You’ve worked a lifetime for what you have. You did everything right; funded your retirement plan, paid off your home early, amassed enough savings to cover future expenses and even planned to leave a financial legacy to your loved ones. Too bad your ex-spouse—and his or her kids—will inherit it all…
Estate-planning mistakes are both costly and common, even among the smartest planners. Any number of oversights can leave you vulnerable in the event you become incapacitated. Others can seriously compromise the amount your heirs will inherit when you die.
If you want to be sure that your estate does not get impacted by predators, creditors or taxes, keep reading to be sure you’re not committing the five largest mistakes of estate planning.
1. Picking poorly
Many people forget that estate planning is a two-part process. Some of the documents provide instruction for dividing up your estate after you die, other, potentially more important documents, outline directives for handling your finances and medical care if you become disabled.
Think long and hard about whom you select as your durable power of attorney and medical power of attorney. Your life is literally in that person’s hands. One mistake people make is picking someone not trustworthy or qualified to act on their behalf. Put the best estate plan into place, but pick the wrong person to help execute it and there is no longer any certainty.
It’s a mistake, for example, to pick your eldest child out of a sense of duty, when your youngest child may be more responsible or likely to make better decisions.
You should also consider proximity and be prepared to amend your powers of attorney as needed. Maybe you picked the child you live closest to now, but they later move halfway across the country. It’s no longer reasonable to ask them to be your medical power of attorney.
Most importantly, ask permission before naming someone as your power of attorney. The person you selected may not want the job or feel up to the task, and he or she certainly doesn’t want to be surprised by the designation after you pass.
One critical tip: Make sure you sign a Health Insurance Portability and Accountability Act release, which allows medical professionals to discuss your health with your designated representative.
2. Leaving your IRA to your estate
What if you name your estate as beneficiary of your individual retirement account? Surprisingly, that could have very serious unintended consequences. Doing this would subject those monies to claims and creditors during probate, the legal process for settling your estate. When you die, your individual retirement account could be used to pay off any debts in your name. Whatever money remains, if any, gets distributed to your heirs—and not in a timely fashion. Probate is costly and can take years to complete. On the other hand, those assets will pass outside of probate free from creditors if you name a living person or persons as your IRA beneficiaries.
Another reason not to leave your IRA to your estate is that it denies your heirs the ability to let those assets grow. How so? Non-spouse heirs can normally either liquidate an inherited IRA and pay taxes within five years of the owner’s death, or “stretch” their required minimum distributions and relative tax bite over their lifetime. The stretch option may be far more valuable, since it enables the account to continue earning compounded interest for decades to come. By failing to name a person as your beneficiary, your heirs lose that ability to stretch and must distribute the IRA assets within five years.
3. Forgetting to update beneficiaries
Failing to update your beneficiary forms after a divorce or death in the family is about the most common error!This is particularly critical where IRA beneficiaries are concerned.
For example, if you update your will but forget to change the designated beneficiary to your IRA, the person named to your IRA is legally entitled to that asset when you die. That could be your estranged ex, who can then leave that money to his or her own children from another marriage.
Thus, it’s important to review your designated beneficiaries on all documents, including retirement accounts and life insurance, after every life event and be sure they all reflect what’s written in your will.
Many people inadvertently circumvent their own! They’ll indicate in their will that they want their assets divided equally among their three children, but then they go and name one child as the beneficiary to their IRA account and another to their house or a joint bank account.
If you plan to divide your estate equally among your kids, each beneficiary form for each of your accounts should indicate that the assets are to be divided equally among your children.
4. Failing to sign a health-care directive
Equally egregious, where estate planning is concerned, is failing to create an advance health-care directive, also known as a living will. This document lets your family, physicians and friends know what your end-of-life preferences are, as far as procedures such as surgery, organ donation and cardiopulmonary resuscitation are concerned. In short, it’s the piece of paper that tells them whether to pull the plug or not.
Such guidance spares your family the emotional angst of having to guess at your wishes when they are already under stress.
We are an aging society and with that comes the potential for loss of capacity and ability. Without these documents, it’s a much more complicated process and it opens the possibility that your family will disagree over what they believe your wishes are and who should be in charge. That’s doubly true if you remarried and your spouse and children are at odds.
Keep a copy of your signed and completed health-care directive safe and accessible to ensure that your wishes will be known and carried out at the critical moment. Give copies of all your estate planning documents to your attorney or family members as well.
Many people, park their paperwork in a safe deposit box, forgetting that the bank is not allowed to release the contents of that box to beneficiaries until probate is complete. By then, the funeral is over and assets divided according to state law.
5. Leaving a living trust unfunded
A living trust allows you to pass assets to heirs outside of probate and can be a valuable estate-planning tool. But it cannot work if you fail to title assets to the trust. Once you set up a living trust, you must retitle your assets under the name of the trust.
There’s a lot of misunderstanding when it comes to trusts. Many people think that the schedules attached to the trust, which asks them to list the assets they will transfer, means they’ve actually transferred those assets. That’s not the case. The schedule merely indicates which assets you intend to transfer. You must still take steps to physically change the title of those assets under the name of the trust. For real property, that involves changing the deed. For assets such as stocks and bank accounts, the accounts must be retitled by the financial institutions where they are held.
And, most importantly, don’t delay!
Many people delay estate planning, partly because it’s unpleasant to contemplate our own mortality, partly due to the expense, and partly because younger adults believe such paperwork isn’t necessary until they reach old age. Big mistake, especially if you have small children.
If you don’t create an estate plan, you’re letting the courts decide how to divide your assets, which may not reflect your wishes, particularly if you have children or specific distribution desires. If you wish to donate to charity, for example, the courts aren’t going to grant that unless it is specified in your will. Without a road map, it just makes it much more difficult for everyone.
Postponing the process may also limit your ability to maximize the amount you leave to your heirs. If you wait too long, some of the best planning opportunities may be gone; i.e. gifting money/stock or restructuring assets.
So you can avoid the biggest estate-planning mistakes with just a few signed documents and some vigilance. Because of the complexity involved however, it’s vital that legal counseling be used. This is one of those areas where it’s even more expensive if you don’t take care of it correctly. Just know what you’re asking for and what it is that you want.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
The information herein contained does not constitute tax or legal advice. Any decisions or actions should not be made without first consulting a CPA or attorney.
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC