When a simple will is not the way
When it comes to estate planning, procrastination is usually the most common enemy.
As many as three-quarters of people pass away without having completed an estate plan for distributing their assets, says Jimmie Joe, an attorney and certified public accountant in Diamond Bar, Calif.
That can be a costly error for heirs, since the deceased's assets wind up stuck in probate, a process that allows a court to determine who has rights to the assets.
Probate can cost both time and money, since assets may be tied up in court for months and can be eaten away by fees.
"With a little bit of time, effort, and planning, an individual or married couple can save other family members the grief of probate and estate taxes," Mr. Joe says.
Contrary to common belief, simply writing a will does not always guarantee that an estate will avoid probate, Joe says.
Instead, he advises creating a revocable living trust. Such a contract shelters a person's assets during his or her lifetime, while listing a beneficiary.
Because the assets are in a trust and not in the person's name, probate is typically avoided. The revocable aspect of this contract allows the arrangement to be altered until death.
Another common error is failing to make full use of federal estate-tax exemptions. Currently, assets of up to $1 million per person are exempt from federal taxes, while anything above that amount is taxed as high as 50 percent.
But a husband and wife can combine their exemptions by placing their assets into a living trust to shield as much as $2 million. If the couple, for example, held $1.5 million inside the trust, no taxes would be owed if one person died. Without the trust, $500,000 of that estate would be taxed.
Another mistake: listing your estate as your beneficiary. Such a step can cause delays or unnecessary expense, says Thomas Murphy Jr., an attorney in Springfield, Mass.
Many people who took out small life-insurance policies during the 1930s and 1940s listed their estates as beneficiaries, Mr. Murphy says.
If a person transfers all other assets such as bank accounts or a home outside his or her estate, the only asset in the estate may wind up being that small insurance policy.
"It's not worth probating the estate for that small amount of money," Murphy says.
Another downside: Creditors can't make a claim against insurance benefits, but they can seek repayment from an estate. So any insurance benefits that go into your estate may wind up in the hands of creditors rather than family members.
Avoid naming minor children on life-insurance policies, Murphy says. If a child under 18 is listed as beneficiary, then the funds will go into the estate or be held until a guardian or trustee can be established.
Don't assume that your will determines who gets every asset. Beneficiaries named in insurance policies and retirement plans often supersede instructions in a will.
Some types of accounts and titled documents have mechanisms for naming beneficiaries and avoiding probate.
A "payable on death" or "transferable on death" option may be available for bank accounts, equities, and mutual funds, Murphy points out.
Whoever is named as a beneficiary should be described with precise detail. Merely writing "my wife" or "my child" can set up disputes among siblings or former and current spouses. "Be specific as possible," Murphy says.
Often, Murphy says, people forget to update documents naming beneficiaries after they get divorced or if a beneficiary dies. As a result, a spouse from an earlier marriage may wind up receiving benefits intended to help a partner at the time of death.
"Life evolves," says Murphy. "People have to review some of their documentation on a regular basis."
He suggests reviewing all life- insurance policies once a year to make sure the beneficiary listed is the one you still want. It's also important to let survivors know where you keep all vital records. Next of kin may not know the name of the attorney who helped prepare a will unless you tell them.
To provide his clients with easy access to their records, Murphy helped create FamilyFiles.com, an online data storage and notification company.
Another reason to review an estate plan regularly: Estate-tax laws often change.
Last week, the US Senate rejected plans to permanently repeal the estate tax. But changes enacted last year will gradually increase the size of estates exempt from taxes. The amount will increase every two years until 2010 when it is scheduled to be repealed for a single year and then reinstated with the $1 million exemption.
Errors in how you handle life-insurance policies and retirement plans can cause lengthy delays in distributing your assets after your demise, warns Thomas Murphy Jr., an attorney in Massachusetts. He offers the following tips for helping to prevent that from happening:
Don't name your estate as beneficiary of a life-insurance policy or retirement plan. Instead, choose a specific beneficiary.
Always name a secondary beneficiary. That way, if the primary beneficiary dies before you, the benefits don't land in the estate.
Don't name minor children as beneficiaries. Insurance companies, pension plans, and retirement accounts don't generally pay death benefits to minors.
Update records regularly to reflect life changes and be as specific as possible when identifying intended beneficiaries.