Beneficiary designations and titles to assets are the most likely sources of estate planning mistakes and problems to address. Though estate planners are aware of the common mistakes and the consequences, many people aren’t. The mistakes we’re going to cover usually involve assets and ways of holding property that avoid probate. Because the property avoids probate, it often doesn’t receive scrutiny from an estate planner, and a planner might not even be told about the property because the owner believes it is taken care of.
Estate Planning Mistakes:
1. Converting financial accounts to joint ownership
it substitutes for a financial power of attorney. Instead of having a document drafted that gives the adult child the power to manage the accounts when the parent is unable to, the joint title takes care of that. Each owner has authority over the accounts and can make decisions. Secondly, the jointly-held account often creates problems. In most states, half the jointly-held account is subject to the claims of creditors of either co-owner. Your assets could end up in someone else’s hands if your adult child divorces, loses a lawsuit, or runs up big debts.
2. Naming one child as beneficiary
Too often a parent decides to keep things simple by naming only one adult child as beneficiary of life insurance or a financial account, including an IRA. The parent’s intent, which often was expressed to the children, is that the child who is named as beneficiary will split the account or insurance evenly with the other children. If one child takes title to the property, it is subject to the claims of any of his or her creditors.
3. Failure to name or update.
This means that an asset that normally would avoid probate must go through the probate process. It will be considered part of the estate and be distributed according to the terms of either the will or state law. For financial accounts, the company that holds the account might have its own default rules for determining who is the beneficiary when one isn’t named. Too many people select beneficiaries when they open an account or buy a policy and never review the decision after marriages, divorces, deaths, etc.
4. Not having contingent beneficiaries.
The contingent beneficiary receives the property when the primary beneficiary already passed away or declines the property. When there isn’t a contingent beneficiary, then most of the time the consequences are the same as if no beneficiary were named. But sometimes state law or the rules of the account custodian might dictate a strange result.
5. Naming trusts as IRA beneficiaries.
When a trust is named IRA beneficiary, required distributions from the IRA are accelerated. The ability to stretch out the distributions and maximize tax deferral is lost. Only certain Types of Trusts can be IRA beneficiaries and maximize tax deferral.
6. Naming multiple co-beneficiaries.
This is frequently done with IRAs, financial accounts, and even real estate using a Transfer on Death deed or a similar designation. The arrangement can work well. With an IRA, the beneficiaries can agree to split it into separate IRAs. Too often, however, the strategy leads to problems. The beneficiaries can’t agree on how to manage the property or how to split it. It can be a major problem with real estate, because they all have to agree on everything. If they agree to sell, then they must agree on a broker, the offering price, and how to respond to each offer. They also might have to contribute equally to property taxes and other expenses until the property is sold.
7. Naming an inappropriate beneficiary.
A minor should not be named the direct beneficiary of property or life insurance. If he or she is, then the child will receive full title and control of the property upon turning 18. When minor children are involved, you need to set up a trust that manages the assets and distributes income and principal either on a schedule you set up or at the trustee’s discretion.
Not avoiding probate.
When an asset passes to others through a will, it has to go through the probate process. Probate can be both time-consuming and expensive. The details vary from state to state and even among localities in a state.
Many states in recent decades enacted less expensive and more streamlines probate procedures, at least for estates of lesser value. But in other states, the delays and costs of the old probate process remain. In addition to being expensive, probate can be disruptive to the management of your assets and leave beneficiaries uncertain when their inheritances will be received and how much they’ll receive. When you own assets in more than one state, your estate might have probate procedures in each of the states.
Probate also is a public process. Anyone can go through the probate court records to determine how much your probate estate was worth, what you owned and owed and how you divided it. Some assets avoid probate by operation of law, as we discussed in the first installment of this series. These include most retirement accounts, life insurance, annuities, and jointly-owned property. Others avoid probate after being transferred to a trust, such as a revocable living trust. The living trust is perhaps the most common way to avoid probate, and we’ll discuss it in detail in a later installment of this series.
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FAQs
How much of your estate should avoid probate.
When you spend time in more than one state, especially when you own real estate in two or more states, consider the probate situation in each state.
Is avoiding probate possible through probate exemptions?
Yes, in some states the law provides a way of avoiding probate by allowing an exemption or a simplified probate process for small estates only worth a certain amount.
Should I avoid Probate and why?
Yes, Though it’s a choice but the two main reasons to avoid probate are the time and money it can take to complete.
