Estate planning aims at the transfer of wealth from one generation to another in a way which minimizes taxes and maximizes economic gain. It usually involves parents making gifts to their children, grandchildren, or charities. The problem is that while many clients spend hours with attorneys, accountants, and financial advisors crafting an estate plan, they spend no time with their intended beneficiaries explaining what they have done and why. After mom and dad are gone, the family acrimony begins - brother sues brother and sisters stop talking to one another for years.
Life insurance and retirement plans compose the largest part of the estate for many people. Insurance death benefits, IRAs, Annuities, and 401(k)s do not pass under your will. They pass under contract law to those persons or organizations who are designated as the beneficiary.
What happens if I divorce my spouse and I don't change the designated beneficiary on my insurance policy? Every state has its own law governing this, but in Pennsylvania the insured's spouse is considered to have predeceased the insured spouse unless it appears the designation was intended to survive the divorce based on the wording of the designation; a court order a written contract between the individual and the spouse or former spouse, or a designation of a former spouse as a beneficiary after the divorce decree has been issued.
"But Grandma said I was to have her diamond ring!"
3. I gave it to him so I get it back. It's very common for family members to try to reclaim gifts that they made to the deceased. Again, there is absolutely no legal basis for this. If you bought a TV for Dad and gave it to him, when he passes it goes under his will - not back to you because you gave it to him. If that's what he wants, it better be made clear in his will.
8. Putting the wrong investments in the IRA. Don't put municipal bonds in your IRA. The IRA pays no income tax, it does not need to take a reduced rate to receive tax-free income. Don't buy an annuity in your IRA. The IRA is already tax deferred, you don't need to buy a product for tax deferral - the IRA already gives you tax deferral.
4. Not beginning the required distributions on time. You are required to begin taking the minimum required distribution ("MRD") by April 1 of the year following the year in which you attain the age of 70 ½. Making this withdrawal is your responsibility. It is not the responsibility of the broker or mutual fund or investment advisor who holds the IRA assets. They may remind you as a courtesy but it is your responsibility to handle this. It is also your responsibility to determine the correct MRD. If you have multiple IRA's you may take the entire MRD from only one of them if you chose.
1. Not getting professional advice. The complexity of the rules governing IRA distribution and beneficiary designations is incredible. Especially where substantial amounts of money are involved, don't try to "do-it-yourself." Who to name as beneficiary? When to take distributions? How much to take out? Should you use a trust? Is it best to name your spouse? These are complicated issues. Lawyers, accountants, and other financial professionals spend hours learning the complex rules that govern these areas. Don't try this at home.
If your spouse or loved one has passed away without updating his or her plan and you find yourself now the trustee or beneficiary of a trust that is not needed, there are ways that you may terminate the trust and end the costs and hassles of trust administration.
Teddy Roosevelt used to be called the Trust Buster because he forced the great railroad combination in the Northwest to break apart. He was the avowed foe of all sorts of trusts and monopolies.