Estate Planning: Letters of Instruction

You may have spent significant time and money getting your estate plan in order and set up the way you want, but what happens next?

A letter of instruction is an important estate planning tool that essentially accomplishes two things: 1) it gives you the opportunity to explain your wishes to your executor and/or beneficiaries to let them know how you want your affairs handled post death; and 2) it tells your executor and/or beneficiaries where to find all of your important documents, accounts, etc.

Important:  a letter of instruction is not a substitute for a will or a trust! It is simply a way for you to clearly let your loved ones know what is important to you and where to find everything they need.  Copies of your letter should be attached to your will, given to your executor and a copy should be kept in a file, drawer or safe in your home (or other place you normally keep important papers in your home).

The topics that are usually included in a letter of instruction are:

• First Steps: this is a handy overview for your family that can include things such as contacting your family members, contact your employer about your death, make funeral arrangements, get death certificate copies, contact the Social Security Administration, process life insurance claims, notify your bank, credit card companies, and other financial institutions.
• Asset List: this should list things like your various insurance policies, pensions, bank accounts and where to find the policies/documents and the names of the custodians/insurance companies.
• Location of Important Papers: indicate where you keep documents such as your will, trust, birth certificate, military records, deeds, insurance policies, pension statements, tax records, investment account statements, checking and savings account information.
• Tax Returns: this should include the name and contact information for your CPA.
• Life Insurance Policies:  a copy of your death certificate must be submitted to all applicable insurance carriers so the more detail you can provide the better.
• Other Insurance: this includes things like accident policies, medical policies, car insurance, homeowners insurance and mortgage insurance.
• Cars, Boats, RVs, Etc.: be sure to indicate where you keep the titles, insurance information, purchase price and brief description of each item.
• Funeral Arrangements: indicate the name and location of the funeral home or type of funeral preferred as well as any cemetery/plot information.
• Family Contact Information: list the names and contact information for family members that you would like to be contacted.
• Physician Information: list the names and contact information for your doctors and other health care providers.
• Financial Matters: indicate the location of any safe deposit boxes, bank accounts, brokerage accounts, documentation for other investments, real property documentation, loan documentation, credit cards, etc. so the respective institutions may be notified and provided with a copy of your death certificate, when applicable.

Just like any other planning strategies, you should review your letter of instruction at least once per year to ensure everything is still accurate.

Who's the BOSS: Part 4, Survivors

If you die without a surviving spouse, who will be the beneficiary of your IRA? Most people assume it’s their children but if your retirement plan beneficiary forms are not up to date, your estate could be the default and render the treasuries of the United States and your home state as your beneficiaries! The estate is the most common default beneficiary designation, not surviving heirs.

What if your primary beneficiary/ beneficiaries pre-decease you? Have you considered that possibility and named contingent beneficiaries? A lot of people stop at naming one primary beneficiary, which is usually their spouse. What if your spouse has predeceased you and you did not get around to updating your beneficiary forms before you passed away? What if your primary beneficiary decides to disclaim the IRA assets? These are very real situations that negatively impact inherited IRA assets every day. Every IRA owner must anticipate such scenarios and plan accordingly.

Financial Legacy or Tax Bill?
Approximately 87% of all IRAs are cashed out upon the death of the IRA owner. Many people who inherit IRAs think their only option is to cash it out. Because of this common misconception, they take a lump sum distribution and lose out on the opportunity for tax deferred growth and a much higher payout over their lifetime.

Do you have a bad exit strategy, or worse, no strategy at all? Do you have a good exit strategy that allows you and your heirs to enjoy exponential growth and increased wealth that may be passed on for generations? These questions cannot be answered without going through a BOSS review.

You may be sitting on what you think is a “good” exit strategy only to find that the beneficiary forms are not up to date or they have not been filled out properly.

Custodians are not infallible either. Do you have confirmation that the respective custodians received and accepted the most current beneficiary designation form? Does the custodian’s form permit a multi-generational strategy? If not, are customized beneficiary forms accepted by the custodian? We all have the choice to leave a financial legacy or a tax bill to our heirs.

Communicate With Heirs
It is very important to do a BOSS review. It is very important to make sure all retirement plans are structured the way you want. It is equally important to communicate your intent and IRA distribution plan with your heirs. You may have engaged in careful planning to ensure your beneficiaries can maximize the benefit of your IRA but if they are unaware of how the MGIRA strategy works, they could unknowingly make a fatal, irreversible error! Although it may be an uncomfortable topic, it is crucial to have that uncomfortable conversation so your heirs will know what you have set up for them, what their options are, and how to execute your carefully crafted plan when the time comes.


Avoid Another Common Error
A common beneficiary error occurs with respect to CDs. No, this is not a reference to your music collection, but what about your certificates of deposit, are they in order? When conducting a BOSS review, don’t forget about your CDs. Did you renew any of them? Does your institution automatically renew your CDs? If so, did you submit anew beneficiary designation form? Be careful with this, once a CD matures and has been renewed, a lot of institutions will treat it as a new account. This means that a NEW beneficiary form must be submitted and accepted by the custodian. When conducting your annual BOSS review, remember to check those POD (“payable on death”) designations on your CDs and pay special attention to any renewed CDs.

Who’s The BOSS: Part 3

Spouse

Is your spouse the sole primary beneficiary of your IRA or other retirement plan? If not, for those married IRA owners living in a community property state, a valid spousal waiver must be on file with the custodian. A spousal waiver is required if the owner is legally married but has named someone other than his or her spouse or someone in addition to his or her spouse as a primary beneficiary. Also, are you aware of the special options afforded spousal beneficiaries? Will your surviving spouse elect to treat your IRA as his or her own? Will your surviving spouse choose to re-title it to an inherited IRA? This and many more factors are often overlooked and need to be considered during a BOSS review as they are integral components of a comprehensive retirement strategy.

The Real Cost of Aging

We protect ourselves from costs associated with car accidents, flood and fire damage to our homes, and we have individual healthcare coverage to help prevent serious illness. Many of us have life insurance to plan for the future and to provide tax-free benefits to our families when we are gone. However, sometimes traditional coverage is just not enough. As we evolve as a society, so do our financial, retirement and health planning tools.

There has been a tremendous spike in life expectancy in America over the last 50 years, so what is the real cost of aging? How much can you expect to pay on average for nursing home care today? Many Americans look to solutions such as reverse mortgage planning or the federal Medicaid program but is that enough?

Below is a chart showing median annual costs for nursing home care in select states. The amount for each state is approximate and is based on a 365 day stay with a semi-private room accommodation:

Not all long-term care solutions will be appropriate for every individual so it is important that you meet with your own professional advisor(s) for an assessment to ensure you have the proper strategies in place for your situation.

Who’s The Boss? Part 2

Beneficiary

Do you have a designated beneficiary named on all of your IRAs, 401(k)s or other retirement plans? If you cannot answer this question with 100% certainty, you need to conduct a BOSS review immediately! To be “designated,” a beneficiary must be a living, breathing, human being with a birth date and a remaining life expectancy. Having a designated beneficiary or beneficiaries identified in your retirement plan paperwork is especially crucial in order to preserve the opportunity to make those plans multi-generational. If an IRA is deemed as having no designated beneficiary when an IRA owner dies, the heirs cannot correct this mistake so the opportunity to stretch RMDs over their individual life expectancies is permanently eliminated.

Owner

Will you have enough money to live on during retirement? Are your current IRAs and 401(k)s a good fit with your retirement plan and can they achieve your goals? It is important to determine the answers to these questions today through a BOSS review while there is still time to make any necessary adjustments or corrections. There are IRAs specifically designed to allow you an opportunity to help create a lifetime stream of income that cannot be outlived! If outliving your nest egg is not a concern, the next question is, what happens to your money when you are gone?

WHO'S THE B-O-S-S?

WHAT DOES B-O-S-S STAND FOR?

BOSS is an acronym that we use to refer to the four key people everyone must consider with respect to retirement planning, i.e., developing an income exit strategy and ensuring all IRAs, 401(k)s and other retirement plans are set up properly. To ensure retirement assets will be distributed in a manner consistent with an overall retirement plan, all paperwork must be filled out accurately and clearly reflect the owner’s wishes. To assist in this, we recommend what we call a BOSS review. This is a retirement plan review that should be conducted at least once per year and must be conducted anytime there is a life changing event such as birth, death, marriage or divorce.

Even though an IRA is frequently the largest asset people have, except perhaps their home, many IRA owners surprisingly fail to conduct a BOSS review on an annual basis to ensure that their money will flow the way they want it to. Many people are unaware that unless their IRAs and other retirement plans are set up correctly, they will be leaving their heirs a tax bill and not a legacy. Nobody is immune to IRA mistakes. Plenty of well educated, intelligent, wealthy individuals die without proper planning because they just didn’t know they had a serious problem…a problem that, sadly, could have been easily corrected.

It’s important to understand what happens to your IRA when you pass away. Many people think that their IRA passes through their will, it does not. The IRA beneficiary designation form determines what happens to IRA assets. IRAs are not inherently probate assets, meaning, they do not need to go through the probate system which requires that a probate court declare how and to whom the assets shall be distributed. IRA assets COULD, however, end up going through the probate court system if there is no valid designated beneficiary and, as a default, the IRA ends up going into the deceased’s estate.

You may ask yourself, why does it matter if my IRA or 401(k) goes to my estate, my children are the beneficiaries of my estate anyway, so what’s the big deal?

The big deal is that if the estate is the beneficiary of an IRA, the opportunity for heirs to stretch the IRA RMDs over their individual life expectancies is effectively destroyed. The opportunity for heirs to enjoy continued tax deferred growth on those IRA funds will be destroyed. The opportunity for heirs to maximize the benefit of the IRA by turning the tax infested IRA into a tax efficient legacy from you is destroyed!

Simple Mistakes Can Cost Beneficiaries Everything

Beneficiary designation forms are an often overlooked area of estate planning that can have dire consequences if not taken care of. For example, divorce is already an unpleasant event but imagine that your ex-spouse gets the proceeds of your life insurance policy and/or retirement accounts because you forgot to update your beneficiary designation forms. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, Kari Kennedy was the administrator of her father’s estate and tried to recover $402,000 that was paid to her father’s ex-spouse. As part of the divorce agreement, the soon to be ex-wife had given up her rights to Mr. Kennedy’s pension and other work-related benefits.

However, Mr. Kennedy failed to remove his ex-wife as the beneficiary of his investment plan assets and replace it with Kari’s name. Following his death, the funds went to his ex-spouse, not Kari as he had intended.

The case made it all the way to the Supreme Court but, unfortunately, Kari was not deemed the beneficiary because, under ERISA, the beneficiary designation form trumps a divorce decree. The Court made it clear that a former spouse can give up the right to retirement benefits as part of a divorce decree but the specific terms of an ERISA governed plan ultimately control what happens to the plan assets.

This is an extreme case but it illustrates the dire consequence of failing to review and update beneficiary designation forms whenever a life changing event occurs such as death, divorce, marriage or birth. A beneficiary review is an important part of your financial review process that your advisor can help guide you through.