Saying you need an estate plan is like saying you need to eat your vegetables. You know it’s good for you but there are other things you’d rather do. A survey by Caring.com shows that in 2021, 25% of Americans ages 18-34 had some type of estate planning document, 22.5% ages 35-54 had a will or trust, and only 44% of people 55 and older had done anything about estate planning.
Even when you’ve put the work into creating an estate plan, your wishes may not be carried out if you fail to keep the plan current. You can’t set-it-and-forget-it. The plan needs to be reviewed regularly to see if the plan still describes the way you want your estate handled.
There are several common ways people can blow up their estate plan.
Not funding a Trust
People spend a lot of time and money to create a trust that will provide all the benefits and protections of a trust. The attorney instructs them to begin moving assets into the trust; for example, quit claim deeds to change ownership of property to the trust, or retitling assets into the trust name. If you don’t make the trust the owner of your estate, you wasted all the time and money put into creating the trust. Your wishes can’t be carried out if there’s nothing in it.
Assuming all assets pass by a Will
You may have totaled up all your assets and then used that figure in your Will to split everything up among your beneficiaries. Oops! Not all assets come under the direction of a will. For example, any assets you have in IRAs or 401(k)s or money you’ve designated as Transfer on Death (TOD) will go to the person or persons you named as beneficiaries of those accounts no matter what your will says. So, make sure you know the difference between assets that will go into your estate and distributed by Will and those that pass by beneficiary designation.
Adding a joint owner
It’s easy to think that adding someone as a joint owner to a bank account or piece of real estate is great planning. However, if the value of that asset is included in what you intend to leave to all beneficiaries, there may not be enough to give all the amounts you listed in your Will to all the beneficiaries, and the Will may be contested.
Not enough assets to fund a Trust
If you created your trust years ago and the value of your estate has declined, is there enough money to pay all the gifts you designated in the Trust document? If not, some people you want to benefit from your estate with either get less than you designated or nothing at all.
For example, at the time you created your trust your estate was worth $2 million. The trust document says you want to leave $1 million to your brother and the rest to be put in trust for your 2 kids. At the time of your death, your estate has declined to $1.2 million. $1 million will go to your brother and your kids will have $100,000 put in each of their trusts. Cash gifts always get paid first.
Leaving money to someone during your lifetime, but not changing the will
In your Will, you may have instructions to give cash gifts to various individuals. For example, you may want to leave $20,000 to a grandchild to help with their education. When they go to college, you’re still alive, so you give them $20,000 right then assuming they got the money early. But if you don’t remove those instructions from your Will, that grandchild will get another $20,000 when you die. The probate court doesn’t know that the money was already given during your lifetime.
Changing beneficiary designations
There’s nothing wrong with changing your beneficiary designations. Things happen. Relationships change. There are life changes such as marriage, divorce, the birth of a child, or there’s someone you just don’t like anymore and you don’t want to give them anything.
Beneficiaries are named on life insurance policies-individual and employer, annuities, Traditional IRAs, Roth IRAs, Inherited IRAs, 401(k)s at your current employer and previous employers, 403(b)s, Simplified Employee Pension Plans (SEP), Simple IRAs, TSP accounts, Deferred Compensation Plans, 457 Government plans, Health Savings Accounts, Pensions, and Transfer on Death (TOD) and Pay on Death (POD) accounts.
Changing the beneficiary from your trust to a person could have an impact on the amount of money available to pay bequests, shelter money from estate taxes, or pay estate taxes.
Similarly, if you change the beneficiary of retirement accounts from a person to a trust you may be creating adverse tax consequences you didn’t intend.
Think big picture when you make changes to your beneficiaries. The changes should fit your overall estate plan.
This article is presented as information only, and should not be considered as tax or legal advice.
