Implementation: Avoiding Common Estate Planning Mistakes

You met with your attorney.  You signed a will, trust, or beneficiary designations that direct your assets in the manner you want.  But there’s still one key piece missing – titling your accounts correctly, updating your beneficiaries, and following through on implementing your plan.

One of the common misconceptions when working through an estate plan is that your assets will automatically pass in the way you have explicitly outlined in your documents.  In reality, it takes careful coordination to make sure everything goes according to plan.  Let’s review a few of the top estate planning mistakes made by individuals during implementation:

Estate planning mistake #1: Failing to update account titles

Your trust document can be as specific as you want, but if you never retitle your account or property in the name of the trust, you’ve likely just wasted thousands in attorney’s fees.  Titling your accounts incorrectly can have profound effects on both your estate and the manner in which the assets actually pass, despite what you may have outlined in your estate documents.

For trusts, it’s important to take the next step and, after you sign your trust documents, actually retitle the correct assets in the name of the trust, whether it’s your house or your financial accounts.  If the trustees change, make sure they get updated on your financial accounts as well.  There are many different kinds of trusts, and trusts are a powerful and flexible tool for controlling different aspects of how assets are inherited or distributed.

For non-trust assets, multiple account types exist and each of them has different implications for who receives the assets upon your death.  The account type is normally chosen on your account application, which you may not have looked at in a while.  Let’s review some of the basics for non-trust assets, keeping in mind that each state has its own rules and exceptions:

What are individual assets?

Individual accounts are held by a single person and typically pass according to one’s will, unless a designated beneficiary agreement has been established with your account custodian.  These assets often go through probate upon the death of the individual, which means that even if the individual has a will, these assets become public record.  If they don’t have a will, the probate process can be time-consuming and costly, in which the state determines how the assets should be distributed.

What is Tenancy in Common (TIC)?

Titling an account as Tenants in Common may occur between two or more parties.  The account holders have a proportionate interest in the assets according to their contribution, so all parties don’t necessarily have equal ownership.

When an individual tenant dies, his or her ownership interest is typically inherited according to their will, while the surviving tenant(s) retain their ownership interest.

What is Joint Tenants with Right of Survivorship (JTWROS)?

Unlike TIC, Joint Tenants with Right of Survivorship typically involves equal ownership interest among all parties.  If an individual owner dies, his or her equal interest in the assets will pass to the surviving tenants, rather than being distributed according to their will.  However, the deceased owner’s proportionate interest will still be included in his or her gross estate.

Another important fact to note is that unlike TIC, assets titled JTWROS typically pass to the surviving account owners, despite what your will may say.  This will cause issue if you intend for certain assets to pass to someone who is not a joint tenant for that account or property.

What is Tenants by the Entirety (TBE)?

Tenancy by the entirety is a title reserved exclusively for married couples, and is allowed only in certain states.  It is similar to JTWROS in that when one spouse dies, his or her share (50%) of the assets are included in their estate, and these assets typically transfer directly to the surviving spouse regardless of what is outlined in the decedent’s will.  It differs from joint tenancy in that one spouse may not transfer their interest in the property without consent of the other spouse.

One other major difference between TBE and joint tenants is that TBE usually provides a degree of creditor protection for each spouse.  What this means is that an asset held as tenants by the entirety may be protected from levy or seizure by the creditors of a single spouse.  This protection, however, does not hold for joint creditors.  Check to see the specifics within your state.

Estate planning mistake #2: Failing to update beneficiaries

One big item that individuals often forget when implementing their estate plans is that retirement accounts, like 401(k)s, 403(b)s, IRAs, or SEPs, typically pass directly to a designated beneficiary upon your death.  They typically have nothing to do with your will and depend on a beneficiary you may have designated when first opening the account.  For accounts that have been in existence for years, that could pose a huge problem if you’ve seen any big life changes (divorce, marriage, new children, or any deaths in the family) and your beneficiaries aren’t updated.

A new beneficiary designation is usually a page or two in the estate planning binder, which you can present to your account custodian or 401(k) provider.  However, the document is completely irrelevant if the 401k provider never gets it.  It’s important to follow through and make sure the new beneficiaries are on file for each of your retirement accounts.  Otherwise, an unintended person could inherit those assets.

Estate planning mistake #3: Lack of review

It may sound extreme, but we’ve seen newer clients who have gotten married and had no idea that, upon passing, their spouse would have inherited precisely $0 according to their will.  Failing to review your estate plan can have potentially devastating consequences for your family.

You should review your estate plan every few years to make sure that account titles, beneficiary designations, trustees, powers of attorney, and all of the other documents you’ve signed are still appropriate.  Each time a major life change occurs (think weddings, divorces, deaths, or births), an alarm should go off in your head to reflect and make sure your loved ones are still taken care of.

It is important to keep your family’s needs and legacy in mind when implementing your estate plan.  A failure to update account titles or beneficiaries and forgetting to review your plan periodically can have a huge impact on the legacy you leave.  Proper implementation and coordination is something your advisor can help you with, but it’s important to keep in mind that if you don’t follow through on your estate plan, those attorney’s fees may not help your loved ones as much as you think.

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Colin Gerrety, CFP®, CIMA®

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