You don’t have to be super-wealthy to see the benefits from a well-prepared estate plan. However, you must make sure the plan is updated regularly so that mistakes don’t occur that hurt the people you love most (“Is Anything Wrong with Your Estate Plan? Here are 5 Common Mistakes”).
An estate plan contains legal documents that will provide clarity about how you’d like your wishes executed, both during your life and after you die. There are three key documents:
- A will
- A durable power of attorney for financial matters
- A health care power of attorney or similar document
In the last two of these documents, you appoint someone you trust to help make decisions involving your finances or health in case you can’t while you’re still living. Let’s look at five common mistakes in estate planning:
# 1: No Estate Plan Whatsoever. A will has specific information about who will receive your money and property. It’s important for people, even those with minimal assets. If you don’t have a will, state law will determine who will receive your assets. Dying without a will (or “intestate”) entails your family going through a time-consuming and expensive process that can be avoided by simply having a will.
A will can also include several other important pieces of information that can have a significant impact on your heirs, such as naming a guardian for your minor children and an executor to carry out the business of closing your estate and distributing your assets. Without a will, these decisions will be made by a probate court.
# 2: Forgetting to Name or Naming the Wrong Beneficiaries. Some of your assets, like retirement accounts and life insurance policies, aren’t normally controlled by your will. They pass directly without probate to the beneficiaries you designate. To ensure that the intended person inherits these assets, a specific person or trust must be designated as the beneficiary for each account.
# 3: Wrong Joint Title. Married couples can own assets jointly, but they may not know that there are different types of joint ownership, such as the following:
- Joint Tenants with Rights of Survivorship (JTWROS) means that if one joint owner passes away, then the surviving joint owners (their spouse or partner) automatically inherits the deceased owner’s part of the asset. This transfer of ownership bypasses a will entirely.
- Tenancy in Common (TIC) means that each joint owner has a separately transferrable share of the asset. Each owner’s will determines who gets the share at their death.
# 4: Not Funding a Revocable Living Trust. A living trust lets you put assets in a trust with the ability to freely move assets in and out of it while you’re alive. At death, assets continue to be held in trust or are distributed to beneficiaries, which is set by the terms of the trust. The most common error made with a revocable living trust is the failure to retitle or transfer ownership of assets to the trust. This critical task is often overlooked after the effort of drafting the trust document is done. A trust is of no use if it doesn’t own any assets.
# 5: The Right Time to Name a Trust as a Beneficiary of an IRA. The new SECURE Act, which went into effect on January 1, 2020, gets rid of what’s known as the stretch IRA. This allowed non-spouses who inherited retirement accounts to stretch out disbursements over their lifetimes. It let assets in retirement accounts continue their tax-deferred growth over many years. However, the new Act requires a full payout from the inherited IRA within 10 years of the death of the original account holder, which in most cases is when a non-spouse individual is the beneficiary.
Therefore, it may not be a good idea to name a trust as the beneficiary of a retirement account. It’s possible that either distributions from the IRA may not be allowed when a beneficiary would like to take one, or distributions will be forced to take place at a bad time and the beneficiary will be hit with unnecessary taxes. Talk to an experienced estate planning attorney and review your estate plans to make certain that the new SECURE Act provisions don’t create unintended consequences.
Reference: Kiplinger (Feb. 20, 2020) “Is Anything Wrong with Your Estate Plan? Here are 5 Common Mistakes”