Avoid This Big Estate Planning Mistake

Why this key estate planning mistake can leave your account open to vulnerability and what you can do to be prepared.

The Big Estate Planning Mistake

As people get older and perhaps feel or fear a decline in their cognitive abilities or physical mobility, they decide to bring a family member, often a son or daughter, into their financial affairs. This is a good idea (as long as the person is trustworthy and will always act in your best interest) as it’s helpful to have someone to lean on for advice or take care of tasks you’re no longer able to do and who understands what your financial picture looks like.

The obvious way is to add that person to financial accounts as an account owner. It allows them to speak to bankers, financial advisors, accountants, etc., regarding your financial matters. But the problem is that this person is also typically a beneficiary of these same accounts. This is the biggest estate planning mistake that I commonly see.

It’s Open Season

Once you add someone to a financial account as an owner, that account can be attached to legal proceedings. If the person you added to the account were to be divorced, file for bankruptcy, or be sued civilly for something like a car accident, creditors could take that money. Retirement accounts are typically exempt from this, however.

The Gift Tax Exclusion

For 2022, the gift tax exclusion is $16,000 per recipient per giver. So if you and your spouse have two children, both of you can give each child $16,000 per year. Each child could get $32,000 total. You don’t have to file a gift tax return as long as the amount is under $16,000, nor does the recipient.

The gift is not taxed when given, but it does count against the lifetime exemption, which is $12.06 million for a single person and $24.12 million for married couples. Adding a beneficiary to your financial accounts can count against the gift tax exclusion. Reaching these lifetime limits isn’t an issue for most people, but it’s something to be aware of.

Capital Gains

Under current fair market value basis rules, or the “step-up” and “step-down” values, an heir receives a basis in inherited assets equal to its date-of-death value. The difference between the original cost to the original owner and the value when that owner passes away is passed down to the beneficiaries, so capital gains are avoided. But if the beneficiary were added to the account before the owner’s death, that “step-up” basis would be lost and capital gains would have to be paid.

Estate Planning Alternatives

Luckily, there is a solution that allows a beneficiary to maintain the protections the estate plan was meant to give them while allowing them to be involved in the owner of the estate’s affairs. Create and name the person you want to be involved as your durable power of attorney. An attorney can do this for you.

Naming someone POA will authorize them to speak to bankers, financial advisors, CPAs, attorneys, and medical personnel and for those professionals to speak to your power of attorney. The POA can also act on your behalf regarding financial and medical decisions. But POA will not affect that person as a beneficiary. The perfect solution to the big estate planning mistake many people make!

What the Wealth?! The Book

My first book, What The Wealth?!: A Guide to Financial Clarity for Professionals and Families, was published in January 2020. I’m happy to announce that my next book will be published in the next 30-60 days! The book will discuss money, core values, dreams, and how to combat the 5 biggest risks to your retirement.

Listen in to learn why this key estate planning mistake can leave your account open to vulnerability, why you might go above the annual gift tax exclusion, and how this mistake actually disadvantages your beneficiary. I will also leave you with a better way to solve the problem you’re trying to avoid in a way that protects yourself, your account, and your beneficiary.

Listen to the Full Episode:


What You’ll Learn In Today’s Episode:

  • Why adding a beneficiary to your estate account is a bad idea.
  • The three reasons to avoid making this mistake.
  • How this mistake can disadvantage your beneficiary.
  • How it leaves your account open to threats.
  • Using a power of attorney to your advantage instead.

Ideas Worth Sharing:

“It is a very noble thing to leave money to others.” – Jonathan Bednar

“Whatever you paid for your assets is what they will inherit it at.” – Jonathan Bednar

“These three reasons are very important to consider when you’re trying to evaluate how you bring somebody else on to help navigate financial planning and all the moving parts of money as you get older.” – Jonathan Bednar

Resources In Today’s Episode:

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