Insight

1. No Estate Plan at all

It is not uncommon for us to work with people who have accumulated more than enough assets to retire, but do not even possess a simple will. A will provides specific information about who will receive your money, property, and other assets after you pass.

Without a will, state law decides who will receive your assets, and it’s likely it will not be the way you wanted. Dying without a will, also know as dying intestate, involves a time consuming and costly process for your heirs that can easily be avoided.

A will also provides the opportunity to appoint a guardian for your minor children and an executor to carry out the business of closing your estate and distributing your assets.

2. Missing or Incorrect Beneficiaries

Speaking of a will, many people are surprised to hear that some of their assets are not controlled by their will. Accounts like 401(k)s, IRA’s, and insurance polices will be to the named beneficiary after death.

To make certain the right person inherits these assets, a specific person or trust must be named as the beneficiary for each account.

It is important to regularly review and update your beneficiaries if needed. We have seen problems with people opening up IRA’s in their 20’s and not updating their beneficiaries after they are married. When they pass the assets would legally transfer to the original beneficiary instead of a spouse, their children or both.

3. Incorrect Joint Title

Married couples can own assets jointly. There are different types of joint ownership:

• Joint Tenants with Rights of Survivorship (JTWROS): If one person passes away, their spouse or partner will automatically receive the deceased person’s portion of the asset by order of law. This transfer of ownership bypasses a will entirely.
• Tenancy in Common (TIC) — Each joint owner has a separately transferrable share of the asset. Each person’s will dictate who receives the share at their death.

Improper joint ownership can become an issue if a deceased person’s share of a joint asset is intended to be used for a specific purpose, such as funding a trust, following their death.

For example, John and Linda are a married couple with a large amount of investment assets. Their non-retirement accounts are all owned jointly as Joint Tenants with Rights of Survivorship. Assuming George passes away first, his wish is to use a portion of the investments to fund a trust created by his will for the benefit of their four grandchildren. However, because all of the assets automatically go to Mary once he dies due to the JTWROS titling, there are no assets available from George’s estate to fund the grandchildren’s trust.

4. Failure to Fund a Revocable Living Trust

A living trust allows a person to place assets in a trust with the ability to freely move assets in and out of the trust while living. At death, assets continue to be held in trust or distributed to beneficiaries, all of which is dictated by the terms of a trust document.

The major advantages of a revocable living trust are twofold: First, it reduces or eliminates the time and expense associated with the probate process, which is necessary with a will. Second, it provides privacy and protection from the probate process. A will, when submitted to probate, becomes public record, which makes it not only visible, but able to be challenged.

The most common mistake made with a revocable living trust is failure to retitle or transfer ownership of assets to the trust. This critical step is often overlooked after the “heavy lifting” of drafting the trust document is completed. However, the trust is of no use if it does not own any assets.

5. Naming a trust as a beneficiary for an IRA

The new SECURE Act, which went into effect on Jan. 1, 2020, calls for the removal of a provision known as the stretch IRA. This provision allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. It allowed assets in retirement accounts to continue their tax-deferred growth over many years — a very powerful strategy.

But the new law requires a full payout from the inherited IRA within 10 years of the death of the original account holder, in most cases, when a non-spouse individual is the beneficiary.

Because of these changes, it may no longer be ideal for a person to name a trust as the beneficiary of their retirement account. It is possible that either distributions from the IRA may not be permitted when a beneficiary would like to take one, or distributions will be forced to take place at an undesirable time and unnecessary taxes will be generated.

It makes sense for people to speak with their attorneys and visit their estate plans to ensure that the new SECURE Act provisions do not create unintended consequences.

If you have questions about your Estate Plan, give us a call at 610-825-3540.