While you’re probably eager to plan your legacy, coordinating a wealth transfer is easier said than done, as the process comes with financial and legal considerations. What are some of the dos and don’ts of transferring wealth? Take a look at these five pitfalls and strategies to help avoid them.
Pitfall #1: Equal distribution is always fair
If you have multiple beneficiaries in mind, you may think the only logical thing to do is to divide all assets among them equally. While that is an option, it may not always the best one, as each beneficiary is a unique person with their own needs and circumstances.
For example, if one child works at the family business and is ready to take the reins, while the other works elsewhere, it could make sense to give your company to the former while providing the latter with other assets. Or, if one child moves in with you to take care of your medical needs, you may compensate them with a larger inheritance.
These choices are difficult, but a financial advisor can help you to determine what’s best for all parties.
Pitfall #2: My will is all that matters
You might assume that your assets will be divided based on your will. Keep in mind, though, that many assets, such as 401(k), IRAs, life insurance benefits and annuities follow your beneficiary designation rather than the provisions of your will. Aligning your will and your beneficiaries can help ensure your wishes are carried out.
Pitfall #3: I don’t need to update my estate documents
Deciding who receives your wealth may seem clear as day right now, but relationships change and so does your situation. If you experience a significant life event, such as the death of a loved one, a move, go through a divorce or remarriage, etc., it’s important to update your documents. If you don’t update your will, then a deceased family member or ex-spouse (depending on state law) may be in line to inherit your assets, instead of your new spouse or other family members. That’s why it’s important to review your will every few years to account for personal changes as well as changes in laws to help ensure your assets are going to the right people.
Pitfall #4: I can plan without talking to my beneficiaries
While you don’t legally need input from others to construct your will, having a conversation with heirs and those you plan to name in your will about what they can expect to receive may eliminate resentment or disagreement between beneficiaries after you’re gone. Based on your conversation, you may decide to modify your distribution provisions. Perhaps you assumed one individual wanted a particular asset, when in fact they didn't.
Pitfall #5: There’s nothing I can do about taxes
Transferring assets to beneficiaries can come with a complex array of estate and inheritance taxes. It’s important to review the size and type of assets transferred and the possible federal and state tax consequences of your actions. Plus, these taxes change over time, meaning an estate plan optimized to current laws may need adjusting at some point.
To make the most of your assets, you can work with a financial advisor or estate planner to create a flexible estate plan that can be adjusted in response to tax changes so you can avoid unnecessary tax hits.
“Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.”