Bridget Sullivan Mermel CFP(R) CPA
Avoid These Estate Planning Mistakes: You Can't Undo These When Dead
Avoid These Estate Planning Mistakes. You can only do estate planning when you're alive. When you're dead, it's too late. Not wanting to think about dying, many people don't check their estate plan.
In this episode, we discuss three big estate planning mistakes that we've encountered with clients recently. We also discuss how often we suggest people check different elements of their estate plan.
01:11 Mistake 1
07:42 Mistake 2
09:25 Mistake 3
12:50 How often to check
John Scherer's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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John: We've seen three huge mistakes that cause all kinds of problems for clients with their wills and estate planning. On today's episode, we're going to describe those big mistakes and most importantly show you how to avoid making those mistakes in your planning. Hi, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a family financial planning practice in Chicago, Illinois. And John, before we start talking about estate planning mistakes, let's remind people to subscribe. It helps our YouTube channel and it helps us keep going and meet our goals of 1000 subscribers. Anyway, John, so let's talk estate planning mistakes.
John: Yeah, that's right. I tell you this is not a fun thing to talk about. You got to do this planning and think about when you're not here, what happens to all these things. So it's human nature, I think to avoid those things. I know for my part that I avoided getting it done when I was first married and after the kids were born. But I'll tell you we had a couple of things come up—I know you have it some and I'm interested to hear what's going on here—but there are some really big errors that got made with the best intentions.
People were trying to do the right thing and we had some problems. And the first one, I'll just jump right in, the first problem is naming the wrong beneficiaries on things like IRAs and life insurance. So real quick description. We have a client whose mother passed away and they had laid out their will to say, “I want each of my two children to get a portion, 40% or something, of my estate and my grandchildren to each get 5%.” So that's great. It was, “I want each of the kids to get some and I want some to go directly to the grandkids.” Makes total sense.
But the estate planning attorney and the person that was handling the investments never connected the dots because most of this person's money, most of mom's money, was in an IRA and an IRA has a named beneficiary on it. And what happened was the IRA named our client’s sibling as the beneficiary. So here everybody was thinking, “Geez, all mom's money is going to go to the two siblings and then to the grandkids.” But the bulk of the money goes outside of the will because of this beneficiary designation on the IRA and goes right to the sibling. And then trying to get that sorted out—there’s gift taxes, there's distribution taxes from the IRA, there's all these moving parts.
And all that had to happen was naming the right beneficiaries if the estate planning attorney had connected it and the investment person had connected and said, “Hey, here's what we're doing. From the will standpoint, my client, mom, in this case, the client wants to have the money going this way. Let's make sure that the beneficiaries on her largest asset also say that same thing.” No problems. As it stands, however, it's been over two years that they've been trying to figure out how to solve this mess.
Bridget: Right. It sounds like a huge headache. And the other thing is that people, I think, underplay the fact that your capacity to deal with these kinds of headaches is diminished when you're grieving the loss of a loved one.
Bridget: And then it makes you rethink the whole thing.
John: Emotions are sky high.
Bridget: Yeah, I'm sure that the person who wasn't named has feelings about that. It triggers a lot of unnecessary stuff that I think was not intentional.
John: Right. It certainly seems like that in this case. Again, who knows why that happened? One huge mistake is thinking, “I've got my will in place,” and not connecting that the beneficiaries on your life insurance, on your 401K, on your IRA do not go through your will. That goes to wherever it says it goes. We had somebody one time who is divorced and hated their ex-spouse. Whatever happened, it was just antagonistic. And they said, “Well, yeah, we want to look at your insurance. Hey, we got all this stuff taken care of.” And the biggest life insurance policy that they had named the ex-spouse. And that can happen in divorces sometimes.
So I said, “I assume that your divorce decrees this.” And the person looked at me and his eyes got bigger. He said, “I had no idea.” It doesn't matter what the will says. Wherever that IRA beneficiary goes is what matters. Does it go to the ex-spouse? Does it go to one kid and not the other? All these different things. It's kind of simple, like a lot of things that we do. It's not always easy, but it's not rocket science to figure out, “Listen, we need to connect and have the attorney talk with the investment side and make sure that what's on your beneficiaries matches what you're trying to have accomplished.
It's a simple thing to do, but golly, it causes huge headaches and can really avoid a lot of anxiety, a lot of pain, unnecessary taxes. I mean, lots of things that happen with that. So number one mistake to avoid—make sure that you name the right beneficiaries that match your estate planning designation.
Bridget: And I just want to say that one of the reasons that this doesn't happen is because it can take a slight amount of effort. So it seems like when I log into my internet, all the things that I've wanted to buy are flashed in front of me. It's like very easy to buy that stuff. But it's not like the beneficiary designations are hidden, yet I do have to look for them.
So I do have to go and look. I have to dig around the 401K website or dig around the Schwab website or whatever to try to find those. And I might have to fill out a form to change it. So that's one of the reasons why people have to dedicate a slight amount of time to just make sure that, “Okay, what I want to do is what I have.
John: I just want to pull out what you said there, because it's a great point. This is not willful negligence: “I'm just going to decide not to do it.” These things that kind of fall between the cracks. The, “Oh, that's right. We didn't quite seal up the box on that sort of thing.” That falling between the cracks is really a huge crux.
Bridget: Well, and people think that they did it right. For instance, recently we've been recommending I bonds to a lot of people. Well, getting an I bond, it's like this kind of complicated thing that shouldn't deter most people from doing it, but there's some complexity to it. But it turns out you can name I bonds so that similar to IRAs and 401Ks, they just automatically go to whatever beneficiary you want. Okay. But when people set that up they realize, “I don't remember.” It’s an “I was in the heat of the moment just trying to get through this thing. I don't want to think about death right now. I just want to figure out what password I should have.”
John: I'll get to that later…
Bridget: Exactly. And so it takes a little bit of mindfulness to actually go back and check. And so when you're doing it, it's worth it. And it makes sense that we try to have clients look at this and double check it with them, like, every two or three years. We say, “We're going to just double check this again, to make sure your beneficiary hasn't died, make sure it is what you intended to be.” And it's interesting that there's definitely times where it's not what people want. We're thinking about it. So check your beneficiaries, even if you think you know what it is.
John: Along those lines, naming the wrong one is a problem. Another problem is not naming them at all.
Bridget: Right. So I had a situation where it was a young person who didn't name a beneficiary on their 401K.
John: Because you're 25 or 35 and have the mentality, “What differences does it make?”
Bridget: Right. Probably a situation where they're just trying to get through the form. Who cares? But accidental death. It’s not that common, but it happens. It happens. I think by the time you're our age, we've all known people who have died accidentally as a young person. So then the extremely grieving family is dealing with this, and then it goes into these weird rules about, “Oh, now it's part of the estate, and it's subject to different rules that are less favorable.”
John: More taxes, basically, than you might otherwise have paid in given circumstances.
Bridget: And actually it’s just a more difficult paperwork situation for a grieving family. So paperwork is obscure. The custodian doesn't know how to do the paperwork, much less the client. This is a situation where everybody's grieving. It’s very unnecessarily difficult and worse, less favorable rules. It could have been so easily rectified.
The other thing is that a young person might be afraid to just name their parents. Default. Name your parents. Because then it'll all filter down to people. And if you don't want to name parents, then you'll know who comes to mind. So we could have a whole different episode on young people naming beneficiaries. But let's move on to our mistake number three.
John: So naming the wrong beneficiaries, number one, and not naming any, number two. The other one that we will discuss is a friend situation, not a client situation where Grandma had three children and the will originally had said, “I want my money to go to each of my three kids in line.” Well, one of the children died at a very young age, leaving behind two grandchildren. So now we've got two legs of the branch, so to speak, where it's my child and their children. And then this other leg is kind of empty because my child is gone. But then there are the grandchildren.
Well, somehow before grandma passed away, she had redone her will and says, “Oh yeah, now I've only got two living children so I'm going to name my two living children as the 50-50 beneficiaries. Grandma ends up dying. Nobody knows what happened, nobody realizes this, but now that they're taking care of the estate. Instead of the money going in three branches basically with some going to the grandkids, now all the money goes to these two branches and the grandchildren from the other child are left out of the picture. They just don't get anything.
And then there's a question of what did grandma really intend to do? Did she intend to do this or not? Or I think that my niece and nephew should get some of this money but then we've got gift taxes. Then they thought they should have more… And it was a whole mess. There was a loss, lawyers involved, a drawn out thing. If grandma had number one left things where each branch got the same amount and then the grandkids could get their share if that's what she wanted. Or, if she intentionally did it the other way.
If she would have told them, “Here's why I'm doing this, here's what I'm trying to accomplish,” all that stuff gets taken care of. All the debate or whatever is going on gets taken care of while grandma is still there to express her intentions. Now she's gone, nobody knows what happens and how to handle this. And different people feel like they have different rights to this, which again, causes all kinds of family trauma, all kinds of bad feelings with each other that could have been taken care of either by explaining what my goals are or making this change earlier.
I think it can be really difficult because every situation is different, every person's goals are different, but if you leave money to two of your kids effectively and not to the other one, that can really be setting you up for problems. So I just encourage people to really think hard about doing that because this is sort of your last memory of person. For example, when you settle grandma's estate, that sort of thing.
Bridget: And in this situation you think it was unintentional?
John: Probably. I can't imagine it was.
Bridget: So that’s legal detail. There was some legal language in the will that that's where the debate is.
John: I think that's what happened. Right. But again, easily avoidable if there's communication or if you thought about it. So some of the takeaways on that: Making sure that what you want to have happen is what your will says. Again, sounds so simple. Well of course that's the case. We have it all the time we go through we just had a client and they thought that their will said that this money had to go into a trust for their child and instead it said that it could go into the trust. Maybe there was a reason for it, but to be really aware of “Oh, yeah, we need to pay attention to those words in that document.”
Bridget: Yeah. And my recommendation is checking your beneficiaries every three years and update your will. Take a good look at that every ten years.
John: That's great. Super. That's a great place to wrap up. Here again. I'm John Scherer. This is Bridget Sullivan Mermel. We both run fee-only financial planning practices, and we both work with clients all across the country. If you like what you hear on our show, Bridget and I are both members of the Alliance of Comprehensive Planning Planners. To find an advisor at the local in your area, you can go to acplanners.org.
Bridget: And don't forget to subscribe. It helps us with YouTube and we really appreciate it.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.