Do you have an estate plan? If not, you are not alone. Fewer than half of Americans have an estate plan—the percentage varies between 55 percent and 70 percent, depending on which survey you rely upon. For those of you with an estate plan, there are mistakes that can be easily avoided. In this article, I will specifically address the issue of retirement plans and beneficiary designation forms.
Most people think that a will is the only document you need for an estate plan—not true! A will directs how your “probate assets” are distributed. Probate assets are assets that are owned solely by you (i.e., no joint owners) and have no beneficiaries named on the account. A retirement plan, such as a 401(k) or IRA, is not a probate asset. Your retirement plan is to be distributed in accordance with the beneficiary designation forms that you complete. It is possible for your will to direct your assets to be distributed to one person, and your beneficiary designation form to direct your retirement plan assets to a different person. Sometimes, this is intentional, and if so, generally done for purposes of minimizing tax consequences. However, many other times, this is a mistake that is overlooked and has unintended consequences.
Why is it important to complete the beneficiary designation form?
Control Who Inherits
Without a properly completed beneficiary designation form, the contractual provisions of your retirement plan will control who inherits your retirement assets. In most cases, the default beneficiary is your estate. However, other retirement plans may state that other persons directly inherit your retirement plan.
You have worked hard during your lifetime to save this money. You should be the one to decide who inherits the funds.
Protect the Funds From Your Creditors
If you intend for the same people to inherit both your probate assets and your retirement assets, it might seem easier simply to name your estate as the beneficiary of your retirement assets and allow all of the assets to be distributed in the same manner. Be warned—by doing so, you are putting your retirement assets at risk of your creditors.
Assume that you die with $100,000 of probate assets (bank accounts, equity in a house, vehicle) and $200,000 of retirement assets. Also assume that, upon your death, you have creditors (credit card companies, a nursing home and medical providers, or even a plaintiff in a lawsuit who obtained a judgment against you). Generally, those creditors can be paid only from your estate. So, if you owe more than $100,000, and if you properly completed your beneficiary designation forms for your retirement assets, those creditors can take only the $100,000 from your estate while your beneficiaries receive all $200,000 of your retirement assets. However, if your retirement assets are distributed to your estate, either because you named your estate on your beneficiary designation form, or your estate is considered the default beneficiary, then your creditors can also be paid from the retirement assets that become part of your estate, and your beneficiaries will not benefit from your hard work.
Protect the Funds From Your Beneficiary’s Creditors
Many people are concerned about protecting beneficiaries from themselves and their creditors. For this reason, many people set up a trust to manage the funds for the benefit of the intended beneficiaries. For example, you could name a local trust company to manage the funds for the benefit of your children until each child reaches the age of 35.
A common mistake with this plan is to name the children instead of the trust on the beneficiary designation forms for the retirement plans. What is the result? Assume the previous situation where you have $100,000 of probate assets and $200,000 of retirement assets. If you establish a trust for your children under the age of 35, but name the children (rather than the trust) as beneficiary, you end up having $100,000 held in trust until they turn 35, and the other $200,000 going to them directly as early as age 18.
Having a will in place is a great start for an estate plan, but the planning should not stop there. Reach out to your lawyer to discuss the next steps, and make sure all of your beneficiary designation forms are completed properly.
Written by Liz Weston
Estate planning mistakes can be expensive to fix — that is, when they can be fixed at all.
That’s the thought that haunts New York attorney Mari Galvin whether she’s creating an estate plan for a client or confronting the aftermath when people didn’t properly plan.
“People think, ‘Oh, I have a simple life,’ but you have to understand [that if] you make a mistake and you have unintended results, you can’t bring the person back to sign a new will,” says Galvin, a partner at Cassin & Cassin law firm.
Galvin is currently sorting out the $12 million estate of a man who thought his situation was straightforward enough to plan with do-it-yourself software. His mistakes left his executors without enough cash to pay the estate’s taxes, which has led to conflicts among the heirs, delays and considerable lawyer fees.
“It’s an absolute mess,” she says.
For many, though, do-it-yourself options may be better than not having any plan. A 2016 Gallup Poll survey found that only 44 percent of Americans have a will, which means most don’t have a plan to guide their families or determine who will take care of minor children. People who don’t have estate plans are stuck in denial, sure, but many are also intimidated by the perceived complexity and cost.
“There’s so many people out there who are just too afraid of the process, don’t understand it, don’t know where to start, don’t know where to go, that they’re doing nothing,” says Chas Rampenthal, general counsel for the self-help site LegalZoom. “That right there is a real tragedy, in my view.”
Fortunately, there’s middle ground between doing it all yourself and paying thousands of dollars for a lawyer.
LegalZoom, for example, offers users the option to consult with an independent attorney while using its software. A basic will without legal advice costs $69, while a bundle that includes advice is $149. At Rocket Lawyer, another self-help service that runs on a subscription model, users pay $40 a month for planning software and unlimited access to attorneys.
Prepaid legal plans, often offered by employers, may be another alternative. (Quicken Willmaker, among the best-known software products, doesn’t offer advice as part of its $70 cost, but its publisher, Nolo, offers a directory of lawyers that users can hire to review their wills.)
Going straight to an attorney will be costlier, but prices vary. A basic will might be $300 to $1,000. The cost for a living trust, which is an alternative to wills designed to avoid probate, starts at about $1,500 and goes up from there, depending on an estate’s complexity.
Jennifer Sawday, an estate planning attorney with TLD Law in Long Beach, California, says people can save money by asking CPAs or other tax professionals for referrals and looking for attorneys who advertise, since they may still be building their practices.
“Understand that most estate plans are actually drafted by software programs so what you are paying for is the advice on the documents you need, having the documents prepared correctly and having the deeds for your real estate recorded for you,” Sawday says.
One of the most valuable services an estate planning attorney can provide, Galvin says, is the opportunity to discuss your situation with an expert who has seen many estate plans in action and who knows what can go wrong.
“With an online form, you have choices, but what you lack is this consultation of being able to say to someone… ‘Walk me through this. Let me get this comfort level of how this would play out for me really for my family,’” Galvin says.
Even those advocating self-help options warn that some situations aren’t appropriate for DIY. These cases can include people with multimillion-dollar estates, disabled children who require special needs trusts, blended families (especially where there may be animosity between the kids and the new spouse), property in foreign countries and complex family businesses, Rampenthal says.
Other people can use software to at least get started on the process, with the idea that they can hand it off to an attorney, if necessary. What’s most important is to get it done.
“One of the most loving things you can do,” Rampenthal says, “is not make people guess at what you wanted.”