Four Common Estate Planning Errors

Four common estate-planning errors can cause you and/or your heirs considerable stress and aggravation, family arguments, and unnecessary taxes and legal expenses.  Below is a description of each error and strategies recommended by experts to handle each situation.

Not Planning For the Disposition of Untitled Personal Property

 

Untitled personal property is items people own where the owner is not identified with a written document (i.e., their “stuff”). Examples include tools, furniture, photos, books, dishes, jewelry, collections (e.g., coins), artwork, and more.  Talking about untitled property is “sensitive” because of emotions involved, sentimental meanings attached to various pieces of property, and differing perceptions of what is “fair” in the distribution process. Also, there is often only one of an untitled property item so it is impossible to divide everything equally. 

 

Experts recommend that property donors determine their goals first.  For example, is it important to give more to less affluent children or according to a child’s age, gender, marital status, or birth order? There are several ways that untitled personal property can be distributed including memorandums attached to a will (i.e., a “separate writing”), lists given to a person’s executor or family members, gifts made during a donor’s lifetime, drawing names out of a hat, verbal promises, and labeling items. 

 

Not Writing a Will

 

Many Americans die intestate (without a will) and, by doing so, default to the “one size fits all” will provided by their state of residence.  This state-determined property distribution formula may or may not be appropriate for their family’s situation but there is no choice in the matter.  Estate-planning costs are also increased because a court-appointed administrator must be appointed, and generally bonded, which increases an estate’s administrative expenses.  Some people procrastinate on drafting a will because they do not know who to name to key positions, such as executor and guardian, so they do nothing. 

 

There may also be a mistaken impression that only family members can be named, which is untrue.  It is not unusual for people to name a professional fiduciary, such as a bank trust department, to serve as executor or to name a close friend, rather than a family member, as guardian.  Another reason to have a will is to make gifts to charitable organizations upon your death.  State formulas do not allow for this.  According to the book You’re 50-Now What? by Charles Schwab, less than 6% of Americans leave money to charitable organizations upon their death, most notably because so many die intestate. Expert tip: prepare a will and update it regularly.

 

Conflicts in the Titling of Assets

 

This error is seen especially in remarried households.  People want an asset to go to one person (e.g., a child from their first marriage) and put this in their will, yet they own the asset with rights of survivorship with someone else (e.g., a second spouse).  In cases where provisions in a deceased person’s will conflict with the titling of assets, the title almost always determines the asset’s subsequent owner.  Persons with complex estates and/or family relationships should seek legal counsel to avoid making this error. Expert  tip: check for will-title conflicts.

 

Incorrect Beneficiary Designations

 

Errors in beneficiary designations can lead to the disinheritance of heirs, delays in providing for the financial needs of loved ones, and unnecessary expenses and tax payments.  Three common errors made when naming a beneficiary are: failing to regularly update beneficiary designations, naming an estate as beneficiary, and failing to name a contingent beneficiary. Expert tip: periodically review the beneficiary designations on IRAs, tax-deferred employer plans like 401(k)s, and life insurance policies to make sure they are current, especially if you’ve experienced a major life event such as the death of a spouse, divorce, marriage, remarriage, or the birth of a child.

 This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

 

 

Keep Track of Your Beneficiaries

Who is going to get what you someday leave behind in life insurance policies and/or tax-deferred retirement accounts? Beneficiary designations are important estate-planning tools and should not be overlooked to make sure your hard-earned money gets passed down to those you select to receive it. Below are nine beneficiary “need to knows”:

Beneficiary Types- Beneficiaries inherit assets when people die. Typically, they are people or organizations that people care deeply about (e.g., spouse, children, charitable organizations).

Beneficiary Use- Beneficiary designations are required for life insurance policies, individual retirement accounts (IRAs), employer retirement savings plans (e.g., TSP, 401(k)s, and 403(b)s), and annuities so that proceeds can be transferred to beneficiaries free of probate.

Contingent Beneficiaries- It is wise to name contingent beneficiaries in case beneficiaries pre-decease you or wish to disclaim an asset, typically for tax planning purposes. If there is no living named beneficiary or contingent beneficiary(ies), assets have no place to go but to the owner’s estate, which means going through probate and expensive estate settlement expenses.

Minors as Beneficiaries- In many families, the beneficiary is a spouse. Absent a spouse, many people name their children. However, property inherited by minors can be tricky. A guardian must be appointed by the court to manage assets of minor children until they reach legal age.

Beneficiary Changes- Beneficiary designations can be changed as needed. With employer-sponsored retirement plans, workers should contact their plan administrator or HR department; life insurance policy owners, their insurer; and IRAs and annuities, the plan custodian.

Reasons for Change- It is not unusual for people to change beneficiaries several times throughout their lifetime. For example, they might name parents as beneficiaries as a young adult and switch to naming a spouse or partner later. If that relationship subsequently ends, they may need to name a new beneficiary again.

Keeping Track- It is easy for busy people to lose track of who they named as beneficiaries. Reviewing documents is not high on their priority list. The downloadable form, Beneficiary and Personal Representative Designations, is useful to list beneficiary designations in one place.

Sharing Information- Let trusted people know you’ve compiled your beneficiary designations in one place and share a copy with them. After all, it will do nobody any good if you compile this information and nobody knows that it exists. Not having beneficiary designation data readily available can result in needless expenses and/or time delays in the distribution of assets.

Factors to Consider- When selecting beneficiaries, consider their resources and characteristics by answering the following three questions: What are their financial needs? How old and self-sufficient are they? and Are they capable and mature enough to manage money?

Appropriate and up-to-date beneficiary designations are an important part of financial planning. Well-designed estate plans can reduce administrative expenses and prevent family squabbles after someone is gone. When people make careful designations of beneficiaries, they can, not only can keep the peace, but make people and/or charities very happy for many years to come.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.