A primary goal of estate planning is to safeguard your legacy after you’ve passed. It enables you to leave all of your hard-earned assets to your loved ones. However, even the most careful and well-intentioned person can stumble along the way. Here are five estate planning mistakes to avoid.
1. Retirement Beneficiaries don’t match your Estate Plan:
Beneficiary designations supersede any will or trust document. No matter how meticulous you believe your estate planning is, the only document that matters to the custodian of your 401(k), IRA or other retirement accounts is the beneficiary designation form. For many people, beneficiary designations are modified with major life changes – marriage, divorce, death of a spouse, birth of children…etc. Therefore it’s important to review your beneficiary designations and make sure the intended beneficiaries are correctly named on all forms. Estate Planning Attorney Peggy Hoyt recommends reviewing and updating your beneficiary designations every year at tax time. Many firms offer their beneficiary designation forms online or you can call the company to request one. It’s also crucial to name a contingent or secondary beneficiary in case none of your primary beneficiaries survive you. Hoyt warns that if a valid beneficiary designation is not in effect at the time of your death, your assets may become payable to your estate, which could cause a substantial tax burden and major inconvenience to your loved ones.
2. Accidentally Leaving your IRA to your estate:
The most important thing to remember with an individual retirement account is to name a beneficiary – otherwise your IRA will most likely pass to your estate and deny your heirs the ability to allow those assets to continue to grow tax deferred and immediate income tax consequences could result. Attorney Hoyt says spouses can roll the account into a spousal IRA and non-spouse beneficiaries can transfer the assets into an inherited IRA, using the beneficiary’s life expectancy to determine required minimum distributions. By naming a beneficiary, you allow the individual to continue tax deferral on the account. If the beneficiary does not need all the assets in the IRA to cover expenses in retirement, the IRA’s assets have the potential to grow tax-deferred – thereby “stretching” the value of the IRA. By leaving your IRA to your estate, you’re stuck with a 5-year payout. According to The Vanguard Group, an IRA payable to an estate must be distributed within five years. In some cases, it may make sense to name a trust as a beneficiary. A recent Supreme Court decision in June 2014 (Clark vs. Rameker) ruled that IRAs inherited by anyone other than a spouse is not a retirement fund and therefore is not protected from the beneficiary’s creditors in bankruptcy. Naming a trust as a beneficiary may provide both stretch opportunities and provide asset protection benefits to the beneficiary, as recently reported by the Wall Street Journal.
3. Leaving a living trust unfunded:
One of the benefits of a living trust is it avoids probate – resulting in a more efficient distribution of assets to your heirs. However, as Hoyt points out, “it’s not enough for the grantor to simply sign the trust agreement. The grantor must fund their assets into the trust by properly re-titling any asset held in their individual name into the name of the trust.” An unfunded living trust has no value to your heirs, that’s why it’s important to take the time to retitle your assets into the name of the trust. In addition, you’ll need to update the beneficiary designations for those assets that require a beneficiary designation such as life insurance and retirement plans. Hoyt explains that by naming the trust as your beneficiary, you only need to update your living trust – instead of repeatedly changing/updating the beneficiary designations on your various beneficiary accounts. For tangible property, you’ll need to transfer those assets by changing the deed. For assets like bank accounts/stock/retirement savings, those accounts must be retitled by the financial institution where they are held. Properly re-titling assets and beneficiary designations to the name of your trust ensures the instructions in your trust will be followed by your successor trustees in the event of your disability or death. Ally Bank offers accounts for trusts – to learn more visit the Trust FAQs page.
4. Not separating your Durable Financial Power of Attorney from your Medical Power of Attorney:
Planning for unfortunate events such as a serious illness or injury is essential in estate planning. Appointing an agent using a durable power of attorney allows that person (the “Agent”) to act legally on your behalf if you become ill or incapacitated. Hoyt advocates individuals to create two different power of attorney instruments – a durable financial power of attorney and a durable medical power of attorney. Nolo.com says keeping the two documents separate helps retain personal details and feelings regarding your medical wishes private from your financial broker, and in turn, your health care professionals aren’t burdened with your finances. Hoyt also says that assigning two separate agents may also be a wise decision because “while you want to trust the people you appoint as your agent, you also want to make sure they have the expertise in the appropriate designated areas of finance and healthcare.” Nolo.com further advises to make sure the separate agents work well together.
5. Neglecting Your Digital Assets:
Laws often lag behind technology. One area where this is largely applicable is estate planning for your digital assets. In an ever-increasing digital world, the accumulation of data on computers, smartphones and online accounts create difficulties for individuals, executors and attorneys in the estate planning process. For many, the traditional paper trail no longer exists. Although there is no uniformly accepted definition, digital assets generally include digitally stored content, accounts managed and maintained on the Internet. Some examples include: Email accounts, social networking accounts, online bank accounts, Apple’s iCloud, Google Drive, and Dropbox; and music accounts, such as iTunes and Pandora. Having your digital assets documented and organized is a vital part of estate planning. On his website, DigitalPassing.com, Attorney James Lamm advises to make a list of your valuable or significant data, online accounts, and digital property. In addition, Lamm recommends you should list where each digital property item is located, how to access it and why it’s valuable or significant to you – making sure to regularly back-up the data to a hard-drive, USB flash-drive, CD or DVD. In addition to compiling an inventory of digital assets, an estate plan should also authorize a fiduciary to access, maintain, distribute and dispose of digital assets. Despite the best planning, it’s important to note that few laws exist on the rights of fiduciaries over digital assets. Delaware is the first state to enact a law authorizing fiduciary trustees to gain access to online accounts and other digital assets. Only seven other states have limited laws surrounding digital assets. It’s wise to review your digital estate plans with an attorney and to seek advice regarding compliance with federal and state laws.
A well thought out and sound estate plan helps to protect assets, minimize estate taxes, ensure appropriate distribution to designated beneficiaries and prepares family members. Hoyt says that by keeping all your estate planning documents current, you guarantee the people nearest and dearest to you are protected. It’s always important to have appropriate professional advice in tackling something as significant and complicated as estate planning. To find an estate planning attorney, visit The National Association of Estate Planners and Councils (NAEPC).