The way you relate to your money has a very real and tangible impact on your life, and the lives of your loved ones. There are three “money types” that people tend to deal with:
1.) NOW Money – the money that is for your current and everyday needs.
2.) LATER Money – money that you save and invest for future income needs (child’s college tuition, retirement, vacation home, etc).
3.) NEVER Money – money that you don’t think you will ever have to touch. In other words, money/assets that you would like to leave to children, grandchildren, charity, etc).
This post is going to focus primarily on your NEVER Money. Never Money can take a variety of forms – stock portfolios, IRA’s that you and your spouse created and grew over the years, real estate investments, and many more. Whatever it is, it is critical to take steps to ensure that it goes to the right person or organization, and in the right way. Below are 10 common legacy/estate planning mistakes that people often make:
10 Common Estate Planning Mistakes
1. Procrastination. Simply failing to get around to it.
2. Believing that estate planning is only for the wealthy. When taking into account the people are often surprised at the size of their “estate.”
3. Not reviewing or updating your beneficiaries and will. Life changing events such as births, deaths of family members, divorces, and changes in general in your family structure can have a significant impact on how your assets are distributed.
4. Not having a tax-planning strategy in place. Current tax laws are complex and ever changing. There are strategies available to help you minimize taxes and avoid estate tax penalties. Sit down with your tax professional to implement advanced tax and estate planning strategies.
5. Take advantage of gifting. The government allows tax-free annual gifting of $13,000 per individual or $26,000 per couple annually to as many individuals as you choose. This is a means of giving away some of your estate tax free to family members.
6. Joint titling of assets. It is true that joint titling of assets may allow you to avoid probate, but do not overlook the additional risks; misappropriation of assets by the joint title holder, exposing of assets to a divorcing spouse of the joint account holder, exposing assets to creditors of the joint account holder.
7. Failure to provide someone you trust with the location of important documents. All of the work you have gone through in planning the distribution of your assets is worthless if nobody can find the documents.
8. Leaving everything to your spouse. The government offers an estate tax credit (repealed for 2010) by leaving all of your assets to your spouse you are sacrificing their share of estate tax credit.
9. Doing it yourself. Not seeking out expert advice.
10. Naming your estate as the beneficiary. By directing your assets to be paid to your estate “pursuant to the terms of your will” assets that would normally avoid probate-will become subject to probate which can be both time consuming and expensive.
As you can see, tax issues are mentioned in several of these 10 mistakes. With a proper tax strategy, there are ways to leave money in a legacy that doesn’t include a huge tax bill for your heirs. Life insurance is one option to consider when planning your legacy. It is unique because it is designed to create a lump sum benefit when you pass away that is paid to your beneficiaries, and they don’t pay income tax on the benefit. Properly designed and structured, it can be one of the most flexible and efficient financial tools you can use.
Ask these 6 questions before purchasing a term life insurance policy:
What are your income needs?
It’s important to consider your family’s income needs over the course of your policy, including expenses such as mortgages, college tuition, medical bills and funeral costs.
What length of term do you want?
The length of your term will depend on your long-term income outlook. For example, if you’re working for 10 more years and then have retirement benefits and Social Security, a 10-year term may work for you.
Can you convert the policy?
If you outlive your term life insurance policy, you may want to convert it near the end of the term without needing another medical exam. Be sure to read the fine print on the conversion option, as there can be time limitations for conversion.
What other benefits do you want?
Riders – such as disability waivers that pay your premiums if you become disabled – are more common on whole life insurance policies than on term life insurance policies. But they are available, so look into them.
How applicable are advertised rates?
Even if you’re relatively healthy for your age, the rates promoted in online or newspaper ads may be based on an applicant with exceptional health. The price quoted may not be applicable to you.
Is the insurance company stable?
Life insurance companies are usually in excellent financial health, but you should still check out their rating. Agencies that rate life insurance companies include A.M. Best Company, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Ratings Services.
My last point relates to mistake #3 – not making sure beneficiary information is up-to-date. A periodic beneficiary review (video) is a critical tool to ensure that you leave the legacy that you want to the people you want to leave it to.
If you want to learn more about the three money types and how they impact your life, tune in to Your Financial Editor – this Saturday morning @ 8 on AM 930 WFMD. Listen live @www.wfmd.com.