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?”

Get These Three Estate Planning Documents In 2019

These may not be the first things you are thinking about as we launch into a brand-new year, but the idea is not to wait until you’re not thinking clearly or when it’s too late and you don’t have what you need to protect yourself, your family and your property. The details, from the Fox Business news article, “3 financial documents everyone needs,” are straightforward. Put this on your to-do list today.

A Will. The essential function of a will is to ensure that your wishes are carried out, when you are no longer alive. It’s not just for rich people. Everyone should have a will. It can include everything from your financial assets to life insurance, family heirlooms, artwork and any real estate property.

A will can also be used to protect your business, provide for charities and ensure lifelong care for your pets.

If you have children, a will is especially important. Your will is used to name a guardian for your minor children. Otherwise, the state will decide who should rear your children.

Your will is also used to name your executor. That is the person who has the legal responsibility for making sure your financial obligations are honored. Without an executor, the state will appoint a person to handle those tasks.

An Advanced Medical Directive. What would happen if you became ill or injured and could not make medical decisions for yourself? An advanced medical directive and health care proxy are the documents you need to assign the people you want to make decisions on your behalf. The advanced medical directive, also called a living will, explains your wishes for care. The healthcare proxy appoints a person to make healthcare decisions for you. As long as you have legal capacity, these documents aren’t used, but once they are needed, you and your family will be glad they are in place.

A Durable Power of Attorney. This document is used to name someone who will make financial decisions, if you are not able to do so. Be careful to name a person you trust implicitly to make good decisions on your behalf. That may be a family member, an adult child or an attorney.

Once you’ve had these documents prepared as part of your estate plan, you’re not done. These documents need to be reviewed and updated every now and then. Life changes, laws change and what was a great tax strategy at one point may not be effective, if there’s a change to the law. Your estate planning attorney will help create and update your estate plan.

Reference: Fox Business (Dec. 19, 2018) “3 financial documents everyone needs”