Avoid Estate Planning Mistakes

Avoid Estate Planning Mistakes

Estate planning should be a business-like process, where people evaluate the assets they have accumulated over time and make clear decisions about how to leave their assets and legacy to those they love. The reality, as described in the article “5 Unfortunate Estate Planning Myths You Probably Believe,” from Kiplinger, is not so straightforward. Emotions take over, as does a feeling that time is running short, which is sometimes the case.

Reactive decisions rarely work as well in the short and long term as decisions made based on strategies that are set in place over time. Here are some of the most common mistakes that people make, when creating an estate plan or revising one in response to life’s inevitable changes.

Estate plans are all about tax planning. Strategies to minimize taxes are part of estate planning, but they should not be the primary focus. Since the federal exemption is $11.58 million for 2020, and fewer than 3% of all taxpayers need to worry about paying a federal estate tax, there are other considerations to prioritize. If there is a family business, for example, what will happen to the business, especially if the children have no interest in keeping it? In this case, succession or exit planning needs to be a bigger part of the estate plan.

The children should get everything. This is a frequent response, but not always right. You may want to leave your descendants most of your estate, but ask yourself, could your lifetime’s work be put to use in another way? You don’t need to rush to an automatic answer. Give consideration to what you’d like your legacy to be. It may not only be enriching your children and grandchildren’s lives.

My children are very different, but it’s only fair that I leave equal amounts to all of them. Treating your children equally in your estate plan is a lot like treating them exactly the same way throughout their lives. One child may be self-motivated and need no academic help, while another needs tutoring just to maintain average grades. Another may be ready to step into your shoes at the family business, with great management and finance skills, but her sister wants nothing to do with the business. The same family includes offspring with different dreams, hopes, skills and abilities. Leaving everyone an equal share doesn’t always work.

Having a trust takes care of everything. Well, not exactly. In fact, if you neglect to fund a trust, your family may have a mess to deal with. A sizable estate may need revocable or irrevocable trusts, but an estate plan is more complicated than trust or no trust. First, when an asset is placed into an irrevocable trust, the grantor loses control of the asset and the trustee is in control. The trustee has a fiduciary duty to the beneficiaries, not the grantor of the trust. The beneficiaries include the current and future beneficiaries, so the trustee may have to answer to more than one generation of beneficiaries. Problems can arise when one family member has been named a trustee and their siblings are beneficiaries. Creating that dynamic among family members can create a legacy of distrust and jealousy.

My estate advisors are all working well with each other and looking out for me. In a perfect world, this would be true, but it doesn’t always happen. You have to take a proactive stance, contacting everyone and making sure they understand that you want them to cooperate and act as a team. With clear direction from you, your professional advisors will be able to achieve your goals.

Reference: Kiplinger (Sep. 17, 2020) “5 Unfortunate Estate Planning Myths You Probably Believe”

The High Cost of Medicare Mistakes

The High Cost of Medicare Mistakes

A 68-year-old woman knew that she had to sign up at age 65 for Medicare Part A for hospital care and Part B for outpatient care, since she did not have employer provided health insurance from an employer with 20 or more employees. She knew also that if she did not have health insurance from an employer and didn’t sign up immediately, she’d face a penalty with higher Part B and Part D premiums for the rest of her life when eventually she did sign up, reports Forbes in the article “Beware Medicare’s Part B Premium Penalty And Surcharge Traps.”

Here’s where it got sticky: she thought that Medicare provided an eight-month special enrollment period after one job ended to apply penalty free. She is employed on a sporadic basis, so she thought she had a window of time. Between the ages of 65 and 68, she had several jobs with large employers, and was never out of work for more than eight months.

She was out of work for 25 months total between ages 65 and 68, when she was not enrolled in Medicare. She thought that since she was never out of work for more than eight months, she didn’t have to sign up until she officially stopped working and would then enroll penalty free in traditional Medicare Parts A, B, and D.

She had read information on the Medicare website and her interpretation of the information was wrong. It was a costly mistake.

In determining whether you need to permanently pay a Medicare Part B penalty, Medicare counts up all the months between age 65 and the month you first enroll in Part B, even if you have a job with a large employer with no gaps in employment for more than eight months.

She got hit with a 20% lifetime Medicare Part B premium penalty. For every 12 months that you’re not covered by Medicare B after reaching 65 and before you enroll, the penalty is an additional 10%. And making things worse, she was hit with a Medicare Part B penalty based on the cumulative (not consecutive, which is an important difference) 25 months that she went without credible prescription drug coverage.

This is the sort of problem that does not self-resolve or get better over time. In this case, another mistake in timing is going to hurt her. She sold some assets and realized a capital gain in 2018, which increased her Modified Adjusted Gross Income (MAGI). In 2020, she’s going to have to pay the Income Related Monthly Adjustment Amount (IRMAA). If your MAGI, two years before the current year, is less than $87,000, you are exempt from IRMAA in the current year. Her cost: $1,735.20 more this year. Had she instead realized those capital gains over the course of several years, her 2018 MAGI might not have crossed the $87,000 threshold. Most people are not aware of the IRMAA and take capital gains in larger amounts than they need.

This is a harsh lesson to learn, at a time in life when there’s not a lot of flexibility or time to catch up. Talking with an estate planning lawyer about Medicare and about tax planning, as well as having an estate plan created, would have spared this woman, and countless others, from the harsh consequences of her mistakes.

Reference: Forbes (Jan. 29, 2020) “Beware Medicare’s Part B Premium Penalty And Surcharge Traps”