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How to Fix 5 Common Estate Planning Problems

Not surprisingly, most people loathe reviewing their estate plan because it can be both confusing and daunting.  Others do not want to think about death and avoid the topic altogether.  If you already have put an estate plan together, you are ahead of the curve as many people do not have one.  If you do not yet have an estate plan, there is no better time than now to sit down and get one in place.  In either scenario, below are five common estate planning mistakes and how to fix them so that you are fully protecting your family.

  1. You Have Not Updated Your Plan

    Many people consider estate planning a “one and done” proposition.  This could not be further from the truth.  Life happens.  This may include adding new beneficiaries due to the birth of children or grandchildren, or removing beneficiaries due to a change in circumstances.  Your family’s needs will almost certainly have changed over the years since you first created your estate plan.  Likewise, your executor – the person who will be in charge of your assets in the event of your untimely death – may have passed away or may no longer be able to serve.  For these reasons, it is key to keep your beneficiaries and successor executors current.

  2. Your Plan is Missing Key Components

    While you may already have an estate plan in place, it may not be comprehensive enough to fully protect your loved ones after you have passed.  At a minimum everyone should have a last will and testament, a financial power of attorney, and a health care directive.  These documents should have been reviewed by a knowledgeable estate plan attorney within the last 5 years and immediately after any major life event, such as a marriage, divorce, birth or death of a child, receiving an inheritance, or significant increase or decrease in assets.  With these life changes, the level of protection you need may have also changed.  Relying on an old strategy may leave you and your loved ones vulnerable.

  3. You Have Not Kept Up with Changes in Tax Laws

    In the past twenty years, the estate tax exemption has increased by fifteen times.  If you have significant wealth you need to make sure your estate plan takes advantage of unique planning opportunities under current law.  This is because an outdated estate plan structure that has not kept up with current tax law can actually do more harm than good for your loved ones, since it may needlessly cause taxes to be paid.  Accordingly, a qualified estate planning attorney who fully understands your circumstances should review your documents and make any necessary adjustments.

  4. You Moved Without Updating Your Estate Documents

    It is important to understand that each state has different laws that governs estate planning.  For this reason, if you move from one state to another it is vital that you have a local estate planning attorney review and revise your documents.  You want to make certain your plan is compliant with the laws in the state in which you primarily reside.  This also applies to medical powers of attorney or advance directives that may be valid in your old state but ruled invalid in your new state, depending on the local law.

  5. You Failed to Focus on Life Insurance and Retirement Accounts

    One common mistake is for individuals to fail to review life insurance policies after they were originally issued.  Neglected policies may not be properly funded, resulting in a lapse in coverage and requiring hefty premiums to keep the policy in force.  Likewise, it is important to take advantage of listing beneficiaries on retirement accounts rather than leaving them to your estate.  When a beneficiary is listed, these assets avoid probate – the long and expensive legal process of distributing your assets upon your death through court supervision – and allows beneficiaries to keep the majority of these funds in tax-advantaged accounts.

We’re Here to Help.

Without proper maintenance and administration, your carefully put together estate plan may not work as you intend.  Instead of allowing this to happen, give us a call today, so we can begin reviewing your estate plan to make sure all of your bases are covered and any needed changes are made.  Call or contact us today.  We’re here to help.

3 Things You Must Do Once Your Divorce Is Final

The divorce process can be long and expensive.  However, the work does not end once the divorce decree is signed. In order to ensure that your assets and estate planning wishes are carried out in light of this major life change, there are three things you must do as soon as possible.

Change Beneficiary Designation On Life Insurance

A life insurance policy is a contract between you and the insurance company.  You designate the beneficiary (the individual(s) or entity who will receive the proceeds upon your death) and the insurance company will pay them when you die. Because the beneficiary designation is a legally binding contract, the insurance company has to pay the individual listed as your beneficiary. If your ex-spouse is listed as the beneficiary, they will pay the funds out to him or her.  It does not matter to the insurance company if the two of you are now divorced.

Update Beneficiary Designation On Retirement Plans

Although state law may automatically revoke a designation on a retirement plan if the ex-spouse is listed, federal law states that the last named beneficiary is the one who is entitled to the funds. Depending upon what type of retirement account you have, it might be the state law that controls or the federal law.  To be on the safe side and avoid a potentially long and costly battle for your family, it is best to change the beneficiary as soon as possible.

Create or Revise Your Estate Plan

If you and your former spouse had a joint trust, you will need to have your own individual trust created to hold the assets that are now in your name only. In this new plan, you will need to think about who to name as the trustee and beneficiary. If you have minor children, you may also need to consider who is going to be the individual to manage those assets on behalf of your children. In many cases, you probably don’t want your ex-spouse in these roles.

If you do not have any estate planning documents in place, now is the perfect time to get everything in order. After going through the divorce, you probably have a good idea as to what assets you own and the value of them.  This will be very helpful as we discuss the right estate plan for you.

Your estate plan is more than just a trust.  It can include documents such as a financial power of attorney and healthcare power of attorney.  Whether you have them already or need to have ones executed, this is a crucial time to review them.  Chances are you no longer want your ex-spouse to have the authority to sign documents on your behalf or make medical decisions for you.  To avoid confusion by third parties as to who should be acting on your behalf, make sure to call us so we can update these essential documents.

We can help you cross the finish line

Divorce can be a long process.  Before taking those next steps into your new life, call us, so we can make sure that you cross the finish line with documents that are able to carry you and your wishes forward.

Contact us today.  We’re here to help.

Roth IRA Conversions After Tax Reform… Still a Good Idea? What Are the Implications for Your Family if You Don’t Spend All the Money?

Twenty years ago, the Roth IRA first became available to investors as a financial tool for their estate planning needs. These accounts have maintained their popularity because unlike their traditional IRA counterpart, a Roth IRA provides account owners tax-free income during retirement.

In fact, many people chose to convert their traditional IRA or 401(k) plan into a Roth IRA to benefit from this long-term tax advantage. (Of course, there is a current tax bill that has to be considered when you make a conversion.) The recently enacted tax reform, however, has removed one helpful opportunity: the ability to recharacterize — or undo — a Roth IRA conversion.

You can think of these recharacterizations as a second-look at whether the conversion made financial sense. For example, Kevin decides to convert a $100,000 traditional IRA to a Roth IRA. When Kevin does this, he has to pay income tax on the $100,000 now. This isn’t as bad of a deal as it sounds, because now the money is in a Roth IRA, where eventually all of the withdrawals will be tax free. When Kevin retires, he’ll have “tax-free” income from the Roth IRA instead of having to pay income tax on each withdrawal if it were still in the traditional IRA. In the past, if the market were to decline to say $90,000, Kevin could recharacterize — or undo — the conversion. This is important because he had to pay income tax on the full $100,000 of the conversion, but assets have declined in value only $90,000. So, Kevin would be paying income tax on a “phantom” $10,000 IRA conversion. Now, this second-look that a recharacterization offered is closed, so a Roth IRA conversion is just a little riskier than is used to be.

Implications For Loved Ones

Many people who create IRAs, and the ones who inherit them, are unfamiliar with the rules that apply to them. There are several basic scenarios that will result in different consequences for your loved ones in the event you pass away and leave behind an IRA.

First, if you die before spending all the money in your IRA you can leave the retirement account to your surviving children, grandchildren, or other beneficiary you have designated in your estate plan.

Second, the type of IRA — in other words, whether it is a traditional IRA versus a Roth IRA — is important as it vastly affects the amount of benefit your loved ones will receive. For example, when you leave behind a traditional IRA your family will pay income taxes on the money they withdraw when it is taken out of the account. On the other hand, if you leave behind a Roth IRA the money will be income tax-free for your family. Although both types of accounts are subject to the estate tax (or death tax), the death tax is likely a non-issue for most people now, as the federal estate exemption is presently over $11 million per person.

Third, you can create an IRA trust as part of your comprehensive estate plan. An IRA trust is special trust that is purposefully designed to receive IRA distributions for the benefit of your loved ones after you die. This powerful tool maximizes the benefit to your family upon your passing and can be used for both traditional or Roth IRAs. So, whether you decide to convert or not, you still need to consider an IRA trust.

Finally, although tax reformed altered the flexibility of IRA conversions by removing the ability to undo them with a recharacterization, a conversion may still be a good financial planning option for some. As you work with your financial and tax advisors on your conversions, consider your beneficiary designations and whether an IRA trust might be right for you.

Contact an Estate Planning Professional

There are several factors that should be considered when choosing financial and estate planning tools. Always work with a knowledgeable financial and tax professional. Then, work with us, as your estate planning professional, so we can achieve your goals and maximize the benefit to your loved ones.

Contact us today, we are here to help.