When reviewing your estate plan, watch out for common traps
that can ruin your legacy...
Trap: Lost or obsolete beneficiary
designations. Among your most critical
estate-planning documents are the beneficiary designations you have
filed for employer-provided retirement plans, IRAs, life insurance
policies and investment accounts.
And yet these are also among the most likely of your documents to
be lost or out-of-date.
Examples...
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IRA beneficiary designations
filed years ago with banks and brokerages that have since gone
through mergers and reorganizations often are
simply lost. In that case, when you die, your IRA
will be distributed according to state law by a "default" method
that’s probably contrary to your intent. It may even result in a
big tax bill that could have been avoided.
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Any beneficiary designation
you made years ago could now be obsolete due to changes in your
family circumstances -- such as divorce, remarriage, death of a
family member, birth of a child or simply a change in the financial
needs of family members.
Obsolete beneficiary designations could send funds to the wrong
person -- even to a former spouse or a family member from whom you
now are alienated.
What to do: Check all of your
beneficiary designations, and update them where appropriate. Do
this once a year. Keep copies of them with your will and other
estate-planning documents.
Trap: Inadequate life
insurance. You need enough insurance to cover your
family’s financial obligations after your death.
What to do: Update your coverage
when your family’s needs change.
Examples: To cover future mortgage
payments after buying a property... for children’s
schooling.
If you own a private business, you may have extra insurance needs
-- such as to help the business survive until it can be sold. If
you have a buyout agreement with your partners, insurance can be
used to fund the purchase of company stock.
Opportunity: Life insurance costs
have fallen in recent years -- so while improving your coverage,
you may actually reduce your premiums.
Trap: An old will and planning
documents. If your estate-planning documents are
three years old or older, they probably contain costly
mistakes.
Beware: The federal estate tax law
has been changing year by year. Many states are changing their own
estate tax laws as the federal law changes. Nontax laws affecting
inheritances frequently change.
What to do: Review your
estate-planning documents with an expert at least every third year
-- or sooner if your situation changes.
Trap: Long-term-care
exposure. Most people greatly underestimate the risk
that they will need long-term nursing care. They especially
underestimate it during their working years, while they are still
relatively young, when need for care may result from a disabling
injury or illness.
Danger: Nursing care can cost
$10,000 a month or more and wipe out a family’s lifetime savings,
leaving nothing for heirs.
Safety: If you’re still working, ask
your employer whether long-term-care insurance is available as a
benefit and whether you can maintain the coverage after you leave
the company. If coverage isn’t available through an employer -- and
to cover exposure during retirement years -- consider buying your
own long-term-care policy.
Trap: Disability
exposure. During your working years, you are more
likely to become disabled than to die -- yet far more people lack
disability insurance than life insurance.
Safety: Check to see if disability
insurance protection is provided by your employer. If not, or if
it’s inadequate, consider buying a policy.
Trap: Lawsuit exposure. A
lawsuit brought against one family member could reach the entire
family’s assets.
Risks and what to do about them...
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When one spouse owns a
business or is in a profession that could generate business or
malpractice liability, a plaintiff’s claim for damages could reach
personally owned assets.
Safety: Organize a business as a
corporation or limited liability company to limit personal
liability for claims against it... buy business liability and
malpractice insurance... have the spouse with less risk for a
lawsuit own personal assets. You will need professional help to set
all this up.
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If you have a home office,
injuries to a business visitor may not be covered by your
homeowner’s insurance policy.
Safety: Buy an insurance rider
protecting the office.
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Lawsuit claims are becoming so
large today that even common claims from auto and slip-and-fall
accidents may exceed standard auto and homeowner’s insurance
coverage limits.
Safety: Buy at least $1 million of
additional "umbrella" liability insurance (also called personal
excess liability) against auto and homeowner claims. It may cost
only a few hundred dollars a year. If your estate is worth more,
increase the coverage.