Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Can You Afford these Estate Planning Mistakes?


In Part 1 of this article, we reviewed some classic estate planning mistakes that are fairly common among retirees.

Today, let’s continue the discussion with four more oversights, so you can  evaluate your own estate plan.

Leaving assets outright to adult children.

Many people believe trusts are needed only when minor children inherit.

They understand someone needs to manage the assets and make spending decisions until the children mature.

However, they also think once the children are adults, leaving the assets to a trust isn’t a consideration.

But as it happens, there are situations when it makes sense to leave assets in a trust instead of outright to adult children.

In-fact there are several potential advantages to inheritance trusts.

When children aren’t financially sophisticated, the trust can provide professional investment management.

The trust also protects the assets from creditors of the children.

In most states, creditors won’t be able to reach assets in the trust. They have claims only to income and assets distributed to the children.

The trust also can protect assets in case an adult child becomes divorced. The child’s share of the trust won’t be considered part of the marital estate in most cases, so it won’t be subject to division by a court.

When the trustee has discretion over distributions, a trust can also be helpful should a child develop substance abuse or gambling problems.

The trustee can withhold distributions until it is deemed in the best interests of the beneficiary, or the trustee can pay expenses on behalf of the child directly to the providers of food, housing and other essentials.

Not making full use of a living trust.

The revocable living trust is extremely flexible and provides many benefits.

In the typical living trust, you and your spouse transfer the title to most of your assets to the trust and serve as co-trustees.

You have full control of the assets and deal with them just as before, except you act as a trustee instead of individual owner.

A successor trustee you named takes over and manages the assets when you are unable to or pass away.

The transfer might be smoother than when you rely on a POA.

After you pass away, the terms of the trust determine who takes over as trustee and how the assets are distributed to beneficiaries.

All the assets owned by the trust avoid probate. Also, the public doesn’t know the details of the trust, and the cost and delay of probate are avoided.

The advantages of living trusts, however, often are lost or diminished by mistakes and oversights.

A frequent mistake is for people to neglect to transfer title of assets to their living trusts.

They walk out of the estate planner’s office with the living trust agreement but don’t do the work of transferring legal title to real estate, vehicles, financial accounts and other assets to the trust.

The result is an unfunded trust, of which there are many around the country.

The POA must be used to manage assets when the owner isn’t able to, because the trust doesn’t have control over them.

When the owner passes away, most of the assets go through probate, because title wasn’t transferred to the living trust.

You can combine a living trust with a “pour-over will” to increase privacy. The will can state that any assets in the probate estate are transferred to the living trust and distributed to beneficiaries according to the terms of the trust.

The assets still have to go through probate, but the public doesn’t know how they are distributed. The assets also can avoid the creditors and any divorce proceedings of the beneficiaries.

Losing the portability of a spouse’s unused exemption.

Since 2010, the portability rule allows any unused lifetime estate and gift tax exemption of a deceased spouse to be transferred to the surviving spouse, ensuring it isn’t lost.

After inflation indexing, the joint exemption is $11.2 million ($5.6 million for each spouse) in 2018.

Unfortunately, the portability of the exemption isn’t automatic. The transfer of the unused exemption amount happens only if an estate tax return is filed for the first estate.

Very few estates are required to file returns because of the high exempt amount. Each time an estate tax return is filed, the unused exemptions aren’t transferred to the surviving spouse.

Executors and surviving spouses need to know that an estate tax return should be filed, even when not required, to transfer the unused exempt amount to the surviving spouse.

Leaving a messy estate.

Once you’re past the accumulation years, it’s a good idea to organize and streamline your estate. Otherwise, assets are likely to be lost or misplaced.

If your executor and heirs don’t know what you own, they won’t look for the paperwork.

Even if your heirs locate and claim all your assets, they might have to spend a lot of resources in the effort if you haven’t streamlined and cleaned up the estate.

Most financial services firms have accounts whose owners they haven’t heard from for years.

Often, these accounts are transferred to the state, a process known as escheat.

It’s easier for you than your heirs to prove ownership, so you should check to see if any of your assets have been escheated.

You should also consolidate financial accounts. Consider selling smaller investments and real estate holdings to streamline the estate.

Have your paperwork organized and easy to find.

Leave your executor and heirs a roadmap to your estate. You can do this by using my workbook, “To My Heirs: A Book of Final Wishes and Instructions.



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