Estate tax exemptions are high enough these days that most individuals don’t have to consider avoiding estate taxes as part of their estate planning. Instead, the focus should about leaving a legacy: what should you do to help protect and preserve your family?
Here are some common mistakes that can damage that legacy plan – and what to do to potentially avoid them:
1. No contingent beneficiaries on retirement accounts. Every retirement account should require you to specify a beneficiary, but what if they pre-decease you? Always specify at least one contingent beneficiary: the person(s) to inherit your account if your primary beneficiary dies before you.
Know the difference between “per stirpes” and “pro rata” designations. “Per stirpes” means “by branch,” so if one of your beneficiaries predeceases you, that beneficiary’s surviving family inherits their share equally. With “pro rata,” your account is divided between only surviving named beneficiaries. If no designation is offered, ask what the “default” designation is - to be sure it’s what you want.
2. No bequest of unique personal property. For special assets/heirlooms (from coin collections to artwork), specify in writing ahead of time who receives them. Bequests like this are done via “separate writing:” referenced inside your will, but drawn up outside your will. The separate writing can then be updated at any time. Just make sure you sign and date it
3. Not planning for Dad's new romance. 61% of widowers have a new romantic relationship within 25 months of a wife's death - compared to 19% for widows. To make sure kids will eventually inherit, parents need a good attorney and either a very detailed will or a trust. Most commonly, the deceased spouse’s assets go into a trust to benefit the surviving spouse (income and sometimes principal) during his lifetime, but then pass to the children – and not the new wife – when the surviving spouse dies. Pre-nuptial agreements may also be used before Dad re-marries.
4. Lack of planning for incapacity. A will addresses your affairs after death, but what if you’re incapacitated? With most assets in a trust, your trustee can manage for you until you recover. Without a trust, be sure you have updated powers of attorney (for legal matters) and health care directives. If you’ve recently moved to Florida, make sure you get updated documents Florida will recognize.
5. Not planning for aging parents. Baby boomers: don’t count on an inheritance as your retirement plan. Retirees are living longer and better: there may be little left for kids to inherit. In fact, kids may find themselves supporting parents who are living longer than expected. Filial support laws in 24 states (not Florida – yet) may allow creditors to collect the cost of a parent's care from children, with possible criminal penalties for noncompliance.
6. Heirs not appraising non-marketable assets. It helps to have a value established when inherited (sets the new “cost basis”), especially when sold later on. Spend the money for the appraisal: it could save on taxes eventually.
7. Not selecting the right person for the job. Wills, trusts, powers of attorney, health care directives, etc. require you to name others to represent you. Make sure those you name have good judgment and/or financial skills. Don’t name the bankrupt brother or all four kids jointly (so no one feels left out). Pick the most responsible one, and name a backup to them.
With minor children, you should specify a guardian for them in your will if you die. But you should make these same provisions if you are incapacitated in a separate document called a Pre-Need Guardian Designation (e.g. wills don’t take effect until you die).
Even without a huge estate, estate planning still involves a lot of careful decision-making and steps to completion. Have a good financial planner and attorney support you through this process. And try not to put it off – your situation could change at any time.
Securities are offered through LPL Financial, Member FINRA/SIPC. This information is not intended to be a substitute for specific, individualized tax, legal or investment planning advice.