As part of the financial planning process, I review a lot of estate planning documents. Part of my job is to encourage clients to update their documents, and/or ensure that their estate planning documents match their stated goals and intentions. My experience in reviewing estate documents provides me with sufficient ammunition to rubber-stamp a good estate plan, or red-flag a terrible one.
Why is this important to me? Because I believe in comprehensive financial planning. It is extremely important that you (or my clients) understand your financial plan (not just your investment allocation).
Your estate documents are part of your financial plan. Unfortunately, I have seen too many clients overlook this necessary portion of their plan. Because of this unfortunate trend, I strongly encourage my clients to evaluate their estate planning documents.
Unfortunately, my persistent (or even annoying) nudging isn’t always enough to motivate my clients. But it should be, because you are going to die someday, and it’s important that you consider what will happen to your assets.
So in order to motivate my reading audience I am going to share my list of the 6 worst estate planning ideas to come across my desk. I would encourage you not to be one of these types of people:
1 – I’m not going to die anytime soon.
Awesome! You know when you are going to die. That’s so neat. How did you find out? Who told you? Can you tell me when I am going to die too? That way I’ll know how much money to spend and how to live out the rest of my days. (Please note massive amounts of sarcasm here.)
This comment is ridiculous. You have no idea when you are going to die. To convince yourself otherwise is an irresponsible strategy that justifies your lack of attention to the real issue at hand.
2 – I’ll leave it all to one child; he or she will distribute the assets.
Let’s be honest; all parents have their favorites. In my family, we actually refer to my brother Ben as TFK (a.k.a. the favorite kid).
My favorite child? Well, that’s easy; it’s “O.” Unless, of course, he’s crying. Then I simply don’t have a favorite.
In all seriousness, it’s a terrible estate planning strategy to leave all of your assets to your favorite child. Firstly because of the obvious: this is a terribly unfortunate responsibility to assign to one of your kids. Why should it be their responsibility to figure out how to divide your assets? Also, what are the chances that all of the children will agree to the final distribution of the assets?
Secondly, there are tax and gifting issues.
1 – Tax issues: Is the inheritance IRA or non-IRA money? IRA money may need to be taken as a distribution (thus becoming taxed) prior to being transferred to another sibling. Because of the different tax implications, ‘fair and equal’ may be difficult to ascertain.
2 – Gifting issues: Once someone inherits the money, they can’t simply give it away at their free will. The IRS allows gifts of up to $14,000 per year without any consequence. More than that and a gift tax return should be filed. Giving away money may not be as easy as it seems.
3 – Who do you think I am – a millionaire? I don’t need a will.
Yes, millionaires need wills. But you know who else does? EVERYONE!
If you have assets that you own, and you want to ensure that they go to a person (or persons) of your choosing, then you need a will. If you don’t have a will, the state has laws in place to determine who gets your assets when you die.
By not having a will, you are leaving your family without direction regarding your intentions for your assets. Also, the family of a person who dies without leaving a will is much more likely to incur more expenses and spend more time distributing the decedent’s assets than the family of a person who dies with one.
4 – I did my will online.
I could argue that a do-it-yourself will is better than not having a will at all (a discussion for another day). But if I’m being honest, I am not a big fan of do-it-yourself wills. The primary reason is that you don’t know what you don’t know.
The more assets you have, the more complicated your family situation is, and the more reason for you to have it done by a professional.
5 – I don’t care. I’ll be dead. I’ll let my family figure it out.
Do you know what all families are really good at? Splitting a lot of money. Splitting up and sharing the personal effects of a deceased person.
Families are great at this. Never – I mean, never – have I ever seen even a minor disagreement over estate resolution that led to disagreement, infighting, or worse.
Sarcasm, my friends. If you want to ensure a fight between the beneficiaries of your estate after you die, then please, by all means, “let your family figure it out.”
6 – I named the estate as beneficiary.
By naming the estate the beneficiary, you are now taking an asset that was not subject to probate, and making it subject to probate.
You’re possibly taking away the opportunity for your beneficiaries to leverage tax deferral and stretch IRA opportunities. Additionally, subjecting non-probate assets to probate (i.e. naming the estate as the beneficiary) translates to taking estate creditor proof assets and subjecting them to creditor claims.
Generally, this is just a bad idea.
Don’t be someone who makes one of these mistakes.
I suggest you review your documents. Has it been a long time since they were updated? Has your family situation changed? Has your income or assets changed? Or do you simply feel like it’s time to review your documents? Then it probably is.
None of the information in this document should be considered as tax or legal advice. You should consult your tax and legal advisors for information concerning your individual situation