One of the common questions that I receive from families who call my office is …
“Dan, I Have a Very Simple Situation and Only Need a Very Simple Will.”
As I tell families, this is the single biggest mistake that I see families make. Many of the clients that we work with have, by all outward appearances, a simple family life. They are married couples, with grown children, young grandchildren, own a home, and own comfortable amount of savings in their retirement.
However, I would not characterize their situation as simple. The assets that they leave behind could create a very, very difficult situation for their loved ones to deal with.
Now, everyone needs a Will. If you own anything at all, or if you have minor children, you owe it to your family to make sure your final affairs are taken care of in the event of the unthinkable.
However, simply relying on a Will can be very dangerous.
#1 What If the Beneficiaries in Your Will Are Disabled or Predecease You When You Die?
This creates a difficult problem.
First, if your beneficiaries predecease you, they cannot inherit (obviously) from your estate.
Also, if your beneficiaries are disabled or incompetent at the time they inherit from your estate, two things could happen. One, inheriting assets could result in them being disqualified for certain state and federal government benefits. Two, and more importantly, since they cannot manage their own financial affairs, inheriting assets creates a problem that will require court hearings through a conservatorship proceeding to determine who should manage these assets that your loved one just inherited.
This creates the same problem on any accounts where you have designated them as a beneficiary (i.e., IRA, investment account, etc.).
#2 How Your Kids Should Receive Your Inheritance is Just as Important.
Many families that I speak with who tell me they have a simple situation will tell me that …
“I want everything to go to my spouse, and then after my spouse, everything to go to my three children equally.”
Obviously, this is how most people envision their estate passing at their death. However, how their children should inherit is just as important. For many families we speak with, leaving assets outright to their children is not the most beneficial.
When you leave assets outright to your children at death, it becomes subject to creditors, divorcing spouses, lawsuits, bankruptcy, other predators, unnecessary taxes, and frivolous spending!
Even if you have the most responsible children in the world, frivolous spending is a concern. In fact, over 70% of all inheritances are spent in 17 months!
#3 Forgetting How To Leave Behind Your IRA
This is another big mistake that I see families make. Just like their will, many families feel that they should leave their IRA and other retirement accounts to their spouse, and then after their spouse, to their children in equal shares.
However, just like in #2, leaving assets directly to your children can subject them to divorcing spouses, creditors, lawsuits, bankruptcy, other predators, and frivolous spending. In fact, the biggest issue with leaving an IRA behind is that it has to be withdrawn in a certain manner and in a certain period of time according to tax laws. However, we routinely assist clients with planning their estate and their IRA accounts in a manner that saves their children potentially millions of dollars.
In fact, we recently performed an illustration where a $450,000 IRA left to two children potentially results in over $2 million in distributions over the course of their lifetime.
#4 Income Tax Planning For Your Surviving Spouse
Another forgotten aspect is to make sure that you consider proper income tax planning for your surviving spouse. When you plan your estate and rely only on a will, the house you leave behind to your spouse can result in your spouse incurring unnecessary income taxes upon the sale of the house. The reason is that when you leave your home to your spouse at death as the surviving joint owner, they will lose the full step-up in tax basis. The result is the surviving spouse incurring unnecessary income taxes at their death. In addition, it creates unnecessary asset protection exposure. We routinely work with clients and plan their estate in a manner where income taxes are minimized, and assets are protected for the surviving spouse and children.
#5 Leaving Your Assets To Your New Spouse’s Family
This is perhaps the biggest reason and biggest mistake that I see occur when families think all they need is a simple will.
The common scenario goes something like this …
John and Jane are married and have three children.
John dies, and Jane remarries Tim.
Tim has two children from a prior marriage.
Jane dies, and in her Will she leaves everything to Tim.
Tim later dies, and leaves everything to his two children from a prior marriage.
What do John and Jane’s children receive? That’s right! You Guessed It! Nothing!
When you use and rely only on a Will, you run the risk that the surviving spouse will remarry and leave all of the family assets to their new spouse and their family. This occurs much more frequently than you may realize.
We routinely assist clients with legal strategies where this is avoided and the assets that families spent a lifetime to accumulate stay in the family.