A lot of work goes into creating an estate plan. It can be a lengthy, time-consuming process. You want to make sure everything is in place so your wishes are carried out. But sometimes, you’re so focused on the big stuff that you miss what seem to be minor issues. And just like one bolt missing from a car can cause an accident, missing the little things can send your estate plan into the ditch. What you intended as a benefit to your heirs and beneficiaries becomes a headache that could have been avoided. Here are 5 common mistakes that can have a huge impact.
Mistake # 1 – Not Planning for Incapacity
It’s common to think of an estate plan as what happens after you die. But what happens if you become incapacitated, physically or mentally, and can’t make your own decisions? Who handles your affairs then?
Part of a well-structured estate plan is listing who is authorized to act on your behalf if you can’t. Who will handle your finances, make healthcare decisions, and take care of other issues relating to your care and well-being? It may be one individual or several.
Once you’ve decided who the person or persons are, have powers of attorney drawn up naming the individual(s) who will act for you and what they are authorized to do. And then, tell the people you’ve named as powers of attorney that you’ve chosen them. That person(s) may not want to serve as a power of attorney, which would throw your plan into chaos at the time you need it to function well. Don’t forget this important part of your estate plan. Once you’ve been sidelined by an accident or hit with dementia or Alzheimer’s, it’s too late.
Mistake # 2 – Not Naming Secondary Decision Makers
In your plan, you’ll name the person you want to be the executor of your estate after you die. You’ve already named the people you want to work on your behalf if you become incapacitated. But what if any of those individuals can’t fill those roles because of their own death, incapacity, or other circumstance?
If that happens, the court gets involved and names a replacement. It may or may not be someone you would have chosen. But if you’ve named secondary decision makers in your estate plan, that person steps into the role vacated, and the wishes in your plan are carried out without any involvement from the judicial system, which can be long and expensive, reducing the amount of money for your heirs.
Mistake # 3 – Not Keeping Track of Beneficiary Designations
Beneficiaries are named on all sorts of things—IRAs, 401(k)s, life insurance, annuities, 403(b)s, 457 accounts. Review your list of beneficiaries regularly and make sure they are up to date.
- Sometimes a beneficiary falls out of your good graces and you don’t want them to receive anything or a smaller percentage than previously listed.
- A beneficiary may die.
- Additional kids or grandkids are born into the family.
- A divorce happens.
If you die without changing your beneficiary designations, the person listed on the beneficiary form is the one who gets the money. For example, if you’re divorced and remarried, and your ex-spouse is still listed on the beneficiary form of your 401(k) because you didn’t change it to your new spouse, then your ex-spouse gets the money when you die. The issue has gone all the way to the Supreme Court and the rule is, no matter what your Will says, the name on the beneficiary form gets the money—end of discussion.
Mistake # 4 – Not Considering the Tax Implications of Transferring Property
Over the years, I’ve had lots of clients who wanted to give their property to the kids while mom and dad were still alive. It’s a great gesture, but from a tax standpoint, not always the best idea.
If you give away your property while you’re alive, the recipients’ cost basis in the property will be what you paid for it. If they receive it as an inheritance after you die, they get a stepped-up cost basis.
For example, let’s say you paid $200,000 for your house when you bought it. You give it to the kids while you’re still alive. Later they sell it for $800,000. They’ll have a capital gains tax bill of $600,000. When you give it away while you’re still alive, the kids’ cost basis is what you originally paid for the house.
If, on the other hand, the kids inherit the house at your death, their cost basis is the value of the property on the date of your death. So, if you paid $200,000 for the house, it’s worth $800,000 when you die and the kids sell it for that price, there is no capital gains tax because the kids got the stepped-up cost basis.
Mistake # 5 – Not Including Funeral and Burial Wishes
Whether you pre-arrange your funeral, or just know how you’d like your funeral organized, include those details and instructions in your Will or Trust. One additional step you can take is to name one person who will be in charge of organizing your instructions.
The laws governing burial vary from state to state, so the person you name to handle your arrangements may run into questions such as:
- Who can order a death certificate?
- Is embalming required?
- Is a casket necessary for burial or cremation?
- Do you have to buy a casket from the funeral home?
- Where can bodies be buried?
- After cremation, where can the ashes be stored or scattered?
- Who can authorize funeral decisions?
A fully functional estate plan is great. Don’t miss the little items that can derail it.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice, or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at info@alhambrapartners.com.
