Two sites that offer helpful advice are www.ethicalwill.com and www.personalhistorians.org.
• At least once every five years, you should meet with everyone significantly involved in the estate. At a minimum, this would include the executor, trustees and primary heirs to make sure there are no surprises later on.

One of the first steps in this whole process is to assess your values before you value your assets. Next, you should follow an Empowered Wealth System and, lastly, develop a Family Empowered Bank. Going through this experience will be one of the most insightful experiences you go through. Each client I work with on these steps are forever greatful.