Avoid this estate planning mistake that cost my family millions

Avoid this estate planning mistake that cost my family millions

I never met my Uncle Hank. To be honest, I don’t ever remember even hearing about him. But his death caused quite a stir in my family. 

Occasionally people joke about having an unknown rich uncle who leaves them surprise riches. Hank would not have been suspected of being such a relative. First off, as a great-granduncle, he was not close. He lived on his own in Kansas (far away from us northerners at the time).

Second, he lived very modestly in a trailer park. No mansion to sell and distribute the proceeds or anything.

He had a very simple will set up to disperse his savings, if there was anything left: one thousand dollars each to his siblings, nieces and nephews, and a few charities. Anything left over would be split between his 15 grand nieces and nephews (my father, his siblings and cousins). 

But when he passed away, the family made a discovery under Uncle Hank’s bed that complicated things just a little. They found sacks full of paper stock certificates he had earned when he worked for AT&T in the 1920s. 

They were worth almost $6 million. 

We don’t know if he thought they were worthless or if he simply forgot about them. Bachelors aren’t always great at cleaning under their beds. Either way, it created a major estate planning mess. 

In the late 1990s, when this happened, estate taxes were very high. Anything in an estate over $600,000 was taxed at 55 percent. Additionally, a generation-skipping tax of another 55 percent applied to any money passed to the grand-nieces and nephews. The family was shocked to find out that only 18 percent of Uncle Hank’s surprise nest egg would be passed on to family members after running through the tax gauntlet. 

Don’t get me wrong: Everyone was grateful for such an unexpected gift, whatever the amount. But if Uncle Hank had known and planned for this, he could have made sure more of his money went exactly where he wanted it to go. As it stood, it was too late to do anything but pay the taxes. 

Since then, estate taxes have changed dramatically. Currently, individuals can hand down up to $11.4 million tax-free. The vast majority of families don’t need to worry about estate taxes, but Uncle Hank can still serve as a reminder to all of us: Make sure your estate plan is in place and up-to-date!

Here’s how:

  1. Take an honest inventory. Exactly how much are you leaving behind? Uncle Hank had no idea. And most families I work with are surprised how quickly their estates add up after factoring in savings, retirement plans, home equity and life insurance. Get the hard numbers in front of you and consider how taking responsibility for that money would affect your heirs
  2. Form a plan. Decide who you want to leave your wealth to and how. Don’t forget charities! Even though most of us won’t be planning around estate taxes, there are still other taxes. For example, if you leave your retirement accounts to family, your family may pay income taxes on them. Directing these to charity would skip these taxes. It’s also smart to include your digital assets in your estate plan: Who gets airline miles? What about your digital music library or family photos stored in the cloud? Finally, include a “remote contingent” plan. It’s hard to think about, but what if you and your direct heir(s) pass away at the same time? A good estate plan covers the worst-case scenario.
  3. Work with a pro. It’s tempting to go the easy-for-now route: get an online template, fill it out and call it good. But as we learned from Uncle Hank, small estate planning mistakes can create really big issues. A trained professional can help you put together a smart, comprehensive plan that ensures the wealth you’ve built is being shared wisely after your death. 

Hopefully my family’s story will remind you to plan ahead…and maybe clean out under your bed every once in a while. 

Ready to talk with a financial advisor about your estate plan? Contact the Sound Stewardship team to set up a consultation.

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