No one likes to think about what will happen after you die, but it’s important all the same. Procrastination and pretending that everything will be OK could prove devastating to your loved ones if you were to die unexpectedly.
So, if you take time to start preparing now, you can avoid these five costly mistakes:
1. Not having a will
If you pass away without having a legal will, your estate will be intestate. This means your state’s laws will determine how to distribute your bank accounts, securities, real estate, and other assets at the time of your death.
The key to maintaining control over your estate is to draft a proper will and update it to fit your ever-changing life.
The benefits of having a will include choosing who will take care of your minor children, determining how you want your estate distributed, and minimizing estate taxes.
It’s important to note that you cannot include certain items in a will. Estate-planning attorneys are versed in current state and federal laws and can guide you through drafting a will that is right for you.
2. Not having an established trust fund to protect and control assets
Another way to plan for the unexpected is to have assets protected in a trust fund. Trust funds can protect a variety of assets, including a life insurance settlement, real estate, investments, and cash.
Certain trust funds, including asset protection trusts, provide privacy and security, as all assets in the trust become property of that trust. This protection means that your assets are off-limits from creditors, kept off public record, and out of probate (the legal review of a will and testament).
3. Not naming a beneficiary on your estate
It’s vitally important to name a beneficiary (person you want to inherit your assets) for items such as individual retirement accounts (IRAs) and insurance policies.
When assets have no named beneficiaries, the estate is the common default selected, which could lead to probate, unwanted taxes, or delays.
For example, if there is no beneficiary on your IRA, then the stretch IRA tax break is not valid. This valuable tax break allows the beneficiary who inherits an IRA to receive payments from the account over his or her lifetime after the original account owner has passed.
The key to avoiding this issue is to make sure you have the correct people listed as beneficiaries in your estate documents.
Additionally, have alternate beneficiary options in case your beneficiaries cannot inherit due to death or other circumstances.
4. Not transferring your life insurance policy into a life insurance trust
This common mistake can be costly, as life insurance policies are subject to estate taxes when you die. This means that the IRS will get a sizable portion of the funds instead of your family members (intended beneficiaries).
The way to avoid the estate tax is to set up a life insurance trust to act as the owner of your life insurance policy. This will allow you to avoid the estate tax on the insurance proceeds, and your family (beneficiaries) will not have to wait to receive the funds.
5. Leaving assets to minors without considering guardianship
Who will manage the assets if the minor inherits them before reaching legal age? If a minor inherits assets, and the will has no guardian named, then the probate court will have to appoint a guardian to manage the assets until the minor reaches legal age.
One key aspect to consider is that most states have adopted a model law called the Uniform Transfer to Minors Act (UTMA). This law allows the person leaving assets to a minor to name a custodian to safeguard the assets until the minor becomes a legal adult.
Another helpful solution is putting assets into a trust fund that the minor can inherit—then they can benefit from the funds when they reach legal age.
The bottom line
All investment planning requires the right knowledge and having experienced people advise you on how to safeguard your investments. An estate-planning professional can analyze your assets and help ensure they’re distributed in accordance with your wishes.