If you think estate planning is only for the rich and famous, think again. Estate planning is basically planning for what happens to you and your assets if you become disabled or pass away. As a result, estate planning is for EVERYONE.
One big mistake with estate planning is entirely avoidable. But first, some background information.
When you die, your assets can pass to other people in one of three ways:
Beneficiary designation. Assets like IRAs, 401(k)s, other retirement plan accounts, and life insurance are all examples of accounts that have a beneficiary designation. When opening the account, you designate the person(s) or entity who is to receive that asset upon your death.
Joint ownership. If you own an asset jointly with another person and you die, the asset transfers to the other owner.
Probate. Assets that are owned in your name alone and do not involve a designated beneficiary pass via your last will and testament, through the probate process.
Of course, it’s a mistake not to create a plan for your assets at your death. But a bigger mistake we see all too often is people creating a plan and then neglecting to carry it out or modify it as life changes occur.
For example, suppose you write an elaborate will leaving your assets to various family members and some charities. If the vast majority of your wealth is in an IRA with only one of your children named as beneficiary – you meant to go back and modify it to include your other children, but you forgot — the IRA assets will pass ONLY to the named beneficiary, leaving little to no money in your estate to pass through your will. That means those people and charities named in the will are out of luck.
Another example that inevitably results in shock when someone realizes the mistake involves a second marriage. Suppose you are married, and your husband was married previously. You live a good long life together and the game plan is to leave your assets to each other to provide for one another for the remainder of your lives.
Then, your husband dies, and you are shocked (see, I told you!) to find out that he never filled out the form to remove his prior wife and add you to his beneficiary designation on his retirement account. Guess who inherits that money? The first wife.
But your husband’s will clearly stipulated that all assets were to go to you, his new wife! Doesn’t matter. Beneficiary designation overrides what the will might say.
Don’t make this mistake. Follow these steps to avoid heartache and conflict at your death:
- Clearly articulate what you want to have happen to you and your assets if you die.
- Double check that all your various assets are either titled correctly (e.g. in joint name) or have the appropriate beneficiary named.
- Make sure that the ownership and beneficiary designations coordinate with what the will states.
- Review your plan often, because life happens. Things change.
- Use the services of an estate planning expert to guide you through the process.
To be clear, I am not an estate planning attorney. I only intent to provide some awareness to a mishap I’ve seen happen more than once. Get thee to an attorney for advice on your specific situation. Don’t procrastinate! This is serious business.
Do you have horror stories about estate planning gone wrong? Share your war stories below!