What Is Estate Planning, and Do I Need to Worry About It?

When I recently asked for suggestions of specific estate-planning-related topics to write about, one thing that immediately became clear is that many people aren’t entirely sure what estate planning is — and whether it’s something they should be thinking about.

To put it bluntly, estate planning is planning for your incapacitation or death — choosing, for example, what will happen to your financial assets, your minor children, and your health care in such situations. As you can imagine, that’s a pretty broad field, and almost everybody has at least some degree of estate planning that they should be doing.

At the simplest level, estate planning would include making sure that the beneficiary designations on your retirement accounts and insurance policies are up-to-date. (Remember, it’s the beneficiary designation that controls where the money goes, regardless of what you say in your will.)
A very basic level of estate planning would also include making sure that you have a will that accurately reflects your wishes for any other assets (i.e., assets that do not pass directly to a named beneficiary outside of the will).

At a more advanced level of estate planning, some people will benefit from creating a trust to serve any of several different purposes. In short, a trust is a legal entity to which you would give some of your assets. Those assets are then managed by a person or entity whom you name (the “trustee”), for the benefit of some other person(s) or entity.

A trust can be helpful, for example, if there is somebody to whom you wish to leave assets, yet who you do not think should be put in charge of managing those assets (e.g., because of a disability or because of a well-established history of poor financial decisions).

Alternatively, trusts can be helpful for people on their second marriage. For example, imagine that you want to leave your assets to your new spouse, but you want to be sure that any assets remaining after that spouse dies go to your children from your first marriage (rather than to that spouse’s children from his/her first marriage). In such a case, you could put the assets in a trust, naming your spouse as a beneficiary to receive income from those assets for the duration of his/her life, and naming your children as beneficiaries who will receive those assets after your spouse’s death.
For some people, estate planning involves engaging in various activities to minimize the effect of estate taxes. This is, however, not a concern for most people these days, given the size of the federal estate tax exemption: $5.43 million and State of Washington exemption of $2.01 million in 2015, twice that for married couples.


Estate planning also includes several topics that are not strictly of a financial nature, such as choosing a guardian who will care for your children in the event of your death, or granting a medical power of attorney to a trusted family member or friend, so that he/she can make health care decisions on your behalf if you become incapacitated.

5 IRA beneficiary form mistakes to avoid

By Shelly K. Schwartz • Bankrate.com

One of the easiest and most helpful estate planning tools to use is also the easiest to mess up.

All too often IRA owners commit costly errors on their beneficiary form that negate their best intentions, leaving loved ones out in the cold.

From failing to update their document after a divorce, to forgetting to name a beneficiary, such financial fumbles can force future generations to surrender too much to Uncle Sam -- or worse, deny them their rightful inheritance.

"It happens more often than you'd think," says Certified Financial Planner professional Joel Larsen, a principal with Navion Financial Advisors in Davis, California. "Otherwise capable and intelligent people don't always do proper estate planning because they don't want to address their own mortality."

Outdated forms

It would be a terribly romantic story if it wasn't a terrible mistake. Years or even decades after a divorce, your ex-spouse could still inherit a portion of your estate if you didn't update the beneficiary form on your IRA.

And forgetting to update estate planning information following a divorce, death of the beneficiary or remarriage is one of the most common blunders when it comes to beneficiary forms.

Your beneficiary form should be reviewed and updated after every life event, says Neil Brown, CFP professional and CPA with Burkett Financial Services in West Columbia, South Carolina. Updating your will is not enough.

"The IRA beneficiary form overrides your will," says Brown.

Indeed, if you get remarried and change your will, but forget to amend your IRA, the person named on your IRA beneficiary form (most likely your ex) would be legally entitled to your assets when you die -- and, thus, able to pass that money along to any children he or she had from other marriages.

"Retirees can very easily leave their IRA to someone not within their wishes, or leave it to someone within their wishes, but with very negative tax consequences," says Brown, noting many of his clients have insisted that their beneficiary forms are "taken care of" only to discover on closer inspection that their ex-spouse was still named as sole beneficiary.

Naming your estate

This is the biggest blunder of all.

Those who name their estate as their IRA beneficiary, or who inadvertently do so by failing to select a beneficiary, deprive their heirs of a significant growth opportunity.

Normally, nonspouse beneficiaries who inherit a traditional IRA can choose between two options: Either liquidate and pay taxes on those assets within five years of the owner's death, or "stretch" their required minimum distributions out over their lifetime.

"Too many people do not understand the significance of a beneficiary form and leave them blank or name their estate," says Brown. "This is a complete mistake because it limits the beneficiaries' ability to stretch the IRA after the owner's death. It speeds up the income taxes on the distributions as well and can amount to hundreds of thousands of lost growth potential."

Another negative to not naming an IRA beneficiary: The probate court would consider that asset to be part of your estate after you die, and thus it would be subject to any creditors.

If that's not enough, your IRA would also not be distributable to your heirs until the probate process concludes, which can take more than a year.

Do your family a favor and be sure you've named an actual person as your beneficiary, not your estate.

No financial controls

Another IRA no-no is naming your child as sole beneficiary without establishing controls, especially if he or she lacks financial sophistication.

After you die, the money in your account belongs to your beneficiary. Your beneficiary can spend it however he or she likes -- on a college education, a down payment on a house or at a tattoo parlor in Tennessee.

The most important money conversation you’re not having

By Jeanie Ahn

When Rosemary Flanagan died two years ago at the age of 84, her family was stunned. She led an active lifestyle and showed no signs of slowing down before passing away in her sleep.

Although she was a mother to seven sons, none of them knew what to do with her estate. “I was planning on having this conversation with my mother about her estate planning, making sure that the lawyer was on board and that all of her accounts were up to date, but she died suddenly,” said one of her sons, Thomas Flanagan, 50, who lives in Chicago, Illinois where his mother also lived.

After discovering that their mother’s lawyer was no longer practicing and her will had not been updated in six years, the Flanagan family had no idea where to begin. While mourning their mother, Thomas and his siblings scrambled to find any documents that could shed light on her financial situation. It took a week to find her wallet, months to track down all of her IRAs, and more than a year to close all her bank accounts.

While death and estate planning can be a sensitive topic for families to broach, not having a plan in place can become an even bigger regret.

“There’s a big misunderstanding that estate planning is for wealthy people,” says Matthew McClintock, an estate planning attorney and spokesperson for EstatePlanning.com. “But it’s about making sure whatever you own goes where you want it to go in the most efficient way possible with the minimal amount of stress on the family,” he says.

To get started, here are three essential financial documents you need to prepare an estate plan.

An updated will or trust

The main difference between a will and a trust is that a will goes through probate, a formal legal process, to distribute your assets to those you name in your will. This process can be time-consuming and costly to your loved ones. 

A trust, on the other hand, avoids probate, providing more privacy during the process of distributing your property. Trusts can cost more to set up, and you’ll still need a “pour over” will prepared as a safety net to catch any assets that may not get transferred to your trust. It would have to go through probate to administer any property not held in the trust. At the end of probate, the property gets "poured over" into the trust.

Durable power of attorney for property

This document gives someone authority over your financial affairs in the event that you’re hospitalized, disabled or incapacitated. But it’s only in effect while you’re alive. When you die, the power of attorney dies with you. 

Who is the best person for this? CPA and attorney Mark Kohler recommends you appoint a close family member you can trust who is good with handling money.

When it comes to appointing someone to handle your medical directive – who would make medical decisions for you if you’re unable to communicate on your own – you may want to choose someone else in your family who you think can manage this aspect of your care.

Updated beneficiary forms on everything you own

In most cases, beneficiary forms for accounts including your 401(k) plan or IRA will override your will, so it’s important to take the time to update these forms when you’ve experienced a major life change such as a birth, death, marriage or divorce. If you can’t find the form, simply fill out a new one and print out a hard copy for your files. Certified estate planner Jean-Ann Dorrell recommends checking your forms at least once a year.

Two years later, the Flanagans are still missing some pieces to their mother’s financial puzzle, including a safety deposit box they cannot find with savings bonds and family heirlooms. Without a lawyer in the family, Thomas says it would’ve been too costly to navigate the complicated process on their own. 

While you can buy a basic estate planning package online, it’s always a good idea to have a professional make sure your forms, directives, and trusts are correctly executed. If you’re hiring a professional to walk you through the entire process, you can expect to spend anywhere from $2500 to $5000. 

No matter how uncomfortable the conversation might be, it’s among the most important ones you can have to spare your loved ones from unnecessary inconvenience while they grieve. 

“As your circumstances change, your estate plan needs to grow and adapt as well,” says McClintock. “But the most important thing is to communicate and start somewhere.”

Man's mistake cost his children $400,000 of an IRA inheritance

By Jeanie Ahn, Yahoo Finance

Before Leonard Smith lost his battle with cancer in 2008, he worked with his financial advisors and attorneys to make sure his children received the balance of his retirement funds when he died.

A single mistake, however, thwarted his well-laid plans. Family members realized a year after he died that his IRA beneficiary form was filled out incorrectly. Instead of specifically listing the names of his children along with the percentages designated to each heir, Smith wrote: “To be distributed pursuant to my last will and testament,” where the disbursement of funds was spelled out.

But Smith’s failure to complete the form correctly invalidated the document, making his surviving spouse the beneficiary by default.

“I had no idea that a will could be trumped by an IRA beneficiary form,” Deborah Smith-Marez, 50, Leonard’s daughter, told Yahoo Finance.

Smith-Marez and her siblings fought in court to recover the money, but the court awarded the $400,000 in the IRA to their father’s wife, who married Smith two months before he died.

Like Smith-Marez, many Americans are unaware that long-forgotten beneficiary forms can override wills and undermine their loved ones' intentions.

How does this happen? Beneficiary forms are meant to be a straightforward method for heirs to bypass the probate process and receive funds in a timely manner. But sometimes account holders forget they’ve filled out these forms and fail to update them with major life changes.

Your estate is governed separately from your accounts with beneficiary designations, which include retirement accounts, life insurance policies, bank accounts, certificates of deposit, stocks, annuity contracts, bonds, and mutual funds. So if your last will and testament designates one person as the beneficiary and your IRA designates someone else, the IRA will outrank stipulations in your will. 

Americans now store more and more of their wealth in retirement accounts, with $6.5 trillion held in IRAs, and $5.9 trillion in employer-based defined contribution plans like 401(k)s, according to the Investment Company Institute -- all of which require beneficiary forms to designate recipients upon the account holder’s passing.

Unfortunately, there are no automatic reminders to update these forms on a regular basis – the account holder has the responsibility to keep them current and valid.

After losing a loved one, fighting with family over money compounds the emotional toll. To keep this from happening, follow these five tips from certified estate planner Jean-Ann Dorrell:

1) Set aside time at least once a year to update your beneficiary forms. Your beneficiary forms will override your will 99% of the time so it’s important to keep these forms up-to-date and make sure your will and your designated beneficiaries on accounts don't contradict each other. You should fill out a new form if you’ve had a birth, death, marriage, or divorce in your family. If you can't find your beneficiary designation form, ask the financial instituation for a new one. If you choose to fill out this form online, make sure to print a hard copy for your files.

2) When filling out a beneficiary form, don't forget to designate percentages next to the names of your beneficiaries. You can also write “in equal shares” if you want the assets to be distributed equally. Also know that adding “per stirpes,” Latin for “bloodline,” after your beneficiaries' names and the percentages, will ensure that it will go to your beneficiaries' descendents. 

3) If the institution where your money is held changes its name or merges with another bank, fill out a new form. Forms with old institution names may not be valid and the banks won’t go out of their way to tell you.

4) Keep hard copies of your beneficiary forms, including your “payable on death” forms and your “transfer on death” forms in your emergency file. If all of these forms are in your account online, keep hard copies on hand because computer systems change and the forms might be hard to track down, especially if the bank has merged or changed names.

5) Consider hiring a certified estate planner who is licensed in your state. Many financial planners and attorneys who do not specialize in estate planning can make mistakes when filling out forms because of state-specific rules and laws, or just plain lack of experience.

When is the last time you've updated your financial forms?