4 Mistakes to Avoid During Estate Planning
While you may have invested time and energy setting financial goals for how you want to live your life, estate planning is not usually top of mind. Getting your estate in order is essential to leaving your legacy in good hands when you’re gone. Without a solid plan in place, your assets might not be distributed according to your wishes and your family may not have control over the decisions that are made on your behalf through probate court (the process of determining what happens to your assets after you die, if you don’t properly specify what your wishes are while you are living).
Let’s take a look at some common mistakes along with tips to help avoid additional challenges during this process.
1. Having a set it and forget it mindset with your estate
With so many strategies and items to employ during our financial planning journey, it’s easy to fall into the mindset of “set it and forget it.” You can set 401(k) contributions, adopt certain investment strategies, and automate savings. While we advise many of our clients to commit to the routine of these practices, it is important to remember to regularly revisit these strategies - especially when change occurs. This is especially important when it comes to your estate planning:
- Has anything substantially changed in your personal life since you drafted your original estate documents and set beneficiaries for your accounts? For example: if you have experienced a divorce or the death of a spouse, you may need to update your beneficiaries.
- Have you set up joint accounts with the right to survivorship? There are many different options to consider:
- Joint tenancy with a right to survivorship
- Tenancy by the entirety
- Tenancy in common or community property with the right to survivorship
It’s important to work with a professional to determine what makes the most sense in your situation. Figuring this out now will reduce a lot of headaches for your heirs should anything happen to you unexpectedly.
- Pay attention to ever-changing laws. For example, a current federal law taxes estates worth over $24 million for joint filers. This only affects a small percentage of Americans, but this has a sunset date, and it could drop as low as $6 million for the exemption threshold. Staying up-to-date and making adjustments as laws change is essential for estate planning.
The key takeaway here is simply to be conscious of anything you have set to auto-pilot and understand how any personal or federal tax law changes might impact your estate. Then, we recommend consulting with a financial advisor for direction.
2. Missing an opportunity to be strategic about charitable giving
Wealth Advisor Kyle McFarland and Partner & Senior Partner Adam Newman give a quick rundown on charitable giving as part of our Byte Size Retirement series.
What you choose to do with your assets after you die can define your legacy, and charitable giving may be an important consideration for you and your family. Not only does your money benefit organizations and causes in need, but there is a strategic element to charitable giving that can be beneficial to your estate. Here are some tips to keep in mind:
Take advantage of a special IRA tax advantage
Consider the difference between donating directly from an IRA rather than your bank account. There are tax advantages when you do this correctly after age 70 ½.
Live your legacy
Pair ROTH conversions with contributions to a Donor Advised Fund (a special tax-sheltered charitable account), if age 72 or younger to reduce your tax bill and witness the impact of your generosity.
Using a Donor Advised Fund, you can make charitable contributions to the organization(s) of your choice annually starting now (along with the tax benefits), rather than having donations kick in after you pass away.
Wealth Advisor Kyle McFarland and Partner & Senior Partner Adam Newman compare the benefits of living vs. leaving a legacy in retirement as part of our Byte Size Retirement series.
Gift highly appreciated securities, instead of cash
If you bought securities at $10 a share and they’re now worth $100 a share, you would earn $90 worth of gains upon sale. You’d be taxed for that, even if you intend to give the proceeds to charity. If instead you give the securities directly to the charity of your choice, you can avoid realizing the $90 gain and they can sell the shares tax-free and then enjoy the benefit of your contribution.
3. Lack of communication with your loved ones
Like many things in life, communicating early and often about the intentions of your estate will go a long way. Many families experience stress, rifts and hurt on top of the painful experience of losing a loved one when there is confusion around the deceased’s wishes.
Here are some tips to help ease any tensions:
- If you’re married, make sure both you and your partner are comfortable talking with your financial advisor and have a clear understanding of one another’s wishes. If one of you passes away unexpectedly, it will be helpful knowing the other is confident about their path forward and who to work with on making any adjustments as needed.
- Designate someone you trust who is willing to lead the probate process. Knowing who this person is ahead of time will help ensure your loved ones understand who you want to be in charge.
- If you’re not comfortable sharing your wishes with family ahead of your death, that’s OK. The key in this situation is getting organized, and ensuring you have a trusted advisor that will guide your loved ones through the process when the time is right.
4. Forgetting key steps in setting up a trust
When it comes to setting up a trust, you could do everything right at first, but miss some important steps later on in the process. Keep in mind that you need to do all of the following:
- Engage with an attorney to draw up your trust document, designating that your assets go into the trust now or in the future.
- For properties, you might need to retitle the assets in the name of the trust (e.g. you’ll need to update your property title(s) so that the owner listed is the trust itself, and not you.)
- For accounts, open a new account in the name of your trust and transfer assets as indicated by the trust document and attorney.
- Choose a trustee who is willing and able to take on the responsibilities. This person will be in charge of the assets in the trust, executing transactions and managing distributions. If your intention is to name co-trustees, keep in mind family dynamics and how that could impact the process, depending on the size and complexity of your estate.
When a loved one passes, it’s already a difficult time. But when an estate isn’t in order, family and friends undergo additional stress to sort it all out. While they will feel the challenges more than you will at that time, you may be inclined to set them up for the easiest road possible, by diligently tying up all loose ends well in advance of your death.
Having a solid understanding of what needs to be done will help you make disciplined, informed decisions today. This will enable you to avoid mistakes by way of emotional decisions in the future—either by you or your loved ones.
Advisory services are offered through the Burney Company, an investment adviser registered with the U.S. Securities & Exchange Commission. Registration as an investment Adviser does not imply a certain level of skill or training.