How Should I Take My Pension Pay-Out?

Many retirees have legacy pensions. As they retire, they have the option of drawing those pensions or taking the accrued value in the pension as a lump sum.

A pension is a stable stream of income in retirement, and depending on the option the retiree uses in taking the pension, it is a stream of income that is guaranteed for life.

Investopedia’s recent article, “Pension Planning: Lump Sum Versus Monthly Payments,” says that the pension provider takes the risk of both sub-par market returns and the possibility that the retiree will live longer than expected. The article raises several thoughts to consider, when making the decision:

Implied Return on Pension. Calculate the return on the pension, by assuming the lump-sum you could take was invested, and it generated a stream of income. The longer the pension pays out (the longer the retiree lives), the higher the implied return. Compare that return to the long-term return one would expect from investing in a diversified portfolio. This is heavily influenced by the amount of the lump-sum and varies greatly by person.

Impact on Retirement Plan. A retirement plan should be designed to fully fund the retiree’s spending needs through the balance of his or her life. If the plan includes an investment portfolio, the portfolio is usually a key source of income—but it’s an uncertain source of income, because returns will vary. The pension, however, is a steady stream of income that won’t vary, and usually won’t even adjust for inflation. For some plans, this is okay, since the static nature of the return is more important than the fact that the income doesn’t grow. In other situations, growth is needed.

Spending Habits. If spending is variable or if there’s uncertainty in spending needs, use caution. This may not mean going with the lump sum, or it could simply require delaying the pension decision. The more complete the information, the easier it is to decide.

Health of Pension and Trustee. Pensions can be underfunded, and trustees can and do go bankrupt, meaning a reduction or even the elimination of pension payments for plan participants. It doesn’t happen often, and when it does, the Pension Benefit Guarantee Corporation (PBGC) may take over the payments. In recent years the PBGC has been underfunded, and it’s not easy to predict where things may be in ten years. Do your best to do the research, so that you have a clear picture of both how well-funded the plan is and the position of the trustee.

Reference: Investopedia (November 15, 2018) “Pension Planning: Lump Sum Versus Monthly Payments”

Suggested Key Terms: Estate Planning, Financial Planning, Retirement Planning, Pension

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How Will My IRA Be Taxed?

The most common of IRA tax traps results in tax bills through Unrelated Business Taxable Income (UBTI). The sources of business income from stocks, bonds, and funds like interest income, capital gains, and dividends are exempt from UBTI and the corresponding tax (the Unrelated Business Income Tax or UBIT).

Fox Business’s recent article, “Your IRA and taxes: Don’t get a surprise tax bill” explains that IRAs that operate a business, have certain types of rental income, or receive income through certain partnerships will be taxed, when the total UBTI exceeds $1,000. This is to prevent tax-exempt entities from gaining an unfair advantage on regularly taxed business entities.

UBIT can take a chunk from an IRA, and the Tax Cuts and Jobs Act of 2017 replaced the tiered corporate tax structure with a flat 21% tax rate. That begins in tax year 2018 (this tax season). These tax bills often have penalties, because IRA owners aren’t even aware that the bill exists.

Master Limited Partnerships (MLPs) held within IRAs are a good example of how UBTI can catch investors by surprise. MLPs are fairly popular investments, but when they’re held within an IRA, they’re subject to UBIT. When the tax is due, the IRA custodian must get a special tax ID number and file Form 990-T to report the income to the IRS. That owner must pay the tax, and is typically unaware of the bill, until it arrives as a completed form to be submitted to the IRS (completed and signed on behalf of the owner). In some instances, the owner may have to pay estimated taxes throughout the year. This can mean a significant underpayment penalty.

Working with prohibited investments will also result in a tax bill. Self-directed IRAs can violate the rules. Alternative investments such as artwork, antiques, and precious metals (with some exceptions) are generally considered as distributions and are subject to taxes.

Prohibited transactions are a step above prohibited investments and can result in the loss of tax-deferred status for the entire IRA. This includes using an IRA as security to obtain a loan, using IRA funds to purchase personal property, or paying yourself an unreasonable compensation for managing your own self-directed IRA. Executing a prohibited transaction can result in the entire IRA being treated as a taxable distribution to you.

Therefore, like fund holdings, ETFs, and other investments, it’s critical to understand exactly what you own and how to deal with the tax liabilities.

Reference: Fox Business (March 6, 2019) “Your IRA and taxes: Don’t get a surprise tax bill”

Suggested Key Terms: Estate Planning, Tax Planning, Financial Planning, IRA, Self-Directed, Unrelated Business Taxable Income (UBTI)

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Smart Women Protect Themselves with Estate Planning

The reason to have an estate plan is two-fold: to protect yourself, while you are living and to protect those you love, after you have passed. If you have an estate plan, says the Boca Newspaper in the article titled “Smart Tips for Women: Estate Planning,” your wishes for the distribution of your assets are more likely to be carried out, tax liabilities can be minimized and your loved ones will not be faced with an extended and expensive process of settling your estate.

Here are some action items to consider, when putting your estate plan in place:

If you have an estate plan but aren’t really sure what’s in it, it’s time to get those questions answered. Make sure that you understand everything. Don’t be intimidated by the legal language: ask questions and keep asking until you fully understand the documents.

If you have not reviewed your estate plan in three or four years, it’s time for a review. There have been new tax laws that may have changed the outcomes from your estate plan. Anytime there is a big change in the law or in your life, it’s time for a review. Triggering events include births, deaths, marriages, and divorces, purchases of a home or a business or a major change in financial status, good or bad.

If you don’t have an estate plan, stop postponing and make an appointment with an estate planning attorney, as soon as possible.

Your estate plan should include advance directives, including a Durable Power of Attorney, Health Care Surrogate, and a Living Will. You may not be capable of executing these documents during a health emergency and having them in place will make it possible for those you name to make decisions on your behalf.

Anyone who is over the age of 18, needs to have these same documents in place. Parents do not have a legal right to make any decisions or obtain medical information about their children, once they celebrate their 18th birthday.

Make a list of your trusted professionals: your estate planning attorney, CPA, financial advisor, your insurance agent and anyone else your executor will need to contact.

Tell your family where this list is located. Don’t ask them to go on a scavenger hunt, while they are grieving your loss.

List all your assets. You should include where they are located, account numbers, contact phone numbers, etc. Tell your family that this list exists and where to find it.

If you have assets with primary beneficiaries, make sure that they also have contingent beneficiaries.

If you have assets from a first marriage and remarry, be smart and have a prenuptial agreement drafted that aligns with a new estate plan.

If you have children and assets from a first marriage and want to make sure that they continue to be your heirs, work with an estate planning attorney to determine the best way to make this happen. You may need a will, or you may simply need to have your children become the primary beneficiaries on certain accounts. A trust may be needed. Your estate planning attorney will know the best strategy for your situation.

If you own a business, make sure you have a plan for what will happen to that business, if you become incapacitated or die unexpectedly. Who will run the business, who will own it and should it be sold? Consider what you’d like to happen for long-standing employees and clients.

Smart women make plans for themselves and their loved ones. An estate planning attorney will be able to help you navigate through an estate plan. Remember that an estate plan needs upkeep on a regular basis.

Reference: Boca Newspaper (March 4, 2019) “Smart Tips for Women: Estate Planning”

Suggested Key Terms: Women, Estate Planning Attorney, Assets, Durable Power, Health Care Surrogate, Living Will, Financial Advisors, CPA, Trusts, Heirs, Business

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Are You Retiring in 2019? Here’s What You Need to Know

There are more than few steps you’ll need to complete, before packing up your desk, cubicle or locker and saying good bye to your work family. Even if your 401(k) and IRA is in order, there are things you need to during the last few months of working, says Next Avenue in the article “Tips to Prepare for Retiring This Spring or Summer.”

There’s detailed planning, organization of documents, and additional financial details that need attending. You may also want to start creating your “bucket list” — a list of things you’ve always wanted to do, but never had the time to do while you were working. Getting all of this in order, will speed your waiting time and prepare you better, when the last day of your working life does finally arrive.

Whether you are three months or six months from retirement, here are some tips for your to-do list:

Social Security. Figure out when the best time for you to take Social Security benefits will be. Can you delay it until age 70? That’s when you’ll get the biggest payout. The earlier you start collecting benefits, the smaller your monthly check will be. Take it early, and you are locked in to this lower rate.

Health Care. Figuring out how to manage health care costs, is the single biggest worry of retirement for most Americans. An injury that puts you in a nursing care facility can make a huge dent in your retirement funds, even if it’s just for a short while. This is the time of your life, when focusing on your health is most important, even if you’ve been careless in earlier decades. Evaluate your health status and get check ups with your regular physician and your dentist.

Investments. Check with your HR department about when you’ll need to roll over your 401(k) plan. If you transfer the funds into a low-cost IRA, you may save in fees. Work with your financial advisor to determine what your withdrawal rate will be. You may need to reevaluate some of your retirement goals or consider working part time during retirement for a few years.

Medicare. If you’re almost 65, you can start enrolling in Medicare now. The government lets you start the process within three months of your 65th birthday. Start this process, so you are covered, once you are not on the company’s health care plan.

Expectations. The first six months to a year of retirement can be both wonderful and terrible. While enjoying freedom, many people find it hard to withdraw money from the same accounts they spent so many years building. What if they don’t have enough for a long life? Take a realistic look at your lifestyle, budget, and spending habits, before you retire to make sure you are financially ready to do so. If you think you might work part time, look into the positions that are available in your area and what they pay.

Lifestyle. Often, we are so busy planning for the financial side of retirement, that we forget to plan for the “soft” side: what will you do in retirement? Will you volunteer with an organization that has meaning for you? Write the novel you’ve started on a dozen times? Spend more time with your grandchildren? Travel? What will make you feel like your time is being well-spent, and what will make you fulfilled?

Don’t forget the legal plan. Retired or not, you need to have a will, power of attorney, and health care power of attorney to protect your family, whether you are preparing for retirement or in the middle of your career. Speak with an estate planning attorney to ensure that these important documents are in place.

Reference: Next Avenue (March 6, 2019) “Tips to Prepare for Retiring This Spring or Summer”

Suggested Key Terms: Retirement, Income, Social Security, Investments, Health Care, Lifestyle, Medicare, Will, Power of Attorney

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Aging in Place: Reality or Dream?

Seniors crave their independence and a sense of place. Almost all wish to remain in their own homes and to “age in place.” Being independent in your senior years benefits everyone. However, if aging brings illness, professional home caregiving may be unaffordable, says The Winston-Salem Journal in the article “Who will help me to age in place?”

Even though they want to remain independent, family member participation may be necessary for this to happen. Family caregivers may live with aging parents, serving as guardians, trustees or power of attorney agents on their parent’s behalf. They may perform many tasks, including cooking, cleaning and monitoring their medical or home care. They may take care of the home and take aging parents on outings.

Loyalty to aging parents runs the gamut, from daily contacts and living together, to children who vanish as soon as they are financially independent. While our biology may dictate that close family members are genetically predisposed to care for us most, it’s not everyone’s experience.

If your goal is to have parents, children and grandchildren all spend time together as the generations move through their lives, the time to start is while you are parenting. The most important thing you can do to increase the likelihood of having family members who value each other and care for each other, is to raise children with love and kindness.

You should limit the amount of time that children spend with electronic devices. Making family connections and teaching caregiving skills within the family, requires time and attention. Teach your children empathy and caregiving through gardening, caring for plants and pets and letting them see how you take care of siblings, parents, grandparents, friends and the less fortunate through volunteer work.

Our children learn more from what they see, than what we say. By teaching your children to respect and care for those they love, you will be creating a family legacy based on your values. This will be as much a part of them, as any inheritance you can leave them.

Part of caregiving is taking care of the legal and financial side of your life. Ensure that your family members have an estate plan in place, including a will, financial power of attorney and health care power of attorney. Caregiving for others involves preparing for the ups and downs of life. This shows your children that there are things we do for ourselves and for others that make life easier for those we leave behind. It is an important life lesson for each generation.

Reference: The Winston-Salem Journal (March 5, 2019) “Who will help me to age in place?”

Suggested Key Terms: Aging in Place, Caregiving, Family Legacy, Will, Power of Attorney, Health Care Power of Attorney

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Estate Planning for Parents with Young Children

Attorneys who focus their practices on estate planning, know that not every story has a happy ending. For some of them, it’s a professional mission to make sure that young parents are prepared for the unthinkable, says KTVO in the article “Family 411: Thinking about estate planning while your kids are young.”

It’s a very easy thing to forget, because it’s so unpleasant to consider. The idea of becoming seriously ill or even dying while your children are young, is every parent’s worst fear. But putting off having an estate plan with a will that prepares for this possibility is so important. Doing it will provide peace of mind, and a road forward for those who survive you, if your worst fears were to come true.

Start with a will. In a will, you’ll name a guardian, the person who would be in charge of rearing your children and have physical custody of them. Don’t assume that your parents will take over, or that your husband’s parents will. What if both sets of parents want to be the custodians? The last thing you want is for your in-laws and parents to end up in a court battle over custody of your children.

Another important document: a trust. You should have life insurance that will be the source for paying for the children’s education, including college, summer camps, after-school activities and their overall cost of living. In addition, proceeds from a life insurance policy cannot be given to a minor.

However, what if your son or daughter turned 18 and were suddenly awarded $500,000? At that age, would they know how to handle such a large sum of money? Many adults don’t. A trust allows you to give clear directions regarding how old the child must be, before receiving a set amount of money. You can also stipulate that the child must complete college before receiving funds or reach certain milestones.

An estate plan with young children in mind, must have a Power of Attorney for financial decisions and one for medical decisions. That allows a named person to make important financial and medical decisions on behalf of the child. You may not want to have their legal guardian in charge of their finances; by dividing up the responsibilities, a checks and balances system is set into place.

However, for medical decisions, it is best to have one primary person named. In that way, any care decisions in an emergency can be made swiftly.

While you are creating an estate plan with your children in mind, make sure your estate plan has the same documents for you and your spouse: Power of Attorney, medical Power of Attorney, a HIPAA release form and a living will.

Speak with a local estate planning attorney who has experience in planning for young families.

Reference: KTVO.com (Feb. 6, 2019) “Family 411: Thinking about estate planning while your kids are young”

Suggested Key Terms: Estate Plan, Minors, Guardian, Power of Attorney, Medical Power of Attorney, Beneficiary

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Family Meetings and Trustworthy Siblings Needed to Help Aging Parents

It gets tricky when aging parents start having problems managing their own financial and legal affairs. Siblings can be a challenge, if they lack the ability to understand the changing roles from adult child to caregiver, or if they don’t know how to manage the “business side” of life. That, says the Monterey Herald in the article “Financial planning: Family communication helps aging parents,” can lead to challenging circumstances for aging parents and siblings.

For one thing, parents are often reluctant to seek help, even if they are aware that things are not right. Notices of missed payments may be stuffed in a drawer or left to pile up in stacks on a desk that was once orderly and tidy. Depending on where adult children live, this state of affairs could go on for a very long time, until someone realizes that it’s not for lack of money, but their capacity is starting to diminish. If you are nearby and visit often, you may not notice until things are in a bad state. If you live far away, you may not know until an annual visit brings you to a home that’s in a state of disarray.

Some siblings are easy to work with and understand the challenges that aging parents face. However, others don’t have the temperament or the knowledge to help out. If they are estranged from the parents, they obviously won’t be much help and could get in the way. Trying to reach out and keeping them informed may be difficult. However, it may also be necessary.

If there is a good relationship with siblings and they all live relatively close to each other, the family should begin with a series of regular family meetings. Ideally, the parents call the first meeting to take place, and they are able to take the lead in explaining why everyone is gathering and what needs to be accomplished. If they are not capable of doing that, or don’t want to do that, because they don’t want to be seen as needy or pushy, then an older sibling usually steps up.

A family with a history of good communication can usually deal with the legal and financial matters in several meetings. A family that rarely talks or only speaks during the holidays will need to get accustomed to working with each other in a productive manner. Some families meet at their estate planning attorney’s office. The attorney can serve as a facilitator, while an estate plan is put into place. Often, a neutral, third-party meeting place can diffuse some of the old family dynamics, which often emerge when a family meets at the family home.

Start by putting together a summary of the parent’s situation. What are their expenses, and what are their sources of income? How are their investment accounts titled? Do they have an estate plan? Have they named beneficiaries for their retirement accounts and life insurance policies? Is there a long-term care policy in place? How is their home titled, and where is the deed located?

Having the answers to these questions, will also help you protect parents from financial elder abuse.

Evaluate their health with a realistic view. Do they have the health coverage they need? Are they independent now, and what is the prospect for their future independence? If they should become less able to live on their own, what will that look like? How will that be paid for?

Next, review their legal status. Do they have a will, power of attorney, health care power of attorney and HIPAA release form? If their estate plan has not been reviewed for more than three years, it needs to be updated. Many financial institutions and some health care facilities will not accept documents that are more than three to five years old. If any documents were created before HIPAA went into effect (2001), then they definitely need an updated estate plan.

The goal is to prepare as much as possible in advance, rather than reacting to a crisis. Increasing family communication around caring for aging parents can also bring siblings closer together, with a shared cause. Getting parents the care they need before an emergency, will also leave everyone in the family knowing they’ve done the right thing.

Reference: Monterey Herald (Feb. 20, 2019) “Financial planning: Family communication helps aging parents”

Suggested Key Terms: Aging Parents, Health Care Power of Attorney, HIPAA, Family Meetings, Estate Planning Attorney

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Digital Assets in Estate Planning: The Brave New World of Estate Planning

Cryptocurrency is almost mainstream, despite its complexity, says Insurance News Net in the article “Westchester County Elder Law Attorney… Sheds Light on Cryptocurrency in Estate Planning.” The IRS has made it clear that as far as federal taxation is concerned, Bitcoin and other cryptocurrencies are to be treated as property. However, since cryptocurrency is not tangible property, how is it incorporated into an estate plan?

For starters, recordkeeping is extremely important for any cryptocurrency owner. Records need to be kept that are current and income taxes need to be paid on the transactions every single year. When the owner dies, the beneficiaries will receive the cryptocurrency at its current fair market value. The cost basis is stepped up to the date of death value and it is includable in the decedent’s taxable estate.

Here’s where it gets tricky. The name of the Bitcoin or cryptocurrency owner is not publicly recorded. Instead, ownership is tied to a specific Bitcoin address that can only be accessed by the person who holds two “digital keys.” These are not physical keys, but codes. One “key” is public, and the other key is private. The private key is the secret number that allows the spending of the cryptocurrency.

Both of these digital keys are stored in a “digital wallet,” which, just like the keys, is not an actual wallet but a system used to secure payment information and passwords.

One of the dangers of cryptocurrency is that unlike other financial assets, if that private key is somehow lost, there is no way that anyone can access the digital currency.

It should also be noted that cryptocurrency can be included as an asset in a last will and testament as well as a revocable or irrevocable trust. However, cryptocurrency is highly volatile, and its value may swing wildly.

The executor or trustee of an estate or trust must take steps to ensure that the estate or the trust is in compliance with the Prudent Investor Act. The holdings in the trust or the estate will need to be diversified with other types of investments. If this is not followed, even ownership of a small amount of cryptocurrency may lead to many issues with how the estate or trust was being managed.

Digital currency and digital assets are two relatively new areas for estate planning, although both have been in common usage for many years. As more boomers are dying, planning for these intangible assets has become more commonplace. Failing to have a plan or providing incorrect directions for how to handle digital assets, is becoming problematic for many individuals.

Speak with an estate planning attorney who has experience in digital and non-traditional assets to learn how to protect your heirs and your estate from losses associated with these new types of assets.

Reference: Insurance News Net (Feb. 25, 2019) “Westchester County Elder Law Attorney… Sheds Light on Cryptocurrency in Estate Planning”

Suggested Key Terms: Digital Assets, Estate Planning, Elder Law Attorney, Cryptocurrency, Digital Keys

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Why Is a Revocable Trust So Valuable in Estate Planning?

There’s quite a bit that a trust can do to solve big estate planning and tax problems for many families.

As Forbes explains in its recent article, “Revocable Trusts: The Swiss Army Knife Of Financial Planning,” trusts are a critical component of a proper estate plan. There are three parties to a trust: the owner of some property (settler or grantor) turns it over to a trusted person or organization (trustee) under a trust arrangement to hold and manage for the benefit of someone (the beneficiary). A written trust document will spell out the terms of the arrangement.

One of the most useful trusts is a revocable trust (inter vivos) where the grantor creates a trust, funds it, manages it by herself, and has unrestricted rights to the trust assets (corpus). The grantor has the right at any point to revoke the trust, by simply tearing up the document and reclaiming the assets, or perhaps modifying the trust to accomplish other estate planning goals.

After discussing trusts with your attorney, he or she will draft the trust document and re-title property to the trust. The assets transferred to a revocable trust can be reclaimed at any time. The grantor has unrestricted rights to the property. During the life of the grantor, the trust provides protection and management, if and when it’s needed.

Let’s examine the potential lifetime and estate planning benefits that can be incorporated into the trust:

  • Lifetime Benefits. If the grantor is unable or uninterested in managing the trust, the grantor can hire an investment advisor to manage the account in one of the major discount brokerages, or he can appoint a trust company to act for him.
  • Incapacity. A trusted spouse, child, or friend can be named to care for and represent the needs of the grantor/beneficiary. She will manage the assets during incapacity, without having to declare the grantor incompetent and petitioning for a guardianship. After the grantor has recovered, she can resume the duties as trustee.
  • This can be a stressful legal proceeding that makes the grantor a ward of the state. This proceeding can be expensive, public, humiliating, restrictive and burdensome. However, a well-drafted trust (along with powers of attorney) avoids this.

The revocable trust is a great tool for estate planning because it bypasses probate, which can mean considerably less expense, stress and time.

In addition to a trust, ask your attorney about the rest of your estate plan: a will, powers of attorney, medical directives and other considerations.

Any trust should be created by a very competent trust attorney, after a discussion about what you want to accomplish.

Reference: Forbes (February 20, 2019) “Revocable Trusts: The Swiss Army Knife Of Financial Planning”

Suggested Key Terms: Estate Planning Lawyer, Wills, Trusts, Trustee, Probate Court, Inheritance, Power of Attorney, Healthcare Directive, Living Will, Tax Planning, Guardianship

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Health Care Decisions in 2019 Require a Medical Power of Attorney

The patient above was asked if he had a living will or a health care directive. He wondered, why are they asking me this? It’s a simple knee replacement surgery. Do they think I am going to die? However, as discussed in the article “Take control of health care decisions in 2019 | Coming of Age…Again” from the Kirkland Reporter, all of these documents need to be in place anytime a medical procedure takes place, no matter how routine the patient may think it is.

Someone, whether a parent, spouse, friend or colleague, needs to be able to have the legal power to make decisions on your behalf, when you cannot. You need a health care directive or a durable Power of Attorney for health care, or both, or to have both of these documents combined into one (depending upon the state you live in; these laws vary by state). In Washington, the official term is health care directive. In other states, the term living will is used.

The health care directive is used to tell doctors and medical caregivers of your choices about medical interventions that you would or would not want to be used, in the unexpected event that you become seriously or critically injured, terminally ill or unable to communicate with those around you.

If you don’t have this document, the decisions will be made by select members of your family with health care professionals. If you don’t want certain things to happen, like being intubated or put on a feeding tube, and they feel strongly that they want to keep you alive, your wishes may not be followed.

A Power of Attorney and health care directives are created when working with an estate planning attorney to create an overall estate plan, which includes your will and any necessary trusts. These documents are too important to try to do on your own. There are major implications. What if they are not executed properly?

The person who is your health care agent has the authority to stop medical treatment on your behalf, or to refuse it. They can hire or fire any medical professional working on your care, and they can determine which medical facility should treat you. They can visit you, regardless of any visitation restrictions, and review your medical records. A durable Power of Attorney for health care gives this person the right to make decisions that are not necessarily covered in your health care directive.

Note that you can revoke your Power of Attorney document at any time, with a written notice to your agent.

These are complicated matters that deserve thoughtful consideration. The person you name will have tremendous responsibility — you are putting your life into their hands. Make sure the person you select is willing to take this responsibility on and have a secondary person in mind, just in case.

Reference: Kirkland Reporter (Feb. 20, 2019) “Take control of health care decisions in 2019 | Coming of Age…Again”

Suggested Key Terms: Power of Attorney, Health Care, Medical Directive, Capacity, Estate Planning Attorney, Living Will

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