A Common Estate Planning Mistake

Funding the trustIt’s not enough to set up a trust, it must be funded properly as well.  Read further about this common estate planning mistake and you will see why we assist every client to fund their trust.

What if your spouse is ill and you meet with an estate planning attorney to organize your family affairs? The attorney drafts a trust document and a will, and you and your spouse sign it. That’s that. You think everything is fine. However, what if your spouse suddenly dies, and you discover that the accounts aren’t set up to transfer the way you both wanted. Oh-oh. Could this happen to you?

For instance, a couple might be in their second marriage with no children in common. However, the wife has two children from her first marriage. She and her current husband had been together for 10 years, when she’s diagnosed with cancer.

When they see an attorney, they agreed that her assets would be divided one-third each to the husband and her two children. But most of her assets were in her company 401(k), and the beneficiary on the 401(k) was the husband. No one changed the 401(k) beneficiary designation to reflect the wife’s wishes. When she died, he tried to get the 401(k) to send one-third to each of her children, but it didn’t work. Her employer was legally required to distribute the account, according to the most recent beneficiary designation that they had.

In our example, the husband was a decent sort: he rolled the 401(k) into his own IRA, withdrew the two-thirds for the kids, paid the tax, and gave each of his second wife’s children their share. If they had properly updated the beneficiary form to add the children as direct beneficiaries of the 401(k), the tax cost would have been much less significant. It’s not an uncommon estate planning mistake.

If you have a will and trust, it’s important to note that these account titles and beneficiary designations supersede everything and anything that’s mentioned in your will and trust. If this isn’t set up right, it can mean some time-consuming and expensive maneuvering for your family.

If your accounts list only the husband or wife as the owner, the account titles need to be changed to reflect their trust as the owner. If the wife passes away before this is done, the accounts must go through probate.

Be sure there isn’t a dormant administrative nightmare waiting for your loved ones. Your retirement accounts, life insurance policies and annuities let you designate a beneficiary. Review these periodically and update them if necessary.

Reference: Trust Advisor (March 9, 2017) “These Hidden Estate Planning Mistakes Can Have Horrible Consequences”


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