How Do Family Relationships Mess Up Estate Planning?

According to a recent Key Private Bank poll of financial advisors, 80% said that working through family issues is the most difficult aspect of estate planning.

With more and more blended families, the issues of equitable distributions among family members becomes even more complex. The interaction between parents, children, step-parents, and step-children can be tense in the estate-planning process—especially when a plan is put into action after a parent or step-parent’s death or disability.

Although these family dramas get in the way in many cases, there’s something you can do about it.

Having open family conversations about estate plans and wishes is the key. This can be hard because parents are afraid that sharing their wishes will cause conflict.

However, discussing your goals and how you’d like to share your wealth with your heirs, is only part of the story. You also have to update your documents to reflect your wishes. Review how your assets are titled and understand who is inheriting your wealth. From an estate planning perspective, you want to avoid probate and maintain control over the disbursement of your assets.

Probate is the process that states use to settle the estates of a deceased persons, who have not made arrangements to avoid probate. These proceedings are made a matter of public record, so there is no family privacy. It can also be expensive and time-consuming, and in some states can take a while, until beneficiaries get their shares.

Remember that retirement accounts like IRAs, 401(k)s and pension plans have named beneficiaries, so those assets pass directly outside of the probate process. The same is true for life insurance and annuities. These specific beneficiary designations—whether through “payable on death” or “transfer on death” accounts—will supersede any provisions in a will or trust. That’s why account holders and insurance policy owners should look at their beneficiary designations to be certain that the assets will transfer, according to their wishes.

Reference: CNBC (March 18, 2019) “This is the No. 1 issue keeping you from inheriting that windfall”

Why Should I Check My Beneficiary Designations?

Investopedia’s recent article, “The Importance of Updating Retirement Account Beneficiaries,” shares some of the problems caused by outdated beneficiary designations.

It’s not uncommon for retirement account owners, who’ve been divorced and remarried, to forget to update their beneficiary designations. It is also troublesome, if some children are named as beneficiaries but the document isn’t updated to include those who were born after the initial designation. To avoid these issues, update your beneficiary designations right after you have a change in family status and review them periodically, so they never become outdated or incorrect.

You can also write in a customized beneficiary designation to address “what-if” situations, like what if your primary beneficiary predeceases you and you fail to update the designation?

An IRA plan’s documents also default the designation, if the designated beneficiary predeceases the IRA owner. These options vary among IRA custodians and trustees. This option may reduce the administrative responsibilities from account owners, but it may not reflect their preferences. That’s why account owners should check the plan document and be sure that they update their beneficiary designations regularly.

Spouses, expecting that one will predecease the other, frequently designate each other as their beneficiaries. However, the issue of simultaneous death is then addressed by state law. This will decide that one spouse died first, even though both deaths occurred at the same time.

This determination is important, if there are children from a previous marriage because it may determine if all the children must be included or children from a previous marriage will be excluded. For this reason, the proper documentation naming successor beneficiaries for normal and extenuating circumstances is needed.

You can also create a customized designation to choose how that portion would be distributed, instead of having it default to the surviving beneficiary. For instance, if one of your beneficiaries has children, you can designate them to receive the primary beneficiary’s share, if he or she passes before you do.

When drafting your customized beneficiary designations, you can look at various options with your estate planning attorney to find the one that meets your needs. The beneficiary designation you select may determine, if your elections are carried over to the next generation.

Making a proper beneficiary designation is a critical part of your estate planning.

Reference: Investopedia (May 8, 2018) “The Importance of Updating Retirement Account Beneficiaries”

How Do I Plan for a Blended Family?

A blended family (or stepfamily) can be thought of as the result of two or more people forming a life together (married or not) that includes children from one or both of their previous relationships, says The Pittsburgh Post-Gazette in a recent article, “You’re in love again, but consider the legal and financial issues before it’s too late.”

Research from the Pew Research Center study reveals a high remarriage rate for those 55 and older—67% between the ages 55 and 64 remarry. Some of the high remarriage percentage may be due to increasing life expectancies or the death of a spouse. In addition, divorces are increasing for older people who may have decided that, with the children grown, they want to go their separate ways.

It’s important to note that although 50% of first marriages end in divorce, that number jumps to 67% of second marriages and 80% of third marriages end in divorce.

So if you’re remarrying, you should think about starting out with a prenuptial agreement. This type of agreement is made between two people prior to marriage. It sets out rights to property and support, in case there’s a divorce or death. Both parties must reveal their finances. This is really helpful, when each may have different income sources, assets and expenses.

You should discuss whose name will be on the deed to your home, which is often the asset with the most value, as well as the beneficiary designations of your life insurance policies, 401(k)s and individual retirement accounts.

It is also important to review the agents under your health care directives and financial powers of attorney. Ask yourself if you truly want your stepchildren in any of these agent roles, which may include “pulling the plug” or ending life support.

Talk to an experienced estate planning attorney about these important documents that you’ll need, when you say “I do” for the second (or third) time.

Reference: Pittsburgh Post-Gazette (February 24, 2019) “You’re in love again, but consider the legal and financial issues before it’s too late”

How Can I Goof Up My Estate Plan?

There are several critical errors you can make that will render an estate plan invalid. Many of these can be easily avoided, by examining your plan periodically and keeping it up to date.

Investopedia’s article, “5 Ways to Mess Up Estate Planning” gives us a list of these common issues.

Not Updating Beneficiary Designations. Be certain those to whom you intend to leave your assets are clearly named on the proper forms. Whenever there’s a life change, update your financial, retirement, and insurance accounts and policies, as well as your estate planning documents.

Forgetting Key Legal Documents. Revocable living trusts are the primary vehicle used to keep some assets from probate. However, having only trusts without a will can be a mistake—the will is the document where you designate the guardian of your minor children, if something should happen to you and/or your spouse.

Bad Recordkeeping. Leaving a mess is a headache. Your family won’t like having to spend time and effort finding, organizing and locating your assets. Draft a letter of instruction that tells your executor where everything is located, the names and contact information of your banker, broker, insurance agent, financial planner, attorney etc.. Make a list of the financial websites you use with their login information, so your accounts can be accessed.

Faulty Communication. Telling your heirs about your plans can be made easier with a simple letter of explanation that states your intentions, or even tells them why you changed your mind about something. This could help give them some closure or peace of mind, even though it has no legal authority.

Not Creating a Plan. This last one is one of the most common. There are plenty of stories of extremely wealthy people who lose most, if not all, of their estate to court fees and legal costs, because they didn’t have an estate plan.

These are just a few of the common estate planning errors that happen. For more information on how to be certain your assets will be dispersed according to your wishes, talk with a qualified estate planning attorney.

Reference: Investopedia (September 30, 2018) “5 Ways to Mess Up Estate Planning”

Who Pays What Taxes on an Inherited IRA?

The executor of a person’s estate must take on the important responsibility of ensuring that the deceased person’s last wishes are carried out, concerning the disposition of their property and possessions. There are times when investments and savings are part of that estate.

An individual may have an IRA that designates the beneficiary or her estate as her heir. Inherited IRAs are not like other assets. Executors must be aware of what to do when withdrawing the IRA into the estate account, particularly about how will these funds will be taxed.

nj.com’s recent article asks “Who pays taxes on this inherited IRA?” It explains that the distributions from an IRA are treated as ordinary income by the federal tax code.

The will must be probated, and it may stipulate that the money from the IRA is to be given to the deceased’s children.

These distributions to the children are taxed at their marginal tax rates. However, it is important to note that when an estate is an IRA beneficiary, the entire account must be withdrawn within five years.

If the executor moves the IRA directly into inherited IRAs for each of the beneficiary children, the beneficiaries would be responsible for paying the taxes.

If the executor withdraws the IRA assets, then the executor would pay the taxes from the estate assets.

You will need to speak with the custodian of the IRA to find out what is and is not permitted in terms of distribution: are they allowed to roll the IRA into a beneficiary IRA, or can they divide the account into separate IRAs for the beneficiaries? The distribution must take place within five years, so keep that in mind when discussing options and goals for the IRA and the heirs. An estate planning attorney will be able to determine your best tax options for the inherited IRA when settling the estate.

Reference: nj.com (January 7, 2019) “Who pays taxes on this inherited IRA?”

Am I Too Young to Start Thinking About Estate Planning?

Many people believe they’re too young to begin thinking about estate planning. Others say they don’t have significant enough assets to make the process of planning worthwhile.

However, the truth is that everyone needs estate planning. If you have any assets, and you intend to give those assets to a loved one, you need to have a plan.

Forbes’s article, “Reviewing Your Financial And Estate Planning Checklist,” examines some important topics in estate planning.

The first of topic is a durable power of attorney for property, finances and health care. This document allows you to designate a trusted individual to make decisions and take action on your behalf with matters relating to each of the three areas above.

In addition to the importance of having all powers of attorney readily available, in case you become incapable of making decisions, beneficiary designations should also be looked at frequently to update any changes to family situations, like a birth or adoption, death, marriage or divorce.

Another topic to address is a living trust. A trust will give direction regarding where and how the assets are dispersed when you die. A great reason to use a living trust is that the assets in a trust do not pass through probate court, which can be an expensive and time-consuming process.

Another area is digital assets. It’s critical for your heirs to have access to digital files, passwords and documents. This can be easy to overlook. Create a list of your digital assets, including social media accounts, online banking accounts and home utilities you manage online. Include all email and communications accounts, shopping accounts, photo and video sharing accounts, video gaming accounts, online storage accounts, and websites and blogs that you manage. This list should be clear and updated for your heirs to access.

If we fail to plan for these somewhat uncomfortable topics, the outcome will be stressful and expensive for our heirs.

Reference: Forbes (January 4, 2019) “Reviewing Your Financial And Estate Planning Checklist”