How Can I Goof Up My Estate Plan?

There are several critical errors you can make that will render an estate plan invalid. Many of these can be easily avoided, by examining your plan periodically and keeping it up to date.

Investopedia’s article, “5 Ways to Mess Up Estate Planning” gives us a list of these common issues.

Not Updating Beneficiary Designations. Be certain those to whom you intend to leave your assets are clearly named on the proper forms. Whenever there’s a life change, update your financial, retirement, and insurance accounts and policies, as well as your estate planning documents.

Forgetting Key Legal Documents. Revocable living trusts are the primary vehicle used to keep some assets from probate. However, having only trusts without a will can be a mistake—the will is the document where you designate the guardian of your minor children, if something should happen to you and/or your spouse.

Bad Recordkeeping. Leaving a mess is a headache. Your family won’t like having to spend time and effort finding, organizing and locating your assets. Draft a letter of instruction that tells your executor where everything is located, the names and contact information of your banker, broker, insurance agent, financial planner, attorney etc.. Make a list of the financial websites you use with their login information, so your accounts can be accessed.

Faulty Communication. Telling your heirs about your plans can be made easier with a simple letter of explanation that states your intentions, or even tells them why you changed your mind about something. This could help give them some closure or peace of mind, even though it has no legal authority.

Not Creating a Plan. This last one is one of the most common. There are plenty of stories of extremely wealthy people who lose most, if not all, of their estate to court fees and legal costs, because they didn’t have an estate plan.

These are just a few of the common estate planning errors that happen. For more information on how to be certain your assets will be dispersed according to your wishes, talk with a qualified estate planning attorney.

Reference: Investopedia (September 30, 2018) “5 Ways to Mess Up Estate Planning”

 

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How Do I Include My Pet in My Estate Plan?

A recent survey of pet owners showed that nearly half (44%) of pet owners have prepared for the future care of their animals, in the event their pets outlive them. With traditional financial planning instruments like living trusts, life insurance, and annuities, pet owners can have peace of mind knowing their pets’ needs will be met.

Forbes’s article, “3 Financial Planning Tips For Pets Owners,” says that typically, “pet estate plans” should cover more than simply who will care for the pet, when you are no longer around. Expenses such as food, doggie day care, veterinarian bills and medication should also be considered.

20% of all respondents in the survey said they have financially planned for their pets’ future care. About 38% said they added the pet’s future caregiver as a beneficiary to a life insurance policy and 35% added more coverage to their life policies. 13% also recently purchased annuities naming the pet’s caregiver as the beneficiary.

However, many pet owners forget about end-of-life planning. Consider an individual trust for your pet or donating funds to your local humane society or pet shelter.

One question many have before adding a new animal to the family, is whether they can afford it. The cost of an animal from a breeder can be high, so a more affordable option is to check out your local humane society or animal rescue group. Remember that the costs of food, vet bills and other supplies are just as important to think about, before making a pet a part of your family. Pets are too often returned to animal shelters, because pet parents were unable to afford to properly care for the pet.

Last, ask about pet insurance at your veterinarian. Many clinics offer plans and staff members will be able to talk to you about the right option based on the type of animal, breed, age and other criteria of your pet.

Simple steps like these will make certain your pets are cared for properly and affordably.

Reference: Forbes (January 27, 2019) “3 Financial Planning Tips For Pets Owners”

 

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What Do I Do with An Inherited IRA?

Investopedia’s article, “What to Do With Your Inherited IRA,” looks at the differences between a traditional IRA and a Roth IRA, what it means when you inherit them and how to navigate both.

IRAs come in two flavors: pre-tax and post-tax. A pre-tax retirement account means the money that goes into the IRA has not yet been taxed. This is a traditional IRA, where you add money to the account and can deduct that money on your tax return. When you withdraw money for retirement, you’ll then pay tax on the money. However, a Roth IRA is a post-tax retirement account. You contribute after-tax money to the account, and when you take money out in retirement, it is tax free.

If the decedent is over the age of 70½, he was required to take minimum distributions (RMDs), which will be taxable. Anytime an RMD is missed or is not taken in full, the IRS will impose a 50% penalty on the amount not removed from the account. If you have inherited a Roth IRA and the RMDs haven’t started for the decedent, the IRS has already collected the tax on the money in the account. The money won’t be taxed again, when it is withdrawn.

If you are a spousal beneficiary, you have a few more options. If the decedent started the required minimum distributions, you have four options:

  1. Roll IRA into Your IRA. When this money becomes your IRA, you follow all the traditional rules: you can only remove this money penalty free after the age of 59½, and you must start your own RMDs after 70½. You’ll also have to name your own beneficiary.
  2. Transfer the Assets into an Inherited IRA in Your Name. Because RMDs have already started, you must continue taking them. The RMDs will be taken based on your life, using the single life expectancy table from the IRS. They’re taxed at your ordinary tax rate. There’s no 10% penalty for early withdrawal. However, if you have an inherited IRA, you can’t designate a primary beneficiary—you must name a successor beneficiary, because if the successor beneficiary inherits the IRA, he’ll have to continue taking RMDs based on your This typically results in RMDs being very high and leaves the successor with a large tax bill.
  3. Take a Lump-Sum Distribution. When you take all the money at once, you avoid the 10% penalty, if you’re under 59½. However, you must pay tax on that large distribution. Of the three choices, you’ll typically want to combine the first two options above, especially if you’re under the age of 59½.
  4. Open an Inherited IRA and Close Account Within Five Years. This lets the account continue to grow for five years. Then you can close it and withdraw all the money. You will pay tax on the amount of the withdrawal, but there’s no 10% penalty for early withdrawal.

The options for an inherited Roth IRA are not much different for a spouse. You still have the option of rolling the Roth IRA into your own IRA. This is perhaps one of the best options with Roth IRAs. You can also open an inherited IRA, but you’ll need to distribute the money from the account. You must start RMDs on the later of the date when the decedent would have turned 70½ or by December 31st of the year following the year of death. If you opt not to start RMDs or you forget, you’ll have to close the account within five years. The IRS usually doesn’t require RMDs from a Roth IRA. The final option is to just take all the money from the account, which lets you to take the money out tax and penalty free.

Non-Spousal Beneficiaries. If you’re a non-spouse beneficiary, you have more limited options. If the decedent began taking RMDs, you have a few options. First, you can continue taking RMDs. Because the RMDs have already started, you must continue taking them. Next, you could take a lump-sum distribution and withdraw all the money at once. You’ll avoid the 10% penalty if you are under 59½. However, you’ll still have to pay tax on the distribution.

If the decedent was over 70½ and was required to take RMDs, you have the same options as if they were under 70½, plus one additional option of moving the IRA to an inherited IRA and closing it with five years. You don’t have to take the money out in one lump sum but can spread it out over five years. At the end of the five years, the account must be closed. If you have a Roth IRA, you have all the same options as a traditional IRA for a non-spouse beneficiary.

There are a few reminders to note. First, distributions from a traditional IRA do count as income—these distributions can jump you into a higher tax bracket, which is a factor to consider. If the decedent died without taking an RMD, assuming she was 70½, you first need to remove the RMD. If you forget or delay too long, it can cause you to be subject to an expensive penalty.

Reference: Investopedia (November 22, 2018) “What to Do With Your Inherited IRA”

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