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We never want to imagine the worst. This is exactly why so many people delay facing the “what ifs” involved in the estate planning process.  Leaving your family unprotected is not the solution to the discomfort your have with discussing death.  It’s not easy, but it’s necessary.

For that reason, I thought it would be beneficial to outline some of the most commonly neglected, but less complicated estate planning basics.  These are all strategies that you can implement with very little effort.

1. Keep Your Will Updated

What is a will exactly?

A will is a legally enforceable declaration of how a person wants his property or assets to be distributed after death.  It covers all assets that don’t already have a designated beneficiary.

It doesn’t matter how big or small your assets are, whether you have children, or whether you are married or single. It’s important to write a will that specifies exactly what will happen to your assets after you pass away.

If you die tomorrow, would it matter who received what you left behind? If the answer is “yes,” but you don’t have a will, then you could be in for a rude awakening.

Why is it so important?

While most people realize the importance of having a will, many continue putting it off until it’s too late. Do you really want the state to decide who gets (or doesn’t) get what? That’s exactly what will happen in the absence of a will. Depending on which state you live in, your spouse or children receive your property and assets. If you have neither spouse or children, your other closest relatives are the recipients. But it may not be the same formula you would have chosen had you written a will.

It’s also vitally important to keep your will regularly updated. Revisiting this document each time you experience a major life milestone, such as a marriage, divorce, birth or death in the family will give you a peace of mind. If you don’t, you may have some big regrets.

For instance, if you fail to update your will after you get married, the law presumes the new spouse to be an inadvertently omitted spouse. In this case, the omitted spouse is entitled to claim a share of the decedent’s estate (usually one third to one half). By updating your will to include your spouse, you can make exact specifications about what you would like them to inherit instead of a court making such decisions.

2. Have a Financial Power of Attorney

A power of attorney can act on your behalf in a variety of financial and business situations. When naming someone to this position, you should make sure it’s someone you trust to deal with such personal matters.

The person you choose to fulfill this role would make decisions about your affairs if you suffered an incapacitating injury or became too sick to act on your own. He or she would also help ensure your estate is properly distributed after your death.

It’s a good idea to regularly review whom you’ve appointed power of attorney to make sure your choice is still appropriate. For instance, if your power of attorney is suddenly unable to act on your behalf due to an illness or disability, you will need to update your estate plan to include a new, qualified individual.

Naming a power of attorney is important for people of all ages. It’s extra vital for people without children to have them in place since the person making decisions in the event of an emergency won’t always an obvious choice.

If you become incapacitated and don’t have a power of attorney, the state may appoint someone else in your family, or even possibly a stranger to manage your assets until you either recover or die.

If there is a problem with your power of attorney, you don’t have one, or someone that has your assets (like a bank) will not accept it, a probate court will have to appoint someone (possibly a stranger) to manage those assets for you until you either recover or die.  Now that’s a scary thought!

3. Always Assign Beneficiaries to Your Retirement Accounts

Why assigning beneficiaries is important

By designating beneficiaries, you can send your assets straight to your heirs without having them go through a lengthy and expensive legal proceeding called probate.

Beneficiaries can include spouses, children and other relatives. Or they can include friends, trusts, charities and institutions.

Don’t make hasty choices; rather think long and hard about the trustworthiness of each individual to whom you are leaving your assets. For instance, you probably won’t want to bequeath significant funds to a sibling that has recently declared bankruptcy.

Make sure you confirm both primary and contingent beneficiaries, as well as conduct a plan for what would happen if a beneficiary predeceases you.

What can happen if you fail to act

This is an event that unfortunately happens often. Let’s say you fail to name beneficiaries, or you neglect to update your estate plan following a particular beneficiary’s death. Unfortunately, Uncle Sam could be the one that decides how your estate will be allocated.

If no beneficiary is named to inherit a retirement account like an IRA, the financial firm supervising it will choose one according to its own rules and/or IRS guidelines.

It may decide that the decedent’s estate will be the beneficiary of the IRA, which unfortunately is often the poorest outcome in terms of taxes owed.

Also, if you fail to update your estate after a beneficiary dies, then some beneficiaries could receive more than you intended, while others could get less or even completely disinherited. Many states would actually redistribute that money among other siblings rather than to the deceased beneficiary’s own heirs.

Not updating your estate plan after a beneficiary dies could also result in the lengthy probate process, where other heirs would need to be located and a chunk of your estate funds would go toward court costs.

4. Be Aware of Estate Tax Laws (or risk blowing 40% on taxes)

What is the federal estate tax exclusion limit?

For 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can give $5.45 million to heirs, while a married couple can give $10.9 million and pay no federal estate or gift tax. The annual gift exclusion remains the same as last year at $14,000.

How do gifts I give throughout my lifetime affect my exclusion limit?

It’s important to note you can make the gifts during your lifetime; you just have to keep track of them as they count against the eventual estate tax exemption amount. So if you set up a trust for your children with $5 million few years ago, you could make new gifts to add to the trust and bring it up to the $5.45 million amount.

Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount. It’s $14,000 for 2016, the same as 2015 and 2014, up from $13,000 a year in 2013. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.

Can these taxes be avoided? Yes, with proper and early planning.

Being generous with your income great thing, as you can make a huge difference in the lives of others. But make sure you’re giving in a strategic manner throughout your lifetime. That way both you and your loved ones can avoid unnecessary taxes and make the most of your hard-earned assets.

If you exceed the gift tax exemption limit, then you’ll be responsible for paying a staggering 40 percent in estate taxes on that overage amount.

Before purchasing assets in other people’s names, consider the fact each of these things is considered a “gift.” It could therefore result in a long-term tax consequence if you exceed the gift tax exemption limit.

Making purchases in your own name, and then giving the desired recipient unlimited usage of them could prevent this issue, however. Let me explain via the following scenarios:

Scenario 1: Buy a vehicle for your child in your name but give him unlimited access to it, and you won’t be responsible for any estate taxes.

Scenario 2: Buy a vehicle in your child’s name or in your own name, and then transfer it to his ownership. If the vehicle puts you above your gifting limit, then you’ll be responsible for paying the aforementioned 40 percent in estate taxes on that overage amount.

There also are opportunities to give unlimited tax-free gifts that won’t count against your exclusion when you assist someone with medical and education expenses. To qualify, you must directly pay the institution that provided the services. You can find the detailed qualifications at www.irs.gov.

5. Trusts Are Not Only for the Rich

A trust is a valuable estate planning tool that can be beneficial regardless of one’s financial status, yet many people neglect to establish one before it’s too late.

While a will is usually the first choice for passing on an estate to heirs, trusts are gaining in popularity.

So what exactly is a revocable living trust? In short, it’s a written agreement that appoints a trustee to be responsible for managing your property.

If you have a revocable living trust, it’s established while you’re alive. It’s “revocable” because, as long as you’re in sound mental condition, you can change or dissolve the trust at any time at your own discretion for any reason. A living trust usually becomes irrevocable (cannot be altered) when you die.

Benefits of having a trust

Avoid probate

Trusts can help you avoid the sometimes time-consuming, usually expensive and always public process of probate. A living trust allows your “successor trustee” to transfer your property quickly and efficiently, without the hassle and expense of probate court proceedings. This way, more of the assets you leave will go to the people you want to inherit it.

More control over exactly where and when your money goes after your death

If you create a trust, you can designate exactly how your beneficiaries will receive their inheritance. If you have an irresponsible child, you could specify in the trust that he or she may only receive money in 5% increments. On the other hand, an older or more mature and responsible child can receive his or her inheritance in a lump sum.

Privacy of assets

The specific assets and amounts of assets are not released as public information if held in a trust. This is not the case when assets pass through probate. A trust keeps things private and helps protect your heirs from creditors, predators and future ex spouses. It is also a lot more difficult to protest than a basic will.

The Bottom line:

Many different moving parts make up an estate plan. Neglecting one or more of the above planning essentials could result in unnecessary financial burdens. Go through the process with a financial professional and attorney to ensure your estate plan is in top shape.

The best time to get your estate plans in order was yesterday.  The second best time is today.

Do you have any estate planning concerns that we didn’t address.  Let me know in the comments below.


Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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