It is always easier to ignore a difficult task or put it off until later. However, the wealth you have worked hard to build, your dreams for your family’s future, and your legacy are all in jeopardy if you have not taken the time to properly plan for your death or incapacity. Do not perpetuate your family’s pain over your loss by not taking the time now to design a plan to best protect them and keep them out of court and conflict. Last week, I touched on five common practices that have the potential to leave a real mess behind for your loved ones. Here are five more common oversights and how to avoid them so that you can rest easier knowing your loved ones are protected today and in the future.
1. Failing to Organize and Consolidate Your Assets
If your estate planning process does not include organizing and consolidating your assets, there could be delays in settling your estate upon your death. Without clear communication or instructions, there may be confusion as to what your assets are, where they are located, and how to access them. To avoid this chaos, inventory your assets and place this inventory list in a centralized location. Remember to include your digital assets, such as your online bank account information, and provide the username and password to access such assets. Of course, make sure you inform those you trust (a trustee, for example) where you keep this list. It will be counterproductive if no one can find it.
2. Not planning for marriage – first or otherwise
A smart estate plan should account for any new marriages that could occur in your future. For example, if someone gets remarried and has children from a previous marriage, his or her estate plan must consider these circumstances. Otherwise, the estate plan may fail to protect the new spouse and/or the children. Prenuptial agreements and a QTIP (“Qualified Terminable Interest Property”) trust are two mechanisms for planning for future marriages that can be incorporated into the estate planning discussion.
3. Failing to protect your retirement benefits
Without proper planning, your IRA or 401(k) benefits can be subject to immediate taxation upon your death and thus your hard-earned retirement funds could take a serious hit. Yet, there are certain advanced features of planning that could allow your beneficiaries to receive the tax-deferred benefits of your retirement, just as you would in the future. For instance, you can use a retirement plan trust, in which the trust acts as an intermediate beneficiary of your inherited IRA so that there is a wall between the IRA and the ultimate beneficiary. This can work to stretch-out your IRA distributions, minimize tax liability, and protect your IRA earnings from your beneficiary’s creditors.
4. Ignoring Tax Considerations
People often ignore tax considerations in estate planning because they are not informed about the different kinds of taxes or think that their estates are too simple or not valuable enough to trigger taxes (indeed, the estate tax exemption for 2016 is $5.45 million per person). Yet, this doesn’t mean that your estate will pass to your loved ones “tax-free,” as the manner in which you pass your estate gifts could create tax liability for your beneficiaries. For example, many people overlook the impact of capital gains taxes. However, these untended consequences can be avoided through proper estate planning.
5. Believing that estate planning is one time event
Once an individual has made an estate plan, he or she may think that this task is checked off the to-do list forever. Creating your estate plan should not be a “one and done” task, as your estate plan is a living document that should reflect your and your family’s needs at that particular point in time. Or you could take advantage of a change in the legal landscape that was not a possibility when you first made your estate plan. Reviewing your plan on an annual or at least periodic basis is critical as we never know when the time will be that it goes into effect. At the very least a rule of thumb is to revisit your plan whenever you incur a major life event. Remember, having no plan is a bad plan, but an outdated plan is like having no plan.
Avoiding these five mistakes along with the five from last week’s blog is essential to the well-being of your family’s future. Creating an estate plan unique to your family’s needs is an important step towards securing a bright and successful future for your loved ones. You love much and dream big. Contact the team at Snyder Law, PC in Irvine, California and we will help you plan well.