5 estate planning disasters you’ll want to avoid

According to Fox Business, “over the next 25 years, as much as $68 trillion of wealth will be passed to succeeding generations.” With wealth transfers rising, there are unique estate planning opportunities available for those who are prepared. However, due to the constant changes on the tax environment, there will also be great challenges. 

Luckily, there are steps you can take to protect you and your beneficiaries from unnecessary legal fees and taxes.

Below are five things you will want to avoid in your estate planning strategy: 

Not properly designating beneficiaries

This is one of the most common estate planning mistakes. For newly developed estate plans, this mistake can be easily overlooked, especially with retirement plans. 

If you are successful in designating beneficiaries, they will be able to avoid the process of probate and assets will transfer to them directly. Doing so will allow them to avoid delays and costs associated with probate. 

Putting down a minor as beneficiary

When minors are set as beneficiaries, problems could arise if they are still minors when you die. Minor beneficiaries may not have the legal authority to take control of their inheritance until they reach the age of 18 or 21. If beneficiaries lack legal authority, a court-appointed guardianship will need to be established to watch over the assets on their behalf. 

You could avoid this process by adding a guardian for the minor in your will, which will likely lead to the court appointing that person as guardian over the assets. 

Another route is to set up a trust for the beneficiaries and name a trustee. This will also allow beneficiaries to avoid the probate process. 

Failing to fund a trust

Many people establish a trust, but fail to fund the trust afterward. It is imperative that you place assets into your established trusts to keep it properly funded. If you fail to properly fund the trust, it is possible that your intentions for the trust will be ignored, leading to the assets not covered by the trust to be required to go through probate.

Creating a tax nightmare for your heirs

When you pass on real estate or other highly appreciated investments to your heirs, they are not responsible for any income taxes not the appreciated assets when they receive them. 

However, this does not apply to inheritance of retirement accounts like 401ks and traditional IRAs. Aside from a surviving spouse, heirs inheriting these accounts will be responsible for the taxes owed on the accounts. This could lead to a devastating increase on income taxes.

To avoid this nightmare, you could convert portions of your retirement accounts to a Roth IRA, which will allow you to pay the conversion taxes at the current income tax rate. Upon your death, the money inside the Roth will transfer to your heirs tax-free. 

Not going through the estate planning process

Many people, if not all, do not look forward to the estate planning process. Therefore, many will avoid this process. However, estate plans are vital to taking care of your loved ones financially and have the potential of saving them a lot of stress after you die. 

See David Nichols, 5 estate planning disasters you’ll want to avoid, Fox Business, November 12, 2020.