There are several common mistakes we see people make when planning -- or not planning for what will happen with their estates when they die. A few of those mistakes include:
1. Lack of a see-through provision on a trust.
This can prove very costly. For example, consider a couple who has a $1 million IRA and the beneficiary of the IRA is their trust. If there is no see through provision in the trust, the couple's estate could potentially owe several hundred thousand dollars in taxes when the IRA is passed to beneficiaries due to the higher tax rates trusts are subject to. In certain circumstances, a trust may be an appropriate beneficiary for an IRA, such as when a minor is a beneficiary.
A "see-through trust" refers to a trust that meets certain legal requirements and serves as the named beneficiary of an IRA. In this scenario, the IRS will "see through" the trust and treat the trust's beneficiaries as if they were the IRA's direct beneficiaries. The beneficiaries' life expectancies will then be used to determine the IRA's required minimum distributions. Additionally, a see-through provision allows these distributions to be taxed at the individual beneficiary's tax rate rather than at the trust's tax rate.
Inherited retirement accounts (IRA's, 401(k)'s, etc.) often get mishandled by beneficiaries. They often don't realize that they can take advantage of the tax-deferred stretch-out over their lifetime. So they cash it out and then are surprised by a big tax bill the following year. So not only did they sacrifice perhaps hundreds of thousands of dollars in tax-free growth, but they also face an unexpected tax bill.
Think of the IRA Inheritance Trust as a living trust specifically designed to hold retirement accounts. The IRS approved this specific trust. It will avoid the situation where a beneficiary may unintentionally blow the income tax stretch-out. Moreover, you can name a trustee to manage the retirement account for those beneficiaries that don't manage money well or have drug\alchol addictions. Finally, it provides asset protection.
2. Failing to leave instructions to successor trustees about assets.
This is a big one. For example, life insurance policies often get missed. Life insurance companies make billions from unclaimed life insurance policies. The same for bank accounts and investment accounts. Those unclaimed assets eventually escheats to the state.
In our practice, we provide the Estate Plan Portfolio Binder for every client family. It is the "keys to the kingdom" because it provides invaluable information to a successor trustee that leads them to all important documents and location of assets. Nothing gets missed. It's an organizational tool.
3. Neglecting to transfer valuable assets into the trust.
This happens all the time. People creat trusts to avoid probate for their loved ones. But what if a valuable asset is not titled in the name of the trust? It has to go through probate! That's why we schedule free consultations every 2-3 years with our clients to make sure their trust is "funded" and is otherwise up-to-date with changes in finances, relationships or changes in the law. Estate planning is not a one-shot transaction. We like to think of ourselves as your trusted advisor over a lifetime.