Mistakes are part of life, but estate planning mistakes can hurt those you love unnecessarily.
Especially given the heightened concerns surrounding the “pandemic,” many people are seriously considering their estate planning (or lack thereof).
Before you take up your own estate planning, it may be prudent to pause and consider best practices and even learn from the estate planning mistakes of others.
According to a recent article in the West Haven Observer titled “5 Estate planning disasters you’ll want to avoid,” heirs who are prepared to inherit wealth from family members who actually talk about wealth and have an estate plan, tend to fare better than those who do not.
Even so, a constantly changing legal and tax environment presents significant external challenges.
Nevertheless, a few simple steps may save your beneficiaries from the expense and stress of some of the following common big estate planning mistakes.
Not designating beneficiaries properly. This is one of the most common mistakes.
Fortunately, this estate planning mistake is one of the easiest to remedy once identified.
While it may be easy to forget the beneficiary you designated on a life insurance policy from 30 years ago, failing to check all beneficiary designations after big life event changes can lead to the wrong people inheriting from you.
Using beneficiary designations is an excellent way to bypass the probate process, since such assets are not subject to probate.
Depending upon where you live, probate can be an expensive process (think Missouri, not Kansas).
A beneficiary designation is far simpler and more efficient.
Did you know beneficiaries can be set up on bank accounts, CDs, savings accounts, and even motor vehicles in Kansas and in Missouri.
Whether the institution calls it “Pay on Death” or “Transfer on Death” (the legal terminology really means the same thing), accounts with beneficiaries designated will pass sans probate just like a retirement fund or life insurance policy.
Teaching point: your will does not control any beneficiary designations.
Accordingly, it is essential that there is proper “alignment” between your estate planning documents and your asset beneficiary designations.
Designating a minor as a beneficiary. You love your grandchildren, right?
If they are “minors” and not yet “adults” under state law, then they cannot inherit until they are adults (usually 18 or 21).
If a minor does receive an asset, the court must appoint a conservator to supervise and manage the assets until the age of majority is reached.
Your estate planning attorney will advise you based on your individual situation, but one alternative is to create a trust to hold the inheritance of any minor children as part of your Last Will and Testament.
The trust will be managed by a trustee who may be a parent of the minor children, a trusted friend, relative, or institution.
The trustee manages the assets on behalf of the children as beneficiaries.
If the trust is created under a Revocable Living Trusts instead of under a Last Will, then the trust itself will not be subject to probate.
Failing to fund a trust. All too often, this is the weak link that breaks the estate designed around a Revocable Living Trust.
Consequently, this is a very common estate planning mistake.
Placing assets within the trust is an ongoing process known as “funding” the trust.
Usually this means changing the ownership of bank accounts or real estate from being owned by you to being owned by your trust.
If the trust is not funded and your Last Will has instructions that contradict the trust, then such “orphaned” assets will need to go through probate and the trust instructions will not control them.
Leaving a tax nightmare for heirs. What is one of the many advantages of passing on at death real estate or other assets that appreciate in value?
They get a “step up” in basis at death.
Heirs are not responsible for any income taxes up to the date of death value when sold.
This can be a very big benefit.
There are exceptions, however.
For example, inherited IRAs and 401(k)s are fully inherited as ordinary income from dollar one.
In fact, with passage of the SECURE Act to start the year (and 2020 has been an interesting year), many tax benefits for IRA heirs have disappeared.
Instead of being able to “stretch” their withdrawals from inherited IRA balances over their lifetimes, most non-spouse beneficiaries now must fully withdraw the entire amount from the IRA or 401(k) within ten years, and the withdrawal is fully considered ordinary income.
As you may imagine, this alone could leave your heirs with a huge, unexpected tax bill.
There is a workaround.
By converting some or perhaps all of your retirement accounts to a Roth IRA during your lifetime, you can pay the taxes when converting the IRA to a Roth IRA at your current tax rate, which may be lower than the rate for your non-spouse beneficiaries.
When you die, any money in the Roth IRA passes to them completely tax free.
What is not to like about that?
The biggest estate planning mistake of all? Not having an estate plan at all!
Even though it is admittedly no fun to think about your own morbidity and mortality, a little of your time and resources invested now to create (and maintain) an estate plan will spare your loved ones from an inordinate amount of stress and expenses later on.
Indeed, one of the best gifts you can give your loved ones is a properly created (and maintained) and executed estate plan.
Reference: West Haven Observer (Nov. 12, 2020) “5 Estate planning disasters you’ll want to avoid”