Most people hate reviewing their estate plans, and I can’t say I blame them. From tax law and complex documents, to trusts and health care directives, the intricacies can be daunting. Plus, talking about life after death isn’t anyone’s favorite activity.
Unfortunately, these common stressors often prevent people from revisiting their plan once it’s been drafted, creating the potential for substantial gaps that could dramatically affect how assets are distributed down the line.
To help you identify these gaps, and to help ensure that your wishes are carried out faithfully after you have passed on, here are eight red flags that can indicate a problem with your estate plan.
Written by Casey Robinson, a wealth counselor at Waldron Private Wealth, a boutique wealth management firm outside Pittsburgh, Pa. Robinson has extensive experience assisting multi-generational families with estate planning, integrating trusts, tax planning and risk management.
1. You’re missing critical plan components
We recommend, at a minimum, that all clients have a will, a financial power of attorney and an advanced medical directive that have been reviewed by an attorney within the last 10 years and subsequent to any major life event.
2. You haven’t updated your beneficiaries or executors since the plan was drafted
You may have new beneficiaries you wish to add, such as grandchildren, or beneficiaries you wish to remove, since you established your estate plan. Many times, parents and grandparents want to ensure that assets are held in trust until grandchildren have reached certain ages, but their plan may distribute assets outright, perhaps against their current wishes.
The same thinking should be applied to the executor of your will. If your will lists an individual who has died, or is unable to serve, and no successors are named — the court will appoint someone else. Oftentimes, this will be a beneficiary, making it even more imperative to keep beneficiaries current.
3. You haven’t made plans for your personal effects
Though not as critical as other aspects of an estate, leaving it to beneficiaries to determine the ownership of personal items, like jewelry and family heirlooms, can cause a tremendous amount of family discord. It’s easy to divide an investment account, but it’s not as easy to split an engagement ring.
If you do not spell out who should get your personal items when you die, you may unintentionally leave your loved ones with a host of difficult decisions to make, which can put unnecessary stress on family relationships. If you have already executed your will, consider using a codicil to specify how your effects should be distributed.
4. Your life insurance policies haven’t been reviewed in years
Many retirees own life insurance policies that haven’t been reviewed since they were originally executed. It's vitally important that you review them, to ensure they will perform as you intend them to. Oftentimes, when you review the details of your policies, you find that liabilities have crept into your situation, and that there are many opportunities for improvement.
One of the most common issues people run into with a neglected policy is that it has not been funded properly and has lapsed, which typically requires a hefty premium to keep it in force.
5. You’ve named a close family member or friend as a trustee
This is one of the most common mistakes we find individuals and couples make when planning their estate. People often name a family member or close friend as a trustee, but most of the time, these individuals are completely unaware of what being a trustee means, let alone the fiduciary responsibilities that come with the role. In reality, it’s a huge burden to place on someone you care about.
As an alternative, consider appointing a third-party representative, like a bank or a trust company, to serve as trustee. This will ensure that your assets will be managed according to your directives and will remove the possibility of putting a friend or family member in a tough situation.
6. Your plan does not reflect the current estate tax exemption
Since 2008, the estate tax exemption has more than quintupled (from $2 million to $11.2 million for individuals). If you have significant wealth, this creates a unique planning opportunity that you may not be aware of. Many estate plans were designed prior to these rather significant changes to the tax code and often, the outdated structure causes more harm than good.
The latest exemption changes resulting from the Tax Reform and Jobs Act of 2017 are scheduled to “sunset” in 2025, which further demonstrates the need to work with a qualified estate attorney or wealth adviser who really understands your situation.
7. You’ve listed contingents on your IRAs, 401(k)s and annuities
There are significant benefits to inheriting retirement savings through a beneficiary designation, as opposed to leaving these assets to your estate, and having them distributed by the terms of your will or intestate law. Passing these types of accounts on via a direct beneficiary designation averts the probate process, which saves time and costs, and awards a key benefit: Beneficiaries are permitted to keep the majority of the assets in these tax-advantaged accounts for many additional years.
Additionally, Roth IRAs are tax-free from a distribution standpoint, not only to the owner, but to the beneficiaries as well. I often recommend leaving IRAs and other tax-advantaged accounts to grandchildren, as it allows for the possibility of decades of tax-deferred and potentially tax-free distributions, which can be an extremely powerful estate transfer strategy.
8. You've moved, but haven't updated your estate documents
Every state has different laws that govern estate planning. If you move from one state to another, it’s critical to have an attorney who is familiar with that specific state’s laws revise your documents to ensure they are compliant with your state of primary residence.
If you own property in multiple states, your executor will have to go through the probate process in every state in which you own property. In these cases, we often recommend placing ownership rights to those properties in a revocable living trust, as it generally averts the probate process and the costs/time associated with it.
Medical powers of attorney and other advance directives executed in a previous state may also be ruled invalid in your new state of residence, depending on the state.
It’s easy to view estate planning like a “one-and-done” process. However, there is only so much that can be predicted when the plan is drafted. Without proper administration and review, your carefully constructed plan could quickly become worthless.
As a general rule, consider reviewing your plan with your financial adviser or legal counsel after every major life event to ensure all your bases are covered, and understand that every small change in your current situation can impact future plans.
Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.
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