Biggest estate-planning mistakes to avoid

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Andrew McNair

There are several common mistakes people can make when planning — or not planning — for what will happen with their estates when they die.

The legacy you leave can either simplify the process of dealing with your personal and financial property, or it can be a worrisome burden for those you leave behind.

So let’s take a look at what you should discuss well ahead of time with a qualified attorney to help make sure your legacy isn’t lost to Uncle Sam.

Here are a few mistakes and how to avoid them:

Lack of a see-through provision on a trust.

This can prove very costly. For example, consider a couple who has a $1 million Individual Retirement Account (“IRA”) for which the beneficiary is a trust. In certain circumstances, a trust may be an appropriate beneficiary for an IRA.

However, if there is no see-through provision on 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 often subject to.

A “see-through trust” refers to a trust that meets specific 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.

Oftentimes, a trust’s tax rate is higher than an individual’s. Therefore, a see-through provision could help prevent a large tax bill when the owner of the IRA dies, depending on the individual beneficiary’s tax situation.

A blank or incomplete Schedule.

Schedules are attachments to the trust document that contain important details concerning the trust (most commonly a Schedule A). For example, most trusts have a schedule that is the inventory sheet of the trust, and it typically details what assets you have transferred into the trust.

As such, it’s important to make sure all schedules are complete and accurate — it shouldn’t be blank! It is important to confirm with your attorney that your trust actually owns the assets you intend for it to own.

If it’s not clear what assets the trust owns on the statement, you should be concerned and meet with an attorney who can review your trust to help ensure your wishes are accurately reflected.

Failing to easily avoid probate.

POD means “payable on death.” TOD stands for “transfer on death.” These designations allow the beneficiary to receive assets without going through probate.

Do all of your bank accounts — including all your checking, money market, savings and CD accounts — have POD and TOD instructions on them? They should. Probate can be an expensive process.

Laws governing attorney fees for probate are decided by individual states and can vary. For example, consider a savings account with $200,000. In Florida, attorney fees to probate this account could be as high as 3 percent, or $6,000. Having a POD or TOD on this account could help save on these administrative expenses.

Having too many bank accounts.

The FDIC places a limit of $250,000 per depositor, per bank on the amount that it will insure. As such, you may consider consolidating some of your bank accounts if you have more accounts  than you actually need to ensure you are protected. Otherwise, you might overcomplicate your estate.

Leaving no inventory of assets.

So where is everything? Even if you have been meticulous about having all the right documents, it does no one any good if your beneficiaries can’t find them after you die.

So leave your loved ones a checklist to tell them where they can find your birth certificate, Social Security card, marriage license, pre-nuptial agreement, military records, will, burial instructions, cemetery plot deed or cremation agreement, bank and credit documents, mortgage papers, personal financial documents, and safe deposit box and keys.

Your legacy is the last impression you leave behind. The last thing families want to do is leave their children or beneficiaries with 1,000 puzzle pieces scattered all over the floor. A legacy is not a 1,000-piece puzzle scattered to the wind, but a picture worthy to be framed.

Rozel Swain contributed to this article.

© 2017 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.