Estate Tax Changes and Beneficiary Mistakes

Estate Tax Changes and Beneficiary Mistakes: Before I get into talking about the estate tax changes, I just want to take a minute and kind of define the term beneficiary. 


Often when we think about a beneficiary, we just think about who’s going to get the money when we’re gone. 


But if you really think about it, the meaning of beneficiary is who is benefiting from …


Who’s the beneficiary of what you have worked hard for and saved for?


Hopefully, the first beneficiary is you! 


You’ve spent the time, the energy, the money, working in your career, or building a business, or running the farm. The point is, you’ve spent that time to build up what you have, and so the beneficiary of everything, first and foremost, should be you. 


But if we continue that in that thought when we think about setting up beneficiaries.


Who do you want to benefit from your hard work, your sweat, and tears, your diligence and saving? 


Personally, I want my kids to benefit from my work.  I also want the beneficiaries to also be my kids in Haiti. They’re benefiting from our hard work, not just mine, but other people that are donating to them. 


So when you think of a beneficiary, it’s who’s benefiting from it and you, of course, should be the first beneficiary. 


Now, last week we talked about legislative risk, specifically focused on the legislative risk with IRAs, 401K’s, and retirement accounts. 

Estate Tax Changes 


This week I want to switch gears a little bit but still talk about some legislative risks, this week the focus is on estate taxes. 


Estate taxes are really a form of the government inserting and becoming the beneficiary or a large beneficiary of your accounts and your hard work. 


A lot of people have kind of forgotten about this because the estate tax limit had gone up and went up to $10 million. 


So most people think estate taxes don’t affect me. For those that it does and you have to plan accordingly and there are options out there and great estate planning attorneys to help with that. 


But for the average person, even with great farms and lots of wealth, the $10 million limit means estate tax doesn’t affect them. 


However, this new legislation that’s coming out just cut that in half from a $10 million exemption to $5 million exemption. 


Now, you might say, man, that still doesn’t affect me much. Maybe it doesn’t, but I remember when I started in this industry that the estate tax exemption was $1 million. 


The fact is, as we talked last week, it’s sometimes about the framework, and if they’re already cutting, the estate tax limit, what’s to say they can’t do it again? 


The tax now if you’re over that, $5 million is a top tax rate of 40%. Plus, this is key, they’re eliminating some of the strategies that have been used forever to mitigate these estate taxes. 


If you’re over that $5 million, then we definitely need to talk now before all these provisions and changes take place before you can’t use some of the planning tools that are available. 


As I said, there’s some great estate planning attorneys that are partners on our team and some tools available to help reduce that estate tax.


If not, you still need to keep this in your radar because the state tax changes are a legislative risk that could very well affect you in the future too. 


Beneficiary Mistakes 


Now, as we continue, I want to just talk about when we’re thinking about beneficiaries and some common mistakes that we see with beneficiaries and beneficiary forms. 


First is that they’re just not updated. 


You know, sometimes you set up an account, you set up a 401K a long time ago at the job and you never go back and change your beneficiary. 


I think we just think, well, I changed my will so it’s all going to go that way. But the fact is a beneficiary form trumps all. 


So it doesn’t matter what your will says. It doesn’t matter what your trust is. 


If you have a beneficiary form that says something different then that trumps everything else. 


If you have old accounts and you haven’t looked at beneficiary forms for a while, you need to look at updating them. 


Another common mistake that we see here is maybe you have your spouse down, but then you have no contingent beneficiaries. 


What happens if you don’t have contingent beneficiaries? 


Then it’s going to go to the estate and it’s going to be sent through probate. 


Take the time and take care of it. Most people want it to go to their kids and again, if you don’t have kids, it’s about who you want to benefit from your hard work and all that you’ve done. 


Another mistakes I see is eliminating your grandchildren.


Nobody will probably do that on purpose, but let me explain.


The standard beneficiary designation is per capita, which means if you have three kids and they’re all getting equal shares, but one of them passes away before you, per capita means that their share goes back to the other two kids. 


Maybe that’s how you want it and that’s fine, but if that third child, the one that passed away, had their own kids, your grandkids, most people want their share to go to their grandkids in that family, and unless it is designated the right way with a per stirpes designation, it would not get to those grandkids unless you made a change. 


Now, if you lose a child, the fact is you’re probably mourning a loss and not thinking about changing the beneficiary forms right away, which is exactly what happens any time there’s a life change. 


We’re thinking about the life changes, not about changing our beneficiaries, and so we want to make sure your beneficiaries are up-to-date and you’ve thought about it. 


We have a nice one page, beneficial review form that you can click on to download and it’ll go through a couple different questions and it really is to help you think about who you want to benefit from your hard work. 


Again, the first person should be you, but more than likely unless you die on the day that there’s a $0 balance in your account, somebody else is going to be that beneficiary and making sure that you’ve thought about that is the way to make the most impact on who you want, instead of letting Uncle Sam be the primary beneficiary for you. 


Planning ahead also involves looking at mitigating any tasks for us like we’ve talked about in the past, otherwise, Uncle Sam is the number one beneficiary and your family is number two. 


If you have any questions, give us a call. Download the beneficiary review form and go through it for yourselves.

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