There are a variety of issues estate planning attorneys seek to mitigate when creating an estate plan for their clients. These issues may include unnecessary income and estate taxes, and the need to avoid probate.
It is not uncommon for my wealth management firm to see a well-constructed estate plan fail. The root causes of the problems that occur after a loved one dies can trace back to improperly titled assets and incorrect beneficiary designations. To understand why this pervasive problem is so prevalent, it is beneficial to understand the estate planning process at a high level.
To help illustrate why preventable problems occur, this article will focus on one aspect of estate planning called probate. Probate is the court’s way of determining who gets your assets when you pass away. Probate can be expensive, time-consuming and emotionally draining during an already emotional time, so most people prefer to avoid it.
Two Common Techniques Used To Avoid Probate
List beneficiaries properly
One common method to avoid probate includes properly listing beneficiaries on your assets. Common types of beneficiary documents include transfer on death (TOD) and payable on death (POD). IRAs, Roth IRAs and most work retirement accounts have beneficiary forms where you can list primary and contingent beneficiaries, as well.
Create a living trust
A second approach to avoiding probate includes having an attorney draft a living trust, which is also commonly referred to as a revocable trust. Once this document is completed, you must title certain assets to the trust or name the trust as beneficiary for it to work as intended.
Following the creation of estate documents, typically the attorney or paralegal will provide a detailed list of instructions describing how to title and/or list beneficiaries on your various assets. If one asset is titled incorrectly or does not have the proper beneficiary designation, then probate, unnecessary income taxes and-or estate taxes could ensue. Most of the estate problems seen in my wealth management firm following the death of a loved one stem from this root cause.
The Common Causes Of Estate Planning Issues
For individuals who have several different investment accounts and other assets, it only takes one mistake to cause a problem. Many people find this process overwhelming to complete on their own as the terminology and the process of changing a beneficiary or title can be confusing. As a result, individuals make mistakes when attempting to do this on their own.
A second reason mistakes occur can be attributed to changes that happen over time. Many people understand their attorney’s directions immediately after they have been described to them, but how many remember these directions three years later? Over time, people tend to open new accounts, close old accounts and purchase different assets. All these changes must be correctly titled and/or have appropriate beneficiary designations for the estate plan to work as the attorney intended.
Solutions: Regular Beneficiary And Title Audits
Most often, your audit can be completed in three separate steps:
Create a comprehensive checklist of all your assets and life insurance policies.
Verify the titles and beneficiary designations of each asset to ensure it aligns with what your attorney had intended.
Make copies of your completed documents. There have been several instances in the past when clients correctly list beneficiary designations only to have a financial institution later lose or mistakenly alter the instructions provided to them.
It is important to note that estate and tax laws can change, and your life circumstances can change, so it is important to periodically have your most recent estate plan reviewed at least every three to five years by an attorney. This is important because even if you have your property and assets correctly titled and all your beneficiaries correctly listed, you could still have unforeseen estate planning issues. As an example, problems could arise if your most recent estate documents do not correctly accommodate the most recent estate and tax laws. Problems may also arise if your most recent estate documents do not accommodate changes in your goals or financial situation.
In summary, make sure your estate plan will work as intended by properly titling your assets and by correctly listing your beneficiaries.
This is an updated version of Ty Bernicke’s article originally published in Forbes on June 28, 2023.
The use of Ty Bernicke’s research or publication of articles he has written does not indicate an endorsement of his work as an Investment Advisor. The publications did not receive compensation for publishing Mr. Bernicke’s work.
The views expressed represent the opinion of Bernicke Wealth Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Bernicke Wealth Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Bernicke Wealth Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
