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. According to a survey by Caring.com:
- 25% of Americans ages 18-34 have some type of estate planning document
- 22.5% ages 35-54 have a Will or Trust
- Only 44% of people 55 and older have done anything about estate planning
Even when you create an estate plan, your wishes may not be carried out if you fail to keep it current. Here are 6 common mistakes people make when creating and maintaining an estate plan.
Not funding a Trust
People spend a lot of time and money creating a Trust that will provide all the benefits and protections of a Trust, but then leave the Trust empty. To avoid that mistake:
- Get quitclaim deeds that make the Trust owner of real property
- Retitle assets such as bank and investment accounts and other financial assets so they’re owned by the Trust
- Transfer titles to vehicles to the Trust
- For personal property that doesn’t have titles or ownership documents like jewelry, furniture and collectibles, name them in your trust document on a property schedule and specify that ownership is being transferred to the trust. If any of the items are insured, be sure to change ownership of the insurance policy into the name of the trust.
- Create a Pour-Over Will. The document instructs that any assets in your name at the time of your death are “poured over” into the trust so everything comes under the Trust umbrella.
Assuming all assets pass by a Will
You may have calculated the total value of your assets and used that figure in your Will as the amount to be distributed at your death. Oops! Not all assets come under the purview of a Will. For example, any assets in IRAs or 401(k)s or money designated as Transfer on Death (TOD) will go to the person or persons named as beneficiaries of those accounts no matter what your Will says. It’s been tested in court. Whoever is listed on the beneficiary designation form is the one who gets the money. Make sure you know which assets will pass by Will and which will pass by beneficiary designation.
Adding a joint owner
It’s easy to think that adding someone as joint owner to a bank account or piece of real estate is great planning. However, if the total value of that asset is included in what you intend to leave to all beneficiaries, there may not be enough money to fulfill your instructions.
For example, you calculate the value of your assets to be $1 million. In your Will you instruct your executor to distribute $1 million to your beneficiaries. Then, you add a joint owner to all those assets, thinking it would be good to have someone who can handle your financial affairs if you become incapacitated. The problem is, when you add a joint owner, you give up some ownership. So rather than owning $1 million, now you own $500,000. And when you die, there’s not nearly enough money to pay the bequests and there’s a very real possibility 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 will either get less than you designated or nothing at all.
Let’s say 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 have instructions to give cash gifts to various individuals. You designate $20,000 to go to a grandchild to help with college. When they go to school, you’re still alive, so you give them $20,000 right then assuming they got their 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 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 that’s fallen out of your good graces.
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. It’s important to know the impact of changing the beneficiary on a beneficiary-designated account.
If you change from one person to another the impact may only affect a relationship. But 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. Conversely, if you change the beneficiary from your trust to a person, it could remove those assets from your estate and reduce the amount of money available to pay bequests, shelter money from estate taxes or pay estate taxes.
Think big picture when you make changes to your beneficiaries, making sure the changes fit your overall estate plan.
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.
