Wealth Transfers: 9 Unexpected Obstacles To Plan For Before It’s Too Late

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If you find yourself in the lucky position of either passing along your wealth to your heirs or receiving a wealth transfer from a relative, this is an exciting thing, but it does come with some legal and financial concerns if not done well.

To save you and your beneficiaries from expensive hassles, experts offered nine obstacles to prepare for and get ahead of to avoid messy court battles or tax implications down the road.

Not Laying Out a Vision

Kevin Landis, a CFP, chartered financial analyst and senior vice president with Wealth Enhancement Group, said there are two main types of wealth transfers for those who are not uber-wealthy. The first is beneficiary wealth, leaving your estate to your beneficiaries, and the second is legacy wealth, setting up something that “goes on in perpetuity” such as a trust. You want to decide what kind of wealth transfer is right for you and your beneficiaries ahead of time.

“The bottom line though is just [creating a] vision of what you’d like to see done with your money,” Landis said.

If you don’t leave instructions for your vision, you not only lose control over how your wealth will be disbursed, but you could leave your heirs with a messy legal process on their hands to figure it out, too.

Not Clarifying Tax-Qualified From Nonqualified Assets

Landis shared that the IRS considers wealth transfers such as IRA and 401(k) accounts as “tax qualified” because they have tax benefits. Nonqualified money includes such things as stocks, bonds, brokerage accounts and certificates of deposit (CD).

“So there’s a 10-year rule now that if the kids receive anything that’s tax-qualified, that money has to come out of that tax preferred environment within 10 years, but they lose up to a third of it in income taxes.” 

With preplanning, heirs can create a strategy to offset some of that transferred income with other deductions to minimize taxes, he explained.

Not Getting Things in Writing

It’s not enough to just tell your beneficiaries what you want — it needs to be in writing, just in case anyone else contests the right to your money or assets, Landis said. Not having things in writing can send your estate to probate, a long, expensive and often protracted legal process that can also create bad blood among family members and other beneficiaries.

Not Planning as a Family

While it might seem like a generous thing to leave everything of yours to an heir, surprising them with these assets after your death might not be as kind as you think, according to Julian B. Morris, CFP, CEO and founder of Concierge Wealth Management. He recommended planning as a family, as long as it’s not a sudden death or incident. A sudden influx of wealth or assets often requires planning on the beneficiary’s part, as well for such things as tax mitigation and/or if there are assets that require selling or management.

Waiting Until Someone Is Ill

The best time to do estate planning, Morris said, is when people are healthy because then there is no pressure and everyone is clear headed. If a family member has recently been ill but recovered, that can be another good time to broach the subject, as they may be a bit more sensitive to these realities.

However, Morris added, “When you do estate planning, you recognize your own mortality and you’re not really planning for yourself, which is another obstacle and reason why people a hundred percent put it off.”

The Financial Costs of Estate Planning

Another obstacle to getting these things done is that estate planning, when done well, can cost some money to work with the appropriate legal professional, Morris said. 

And while it’s tempting to use a free or cheap service to do it yourself, Morris pointed out, “You’re not an estate planning expert. You go to the person that is supposed to simplify your job, which is getting the estate plan put together and signing, to make it less complex.”

Try to get everything in order ahead of time to minimize how much time you’ll need to spend with the expert. There may also be low-cost services available to those who don’t have a lot to spend.

Creating Intentions but Not Plans

Landis stressed that if you have “intentions, but not plans,” meaning you haven’t clearly laid out in writing, only verbally, what you want done with your money after your death, things can get very messy. He gave an example of a man named David whose father ran a successful small business, where David inherited it by default when his father became ill. When his father passed, however, since he hadn’t put together any wealth transfer instructions, now David’s siblings and mother are at war over how to share the spoils of the business. 

“The dad should have said, ‘If something happens to me, Dave is going to run the company and the other three kids will be shareholders,'” Landis said.

Not Changing Beneficiary Designations

One of the top errors Landis sees people make in setting up their estates is failing to correct or change a beneficiary designation on a 401(k), insurance policy or other account. Many people find this out the hard way when they get divorced or remarried. Then, if the spouse passes, the new spouse is shocked to learn that the recipient of those funds goes to a prior spouse.

Forgetting About Tangible Assets

It’s also easy to forget about leaving instructions in writing for your tangible assets, like land, cars and even houses, Landis said. For example, he said, some people may want to specify that their kids not just inherit a house, but sell it immediately to be able to take the cash and use it how they wish, he pointed out. If you don’t communicate these things, nobody can follow through on your wishes.

Speaking with an estate planning attorney before it’s urgent can help you get ahead of these obstacles and leave your beneficiaries well prepared.

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