The 5 Biggest Estate Planning Mistakes

You’ve worked a lifetime for what you have. You did everything right; funded your retirement plan, paid off your home early, amassed enough savings to cover future expenses and even planned to leave a financial legacy to your loved ones. Too bad your ex-spouse—and his or her kids—will inherit it all…

Estate-planning mistakes are both costly and common, even among the smartest planners. Any number of oversights can leave you vulnerable in the event you become incapacitated. Others can seriously compromise the amount your heirs will inherit when you die.
If you want to be sure that your estate does not get impacted by predators, creditors or taxes, keep reading to be sure you’re not committing the five largest mistakes of estate planning. 

1. Picking poorly

Many people forget that estate planning is a two-part process. Some of the documents provide instruction for dividing up your estate after you die, other, potentially more important documents, outline directives for handling your finances and medical care if you become disabled.
Think long and hard about whom you select as your durable power of attorney and medical power of attorney. Your life is literally in that person’s hands. One mistake people make is picking someone not trustworthy or qualified to act on their behalf. Put the best estate plan into place, but pick the wrong person to help execute it and there is no longer any certainty.
It’s a mistake, for example, to pick your eldest child out of a sense of duty, when your youngest child may be more responsible or likely to make better decisions.
You should also consider proximity and be prepared to amend your powers of attorney as needed. Maybe you picked the child you live closest to now, but they later move halfway across the country. It’s no longer reasonable to ask them to be your medical power of attorney.
Most importantly, ask permission before naming someone as your power of attorney. The person you selected may not want the job or feel up to the task, and he or she certainly doesn’t want to be surprised by the designation after you pass.
One critical tip: Make sure you sign a Health Insurance Portability and Accountability Act release, which allows medical professionals to discuss your health with your designated representative.

     2. Leaving your IRA to your estate

What if you name your estate as beneficiary of your individual retirement account? Surprisingly, that could have very serious unintended consequences. Doing this would subject those monies to claims and creditors during probate, the legal process for settling your estate. When you die, your individual retirement account could be used to pay off any debts in your name. Whatever money remains, if any, gets distributed to your heirs—and not in a timely fashion. Probate is costly and can take years to complete. On the other hand, those assets will pass outside of probate free from creditors if you name a living person or persons as your IRA beneficiaries.
Another reason not to leave your IRA to your estate is that it denies your heirs the ability to let those assets grow. How so? Non-spouse heirs can normally either liquidate an inherited IRA and pay taxes within five years of the owner’s death, or “stretch” their required minimum distributions and relative tax bite over their lifetime. The stretch option may be far more valuable, since it enables the account to continue earning compounded interest for decades to come. By failing to name a person as your beneficiary, your heirs lose that ability to stretch and must distribute the IRA assets within five years.

     3. Forgetting to update beneficiaries

Failing to update your beneficiary forms after a divorce or death in the family is about the most common error!This is particularly critical where IRA beneficiaries are concerned.
For example, if you update your will but forget to change the designated beneficiary to your IRA, the person named to your IRA is legally entitled to that asset when you die. That could be your estranged ex, who can then leave that money to his or her own children from another marriage.
Thus, it’s important to review your designated beneficiaries on all documents, including retirement accounts and life insurance, after every life event and be sure they all reflect what’s written in your will.
Many people inadvertently circumvent their own! They’ll indicate in their will that they want their assets divided equally among their three children, but then they go and name one child as the beneficiary to their IRA account and another to their house or a joint bank account.
If you plan to divide your estate equally among your kids, each beneficiary form for each of your accounts should indicate that the assets are to be divided equally among your children.

     4. Failing to sign a health-care directive

Equally egregious, where estate planning is concerned, is failing to create an advance health-care directive, also known as a living will. This document lets your family, physicians and friends know what your end-of-life preferences are, as far as procedures such as surgery, organ donation and cardiopulmonary resuscitation are concerned. In short, it’s the piece of paper that tells them whether to pull the plug or not.
Such guidance spares your family the emotional angst of having to guess at your wishes when they are already under stress.
We are an aging society and with that comes the potential for loss of capacity and ability. Without these documents, it’s a much more complicated process and it opens the possibility that your family will disagree over what they believe your wishes are and who should be in charge. That’s doubly true if you remarried and your spouse and children are at odds.
Keep a copy of your signed and completed health-care directive safe and accessible to ensure that your wishes will be known and carried out at the critical moment. Give copies of all your estate planning documents to your attorney or family members as well.
Many people, park their paperwork in a safe deposit box, forgetting that the bank is not allowed to release the contents of that box to beneficiaries until probate is complete. By then, the funeral is over and assets divided according to state law.

     5. Leaving a living trust unfunded

A living trust allows you to pass assets to heirs outside of probate and can be a valuable estate-planning tool. But it cannot work if you fail to title assets to the trust. Once you set up a living trust, you must retitle your assets under the name of the trust.
There’s a lot of misunderstanding when it comes to trusts. Many people think that the schedules attached to the trust, which asks them to list the assets they will transfer, means they’ve actually transferred those assets. That’s not the case. The schedule merely indicates which assets you intend to transfer. You must still take steps to physically change the title of those assets under the name of the trust. For real property, that involves changing the deed. For assets such as stocks and bank accounts, the accounts must be retitled by the financial institutions where they are held.

     And, most importantly, don’t delay!

Many people delay estate planning, partly because it’s unpleasant to contemplate our own mortality, partly due to the expense, and partly because younger adults believe such paperwork isn’t necessary until they reach old age. Big mistake, especially if you have small children.
If you don’t create an estate plan, you’re letting the courts decide how to divide your assets, which may not reflect your wishes, particularly if you have children or specific distribution desires. If you wish to donate to charity, for example, the courts aren’t going to grant that unless it is specified in your will. Without a road map, it just makes it much more difficult for everyone.
Postponing the process may also limit your ability to maximize the amount you leave to your heirs. If you wait too long, some of the best planning opportunities may be gone; i.e. gifting money/stock or restructuring assets.
So you can avoid the biggest estate-planning mistakes with just a few signed documents and some vigilance. Because of the complexity involved however, it’s vital that legal counseling be used. This is one of those areas where it’s even more expensive if you don’t take care of it correctly. Just know what you’re asking for and what it is that you want.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The information herein contained does not constitute tax or legal advice. Any decisions or actions should not be made without first consulting a CPA or attorney.

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC

Estate Planning Document Essentials

Did you know that several states have investigated some of the country’s largest insurers for failing to pay out unclaimed life policies to beneficiaries? Under policy contracts, they aren’t required to take steps to determine if a policyholder is still alive, but instead pay a claim only when beneficiaries come forward.

The lesson here: It isn’t enough simply to sign a bunch of papers establishing an estate plan and other end-of-life instructions. You also have to make your heirs aware of them and leave the documents where they can find them.

Last Will & Testament

The financial consequences of failing to keep your documents in order can be significant. According to the National Association of Unclaimed Property Administrators, state treasurers currently hold over $30 billion in unclaimed bank accounts and other assets. How do you know if you have unclaimed assets? You can search for unclaimed assets at MissingMoney.com

We recommend that our clients create a comprehensive folder of documents family members can access in case of an emergency, so they aren’t left scrambling to find and organize a mess of disparate bank accounts, insurance policies and brokerage accounts.  You can store the documents with your attorney, a safe-deposit box, online data storage or keep them at home in a fireproof safe that someone else knows the combination to.

The Essentials

• The Will – An original will is the most important document to keep on file.  A will allows you to dictate who inherits your assets and, if your children are underage, their guardians. Dying without a will means losing control of how your assets are distributed, instead, state law will determine what happens. Wills are subject to probate; legal proceedings that take inventory, make appraisals of property, settle outstanding debt and distribute remaining assets. Not having an original document means family members can challenge a copy of a will in court.
• Revocable living trust – Increasingly recommended by estate planners because they are more private and harder to dispute.  A revocable living trust is flexible and can be changed anytime during your lifetime. After you transfer ownership of various assets to the trust, you can serve as the trustee on behalf of beneficiaries you designate.
• “Letter of instruction”  – A useful supplement to a will, though it doesn’t hold legal weight. It is a good way to make sure your executor has the names and contact information of your attorneys, accountants and financial advisers. While the will should be stored with your attorney, the letter of instruction should be more readily accessible.
• Health Care Proxy – Possibly the most important advance directive to complete. This allows your designee to make health-care decisions on your behalf if you are incapacitated. The document should be compliant with federal health-information privacy laws, so that doctors, hospitals and insurance companies can speak with your designee. You may also need to fill out an Authorization to Release Protected Healthcare Information form as well.  If you are incapacitated and your family can’t locate a health-care power of attorney, they will have to go to court to get a guardian appointed.
• Living Will – Sometimes it isn’t enough to establish a health-care proxy unless you have explained to your designee how you would like to be treated in case of incapacity. A living will details your wishes in print.
• DNR or “Do Not Resuscitate” order – Very sick or terminally ill patients may wish to have a document outlining their wishes in the face of long term/indefinite life support assistance, thereby removing the responsibility from their doctor or family members.
• Durable Power of Attorney is critical, allowing a designee to make legal decisions on your behalf in the event that you are incapacitated.

* AARP has a state-by-state listing of advance-directive forms on its website.

* Advance Choice Inc.’s DocuBank electronically stores copies of health-care documents for a fee. In case of an emergency, a hospital will contact DocuBank, which will fax over the information. Subscribers get a wallet sized ID card.

Proof of Ownership

• You should keep documentation of housing and land ownership, cemetery plots, vehicles, stock certificates and savings bonds; any partnership or corporate operating agreements; and a list of brokerage and escrow mortgage accounts. If you don’t tell your family that you own such assets, there is a chance they never will find out. Don’t leave them to perform their own detective work; watching the mail for real-estate tax bills, or combing bank accounts for interest payments.
• File any documents that list loans you have made to others, since they could be included as assets in an estate. Similarly, keep a list of any debts you owe to avoid surprising your family. Wills and living trusts generally are drafted to include provisions for how debts should be settled, and creditors have a stipulated period of time in which to file a claim against the estate.
• Make the most recent three years of tax returns available, too. Looking at prior year’s returns offers a snapshot of what assets heirs should be looking for.  This also will help your personal representative file a final income-tax and estate return and, if necessary, a revocable-trust return.

Bank Accounts & Safe Deposit Boxes

• A list of all accounts and online log-in information with your family so they can notify the bank of your death. Remember that if nobody ever takes any more out or puts money in, the account could become dormant and then becomes the property of the state.
• Any safe-deposit boxes you own – Register your spouse or child’s name with the bank and ask them to sign the registration document so they can have access without securing a court order.

Life Insurance and Retirement Accounts

• Copies of life-insurance policies are among the most important documents for your family to have. Family members need to know the name of the carrier, the policy number and the agent associated with the policy.
• Employer sponsored life-insurance policies, granted by an employer upon your retirement, are most often missed.  New York state alone is holding more than $400 million in life-insurance-related payments that have gone unclaimed since 2000, according to the state comptroller’s office.
• A list of pensions, annuities, IRAs and 401(k)s for your spouse and children. Tens of millions of dollars languish in unclaimed IRAs every year according to the National Association of Unclaimed Property Administrators.

Marriage and Divorce

• Ensure someone knows where you have stored your marriage license. If the document cannot be located, application may have to be made to prove the marriage validity before anything could be claimed.
• For those that are divorced, it is important to leave behind the divorce judgment and decree or, if the case was settled without going to court, the stipulation agreement. These documents lay out child support, alimony and property settlements, and also may list the division of investment and retirement accounts.
• Include the distribution sheet listing bank-account numbers that accompanied the settlement to avoid disputes about ownership or payments due. Also include a copy of the most recent child-support payment order. In the majority of states, the obligation to pay child support still exists after death.
• You also should include a copy of the “qualified domestic-relations order,” which can prove your spouse received a share of your retirement accounts.

No matter what your net worth is, it’s important to have these basic elements of an estate plan in place to ensure that your family and financial goals are met after you die. Let your legacy be good planning for your loved ones!

The information herein contained does not constitute legal advice. Any decisions or actions should not be made without first consulting an attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.