Estate planning mistakes you want to avoid
Whether you have already established an estate plan or are doing so for the first time, it's important to know how to navigate the process. The attorneys at The Law Firm of Brown & Jensen have seen how estate planning mistakes can lead to years of frustration and legal challenges for Arizona families.
Below, we have outlined four key mistakes people tend to make when establishing estate plans. If you have any questions regarding your estate plan or how to get started, our legal team can help.
Failing to properly designate beneficiaries
By designating beneficiaries in your estate plan, you avoid numerous legal complications in the future. If you don't properly designate a beneficiary, your loved ones will need to go through the probate process to prove to a court who should receive your assets and property.
It's critical that you establish beneficiaries for all financial and investment accounts by establishing a transfer on death designation. This bypasses the probate process and allows your financial assets to be directly transferred to your beneficiaries.
Designating a minor as a beneficiary without choosing a guardian or trustee
You may have good intentions by adding your minor children or grandchildren as beneficiaries on your estate plan. Unfortunately, doing so can have unintended consequences if they are still under the age of 18 when you pass away. That's because minors don't generally have any legal authority over inheritances or investment accounts until they reach adulthood.
Any assets given to a minor child will have to be supervised and regulated by a court-appointed guardian. That's why it's critical that, if you do decide to include a minor child as a beneficiary, you also choose a guardian to manage assets until the child reaches the age of 18.
You can also establish a trust for a minor child or grandchild, in which you can name a trustee (such as a trusted relative or friend) to manage the assets until the child reaches the appropriate age. A trust is a fiduciary arrangement that appoints a third party to hold or manage assets on behalf of a beneficiary.
Not funding a trust
While setting up a trust is a great way to establish an estate plan, it's important that you fund your trust by placing assets into it. You can do this by changing the ownership of your financial and investment accounts so they are owned under the terms of the trust.
Failing to properly fund a trust could place critical assets out of a trustee's control and require them to be sorted out through the probate process.
Creating outstanding taxes through your retirement assets
When you pass real estate or other crucial property onto your beneficiaries, they are not responsible for any income taxes on appreciated assets. However, they may be responsible for taxes on retirement accounts. Beneficiaries (with the exception of surviving spouses) may have to pay taxes on traditional IRA or 401k accounts that are inherited through an estate plan.
The SECURE Act was passed in 2019, which means that non-spouse beneficiaries must withdraw IRA and 401k accounts within 10 years of receiving them. Once the assets are withdrawn, they are counted as income and taxed accordingly.
To avoid creating a heap of outstanding taxes for your loved ones, you may convert your retirement account to a Roth IRA. This will allow you to pay the conversion taxes, which would be much lower than the taxes your beneficiaries would have to pay. Once the assets from your Roth IRA are passed on, your loved will not be taxed.
Contact our Arizona law firm to get started on your estate plan
Establishing an estate plan is often a confusing process, but is well worth it. By doing so, you ensure that your loved ones are taken care of financially after you pass away. In addition, you save them the emotional stress and legal complications that come with the probate process.
The Law Firm of Brown & Jensen in Arizona can help you get started and ensure that the needs of you and your family are met. Our law offices are conveniently located in Mesa, Tucson, and Scottsdale. Contact us online to set up your free legal consultation.