Last week, I wrote about the general estate planning process. While it can be simple in some cases, there are certain things you’ll want to look out for and mistakes you’ll want to avoid. Poor estate documents can lead to people accidentally cutting loved ones out of inheritances, paying big tax bills unnecessarily, and saddling families with expensive, head-scratching legal battles.
Here are five mistakes – from the obvious to the obscure – people tend to make when planning their estates:
1. Beneficiary Blunders - Not naming a contingent beneficiary on retirement accounts and insurance policies- or failing to review beneficiaries often enough-can be a big mistake. The default if no contingent is picked is likely your estate, which may be subject to probate, creditors, delays, etc. Forgetting to change an ex-spouse on an IRA can have unfavorable consequences for your new spouse or family. (Note: In a retirement plan, your new spouse becomes your beneficiary the day you get married, but not in an IRA.) If you don’t want your current spouse to be the beneficiary of your retirement plan, then they must agree to you naming someone else. And no, your prenuptial agreement doesn’t matter in this case, because only a spouse can waive those rights, and a fiancée isn’t a spouse yet.
2. “Selling” property for $1 - This was popular years ago in areas that saw very rapid land appreciation. For example, when my grandfather moved to Avalon, N.J., he paid almost nothing for his bayfront properties. Today those lots would sell for millions of dollars. The theory was that you could sell it for a very low price and not have to pay taxes on the gain and remove it from your estate. You can sell property for whatever you want, but:
- The IRS will deem it a gift if it is less than market value, and
- Your heirs will lose the “step up” in value.
Here is an example: If you inherit a property worth $1 million and sell it for $1 million, you may pay no tax. But if you “buy” it for $1 and sell it for $1 million, you pay tax on the $999,999 gain.
3. Naming specific investments in your will - Specific bequests are handled first, and the person who died might not even own that investment anymore. Their estate might be required to purchase the investment at a much higher price, which could hurt all of the other beneficiaries.
4. Not having a residuary clause - A residuary clause deals with everything you didn’t specifically name in your will, forgot to put in your will, trust, etc., things you don’t yet own but will before your death, and things you might not know you own. This happens more than you think.
5. Leaving assets directly to a minor without assigning a custodian - Who will handle the money for them? In addition, you’ll want to choose the custodian carefully. Define “for their benefit.” Does a new Escalade count because the kids won’t fit in my Honda Civic? That phrase welcomes a whole host of potentially abusive interpretations.
Be sure to read next week’s column, which will cover five more mistakes. In the meantime, consider contacting a qualified estate planning attorney to review your situation. Feel free to reach out if you have questions or need a recommendation. Register for our upcoming Estate Planning Seminar with Jeffrey Barnes, Esq. of KingBarnes on Thursday, November 19th by visiting https://www.reichassetmanagement.com/events.
Frequently Asked Questions About Estate Planning Mistakes to Avoid
1. Why is it important to review my beneficiary designations regularly?
Failing to name contingent beneficiaries or neglecting to update beneficiary designations can create unintended consequences. For example, an outdated beneficiary designation naming a former spouse could affect a current spouse or family members.
2. Why can naming specific investments in my will be a mistake?
A specific investment named in a will may no longer be owned by the person at the time of death. This could require the estate to purchase that investment at a potentially higher price, which may reduce what is available to other beneficiaries.
3. What is a residuary clause and why is it important?
A residuary clause addresses assets that aren't specifically identified in a will or trust. This can include assets you forgot to include, assets you don't currently own but may acquire later, or assets you may not realize you own.