Kevin Lao  00:00

[music] hey, everybody and welcome to the Planning for Retirement Podcast where we help people plan for retirement. My name is Kevin Lao and I’m your host. Just a quick disclaimer, I have my own registered investment advisory firm. It’s Imagined Financial Security. We’re registered here in Florida. But this information is for educational purposes only and should not be used as investment, legal or, tax advice.

If you do have questions about how to work with my firm, you can go to my website at imaginefinancialsecurity.com. So, today’s episode nine, the 5 Most Common Estate Planning Mistakes, I’ve seen a lot of them over the years, being in the business and I’ve been thinking about doing this episode for a long time, because Estate Planning is a conversation I have with just about everybody, and it’s not a fun conversation because we’re talking about death, disability in capacity.

So, no one wants to address Estate Planning and it’s no surprise that only 1/3 of American adults have an Estate Plan in place. But one thing I always hear from any client is, that they don’t want to be a burden on their loved ones. I’ve put together this episode, and hopefully you find this helpful. These are easy to address, easy to fix. But I always recommend talking to a licensed attorney that can actually help you create and execute your documents properly.

So, the first most common mistake is probably, obvious for most and that’s simply not having an Estate Plan.

So, if you’re one of the 2/3 of adult Americans, you’re obviously in the majority, and you may not have an Estate Plan, that’s ok. It’s very easy to set up your basic will, your basic power of attorney, which is someone that can make financial decisions, if you’re incapacitated, a living will which is essentially, if you are in a vegetative state.

Who’s going to make that decision? What are your wishes in that situation or, a power of attorney for health care, which is someone that can also make healthcare decisions on your behalf, if you’re unable to? Those are the primary documents that most Estate Plans will incorporate. You may need a trust, you may not need a trust and that’s again, up for a licensed attorney, someone that can review your situation and give you some advice on that.

Many people think that if their situation is fairly simple, they may not need a trust and that’s may be true. But you might need a trust for variety of reasons, which we’ll cover here in a minute. So, number one, simply getting an Estate Plan done is, really the first battle.

We get into mistake number two, which is not properly executing those Estate Planning documents.

Again, I’m guilty of this too, my wife and I, we did our first Estate Plan before we had children. So, it was all about who’s going to receive our assets, if something happened to both of us? Who’s going to take care of our dogs? At the time, we had three dogs in our household.

So, there were there was some complexity but not a lot. Since then we had three children and we finally updated our state plan about a year ago. It felt pretty good, frankly, to get it done. To make sure everything was directed to our beneficiaries, making sure that we had guardianship for our kids. If something were to happen to both of us.

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We had someone named that would take care of our kids and also to manage the assets for them. But not properly executing your documents is, super common because it takes a little bit of heavy lifting. If you set up a will or, set up a trust, you are going to have to go in and look at all of your accounts whether you have 401K’s, IRAs, life insurance, annuities, bank accounts, investment accounts, and you might need to make some changes on those beneficiary designations.

So, there are two types of assets in this world, assets that can pass outside of the probate process by having a beneficiary, and then assets that will pass through probate if proper beneficiaries are designated or, if there are no investment beneficiary designation, eligibility. So, let’s start with accounts that can be passed outside of probate.

Most commonly those would be retirement accounts like a 401K, 403B, life insurance contracts, annuity contracts, even assets that are not held inside of retirement accounts like, joint bank accounts or, individual bank accounts or, joint or, individually held investment brokerage accounts. All of those have the option to name a primary beneficiary and most of the time a secondary or, contingent beneficiary. And then for bank accounts the alternative, the name for it is a TOD or, a POD, which is transfer on death or, payable on death.

So, once you’ve reviewed all of your accounts and you have an Estate Plan in place, most of the time your attorney will tell you, hey, here’s who you should name as primary based on your wishes. Here’s who you should name as the contingent beneficiary based on your wishes and you have to do that for every single account that you have. Again, this is up to you, your attorney is not going to do this for you. You’ve got to contact those institutions, get those beneficiary designations updated.

I’ve seen scenarios where clients have been divorced for 20 years, and their ex-wife or, ex-husband is still the primary beneficiary on their 401k. Especially, if you’ve moved around from company to company, a bunch of different retirement accounts or, you have several life insurance policies, one with work, one outside of work, one that your grandmother took out for you when you were a baby, look at all those beneficiary designations. Make sure they are up to date and then make sure you have a contingent beneficiary if that option is available.

Now, the second part to this mistake of, not properly executing is, if you have a trust, making sure that the assets that should be held in trust are titled to the trust. So again, some heavy lifting involved, especially, if you’re moving a property inside of a living trust or, an investment brokerage account inside of a living trust. If you’re naming a trust as a primary or, contingent beneficiary of those accounts that we just talked about, all of that needs to be done by the individual client.

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Again, if paperwork might be involved, you might need to get on the phone with customer service and jump through some hoops. But it’s worth it in the end, because your documents aren’t really going to do anything unless you have the proper beneficiary designations and the assets are titled with the right ownership.

So again, those are all scenarios that you can easily review, take a look at, making sure that they’re all up to date, and review them once every year, two years, three years. I mean, if your situation isn’t really changing a lot, you may not need to review them every year. But definitely every couple of years, every three years, you probably want to review those beneficiary designations and make sure that they’re titled properly.

Third most common mistake is thinking a living trust or, a trust in general, is just for ultra-high net worth people.

I hear this all the time, hey, Kevin, I don’t need a trust. I don’t have over 11 and a half million dollars, which is the current exemption for estate tax purposes. Maybe they have $5 million or, $6 million and they might have other concerns in terms of inheritance for their children or, grandchildren or, they might be concerned about divorce of the one of their kids and assets being split to that son-in-law or, daughter-in-law that they’re not a huge fan of to begin with.

Maybe there’s a creditor protection concern or, spendthrift concerns are a child with special needs that may need care for the rest of their life. Therefore a trust could make a lot of sense in solving those issues in terms of inheriting assets outright. So, all of those reasons are reasons to own a trust, whether it be a living trust or, an irrevocable trust or, a testamentary trust or, if you have minor children that’s another one.

My wife and I, we have three kids that are under 18. If something were to happen to both of us, we have guardianship named and we also have a trust that would be set up to be managed for our boys, until they are of age and that is designated inside of the trust.

So, think of a trust as essentially another entity that will help you execute your wishes and manage the assets properly for your beneficiaries, if there are concerns about them inheriting assets outright or, if you just want to make sure that those assets stay in the family and aren’t subject to divorce proceedings or, creditor protection concerns those types of things.

Another reason I have a trust is, to simply avoid probate. Probate is expensive. It can cost anywhere from two to 3% of your estate. So, if you have an estate that’s $2 million, I mean, that could easily cost you a 30, 40 $50,000 to go through the probate process, and setting up a trust might cost you three or $4,000.

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So, this is a big reason why a lot of people will go through the process to setting up a living trust, even if there aren’t a lot of the concerns that I just mentioned. They love their son-in-law or, daughter-in-law or, their kids are totally able to manage a large inheritance. They may still want to set up a trust. So it’s passed outside of the probate process to avoid the cost of probate and also the public record of probate. It keeps that privacy involved.

The assets may still stay in trust for a lot of those concerns that we just talked about. But that beneficiary their son or, daughter or, whoever that beneficiary is, can still access the assets for whatever purpose that they want to access those funds for, if they’re able to manage it themselves. You also have the ability to set up a corporate trustee.

This is an area that I see is, definitely becoming more common where, maybe there’s several children involved, and one of them is just completely off the rails. Not able to manage assets. There’s a lot of concern, if there was a big windfall of a million or, $2 million that’s passed on to one of the children, they may want to have a trust set up for that beneficiary, and not have that person as the trustee into, in terms of making the financial decisions, when you’re no longer here.

So, you may want to consider a corporate trustee, which is a trust company or, a bank or, financial institution, can serve as a corporate trustee, to ensure the wishes of the trust are executed on that beneficiary’s behalf if you have concerns of the management of those assets.

Special needs trusts and other things as well, having a corporate trustee. I see a lot of times will fit in those situations, because the siblings of that special needs child may not be available. Maybe they’re, a neurosurgeon or, they’re deployed overseas, and they’re just not available to make those financial decisions for their brother or, sister. So a corporate trustee can also be put in place, in lieu of an individual, if you have a trust setup.

There’re a lot of benefits of trust. I’m talking a lot about trust, because I’m a big fan of them, just for the simplicity of the execution of your wishes, and all of the benefits of trust provides, whether it’s a living trust or, a testamentary trust. Again, consult your attorney, see if that makes sense in your financial plan and if it does, make sure that it’s properly executed on the back end.

All right, number four, is leaving tax inefficient assets to beneficiaries.

So, what does that mean? There are certain assets that when they’re passed on to the next generation, are going to be heavily taxed, and then there are some assets that are not going to be taxed at all that are super tax efficient to leave to beneficiaries.

The big one I’ll highlight here is, for traditional 401k is, traditional IRAs that used to have the benefit of what’s called a stretch IRA, when they’re inherited by a non-spousal beneficiary, like a son or, daughter or, a grandchild. Those are no longer available for most beneficiaries. Ok, there are some exceptions to the rule.

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I did a Podcast on this recently, maybe episode three or two. It’s called the Tax Trap of Traditional 401Ks and IRAs. So, look at that, I talked more about this in detail but generally speaking, there could be a scenario where, you have several accounts and certain accounts you may want to designate for retirement income, and spend those down during your lifetime.

Then there are other assets that you may want to protect and preserve, to leave those, to the next generation, given the tax efficiency of those, how those assets are passed on? A lot of that’s going to be dependent on your tax situation in retirement, if you’re in a high tax bracket or, low tax bracket, where you think taxes might go in the future? And then also, what tax bracket is your beneficiary in?

Are they in a really high tax bracket or, a really low tax bracket? And that will drive a lot of those decisions that you’re going to want to make as you approach retirement, and then go through retirement, in terms of spending on your assets.

Number five, last but not least is, just simply not informing key decision makers with important information.

I mentioned earlier, not being a burden on loved ones is important to just about, everyone I talked to. What I find is, that sometimes, you’ll get an Estate Plan done, and you may not tell your brother-in-law that they’re the executor or, you may just mentioned in passing, hey, something happened. Would you be able to manage the trust or, manage the financial affairs?

But they really don’t understand or, know what that means, what’s involved? And I’ve seen a lot of scenarios where a big mess is left to a family member, to clean up and take care of it. So, I think, being transparent with the key decision makers, that are going to help execute your estate, whether it’s a trust or, being the executor of your will, I believe is super important, and then making getting things organized in a way that’s easy for those individuals to execute on.

So, if you have tons of accounts all over the place, does that make sense? Do you want to simplify your balance sheet a little bit? I create a two page document for all of my clients just to simply say, hey, here’s a list of our assets. Here’s a list of our liabilities. Here’s a list of insurance. Where are those accounts held? Who’s a point of contact that you can reach out to? Here’s even a phone number that you can call, and giving that out to my clients powers of attorney or, executors or, trustees.

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I find that as super valuable just to make sure that process is easy for those individuals that are going to execute on your plan. Hope you found this helpful. That’s it for today. Be sure to subscribe if you like what you heard, that way you can stay up to date on new episodes. Again, I always love to hear from you if you have any questions about your personal situation that you want to talk about. You can just visit my website at imaginefinancialsecurity.com and schedule a call with me.