Common Estate Planning Mistakes Financial Planners Should Be Aware Of
COMMON ESTATE PLANNING MISTAKES
Below is a list of the more common estate planning mistakes that financial planners should be aware of when approaching an estate planning conversation with a client. If your client has one or more of these issues, they should have their estate plan reviewed by an attorney.
Failure to plan
Sudden tragedies afflicting families as the result of COVID -19 is a sobering call to urge clients of any age and health situations to address basic estate planning issues
Is there a will? Living Trust? Healthcare Power of Attorney? Power of Attorney for Property? Even a simple will or living trust is better than having nothing. Beneficiaries can be designated, fiduciaries selected, guardians appointed. Probate can be avoided and privacy protected
Planning was done, but it's outdated
When was the last time client's estate plan was reviewed or revised?
Have any changes in family circumstances occurred? (deaths, divorces, estrangement of children, special needs, substance abuse issues)
Changes in the law have occurred. The federal transfer tax exclusion is now $12.06M, while the Illinois exemption is $4M
Is lifetime giving still appropriate? Be careful gifting appreciated property with low income tax basis.
Are there outdated formula clauses in the client's plan? Will they lead to unintended consequences?
Don't rely on handwritten wills.
Be certain the document is properly executed.
The SECURE Act has shortened the time period for making most RMD from retirement plans. Has client addressed this?
Has portability been considered when there is a surviving spouse?
Portability must be elected on a timely filed federal estate tax return, or not later than two years after the date of death of a decedent?
Portability allows the transfer of the decedent's unused transfer tax exemption to the surviving spouse.
Even if family assets appear modest, consider whether a possible windfall tot he surviving spouse (luck, inheritance, personal injury) or remarriage could lead to a large future estate for the surviving spouse.
Are collectibles and tangible assets being handled properly?
Address the often forgotten collectibles? Consider family pets and their care
Be sure assets are in existence if named in a document Address expenses for disposition of the tangible property Provide for digital assets
Life insurance policy mistakes
Failure to name a beneficiary
Naming one's estate as the policy beneficiary
Naming a minor child as a beneficiary without providing for appropriate guardian provisions Failure to choose per stirpes or per capita for the next generation
Disqualifying a special needs beneficiary from government assistance
Failure to consider whether one spouse owns a policy on the other spouse payable to the children. That will be considered a gift fro mt eh policy owner to the children when the insured dies.
Mistakes with retirement plan designations
Who is the beneficiary of a qualified plan? Law requires a presumption that favors the rights of a spouse.
Who is the beneficiary of IRA? Spouse is not a required beneficiary of IRA.
A will or trust does not control the plan beneficiary; the beneficiary designation forms control.
When a spouse is named beneficiary:
Rollover is available marital deduction applies RMD rules are favorable
Spouse is eligible designated beneficiary under the SECURE Act and can use life expectancy for RMD
When a child is named beneficiary:
no rollover
inherited IRA transfer may be available, estate tax liability is possible
When trusts are named beneficiaries, distinguish an accumulation trust and conduit trust:
Advantages: possible stretch out, creditor and spendthrift protection, investment management, matrimonial protection, no inclusion in estate of beneficiary
Disadvantages: compressed income tax rates if plan funds remain in trust, administration fees, complexity
Mistakes with real estate planning
Failure to confirm how title is held - tenant in common or joint tenant?
Failure to address responsibility for loans and mortgages
Failure to preserve property and casualty insurance for estate property
Failure to allow fiduciaries discretion to permit survivors to remain in a home or designate who is responsible for paying the expenses
Mistakes involving executors, trustees, and guardians
Not choosing the right person(s) Choosing too few in a complicated estate Choosing too many
Selecting fiduciaries that do not get along Selecting fiduciaries with a conflict of interest
Allowing (or not allowing) discharge of a corporate executor
Carelessly choosing guardians for minor children