It’s disheartening to see the types of mistakes people make when naming beneficiaries and planning their legacies. Through the book, Avoiding a Legacy Nightmare, I offer information to help readers avoid these costly errors. Here are four estate planning basics that can help ensure your legacy ends up in the right hands.
Estate Planning Basics 1: Have a Plan
You must have a clear idea of who you want to receive your assets and life insurance or annuity death benefits. Write down the people you want as primary beneficiaries of your assets. Make sure that you also note the individuals whom you’d like to receive any special sentimental items or small inheritances.
Estate Planning Basics 2: Make the Plan Official
If you simply keep these notes to yourself and they’re found after you pass on, they won’t be considered official or enforceable. In order to make sure that your wishes are followed, you must work with an attorney to craft a legally binding will.
For life insurance and annuity death benefit assignments, a will doesn’t cut it. Instead, your beneficiary designations must be submitted in writing to the life insurance company in whatever manner they require.
Estate Planning Basics 3: Have a Backup Plan
Sadly, there’s no guarantee that the beneficiaries and heirs you’ve chosen will be alive to inherit your legacy. Having a backup plan in the form of contingent beneficiaries will help avoid confusion after your death. Another way to approach this is to choose per stirpes or per capita distributions. When you choose per stirpes, the benefit left to the now-deceased person is passed on to his or her children. For per capita distributions, an equal portion of the total benefit is passed on to each of the deceased heir’s children and the rest of the named beneficiaries.
Estate Planning Basics 4: Consider Tax Ramifications
Chances are good that if you have a legacy to leave your heirs, you don’t want the IRS taking any significant portion of it. Life insurance death benefit proceeds, which are exempt from estate taxes, can help ensure a tax-free inheritance. However, you must be certain to choose the right beneficiaries in order to avoid this taxation. For example, if you name your spouse the beneficiary of your life insurance death benefit, then the money will be added to his or her estate when he or she passes on. At that point, it will be taxed before being distributed to your children. Instead, it might be best to make your children the direct beneficiaries or to have a trust.
What are some estate planning basics you have questions about?