Unfortunately, many people make common estate planning mistakes that come back to hurt them or their families. Most of these mistakes can be avoided, especially if you think ahead, revisit your plan occasionally, and work with a knowledgeable lawyer.
Outdated Beneficiary Designation
It happens frequently when someone passes away – family members locate retirement accounts and pension information, but they discover that the beneficiary designations are very out of date. The designations may name people who are deceased, ex-spouses, or people who are no longer in the deceased person’s circle.
There is very little the family can do when a beneficiary designation is out of date. If the beneficiary is deceased, then the pension or proceeds may go to the accountholder’s estate or possibly to the beneficiary’s heirs. If the beneficiary is someone who is alive but unexpected, then the proceeds go to him or her. To avoid this result, you can review your beneficiary designations every few years and update them if needed.
Not Updating Powers of Attorney
Another common mistake is failing to update powers of attorney. Like beneficiary designations, these may name unexpected people – estranged parents, deceased friends, et cetera. Without a valid power of attorney naming a living person, another person besides your spouse will likely not be able to make certain decisions for you if you are incapacitated. As a result, you should review the documents every few years.
Coordinating Trust Beneficiary Designations With Your Retirement Accounts
Third, people often fail to coordinate trust beneficiary designations with retirement accounts. Sometimes it makes sense to name a trust as a beneficiary of an IRA or a 401(k). But more often, it does not make sense for tax reasons.
For example, the IRS does not treat a trust as beneficiary the same as an individual as beneficiary. If a trust is the beneficiary, then the entire IRA must be distributed within five years of the IRA owner’s death (if the owner had not yet reached the age of 70 ½) or over the remaining life expectancy of the IRA owner (if the owner had reached the age of 70 ½). This can result in much higher taxes than if the IRA was distributed over a longer time period.
As you can see, making beneficiary designations and signing powers of attorney can have hidden consequences. Be sure to speak with a lawyer and update your plan regularly to avoid estate planning mistakes.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.