#19 | Avoiding Estate Planning Mistakes, Part 1

Jon “Jag” Gay: Welcome back to Protecting and Preserving Wealth. I am Jon Jag Gay, joined, as always by Bruce Hosler from Hosler Wealth Management. Bruce, good to be with you as always.

Bruce Hosler: John, great day to be together, talking about avoiding estate planning mistakes.

Jon: Really important topic, and this is actually part one of two.

We’re gonna do two episodes on this. This, of course, the first one. When I think about estate planning, Bruce, I mean, the first thing that comes to mind for me, and I would imagine most of our listeners are Will and Trusts. Is that where we’re gonna go today in our first part?

Bruce: Yes, and other issues as well, like beneficiary designations and healthcare and financial powers of attorney, everything like that.

Jon: The first thing, and this always confuses me, so this is my first question for you. How does someone know whether they need a Trust or a Will? That part always trips me up.

Bruce: John, everyone should have a Will as a basic estate planning document because it identifies who your personal representative will be when you die.

Jon: Mm-hmm.

Bruce: That person is responsible for settling your estate. The Will is also very important for people who have minor children. Because the Will determines and identifies who will be the guardian of your children if you pass away prematurely.

Jon: Yeah, that’s important. So, if everyone needs a Will, that’s the baseline, like you said. How does a person decide if they need a Trust on top of it?

Bruce: So, if you own real estate and or you have multiple beneficiaries, or if you have a net worth, say of a million dollars or more, then most likely you’re probably gonna benefit from having a Trust. And the reason I say that about multiple beneficiaries is if you have just one beneficiary, you can transfer your real estate using a beneficiary deed and keep it simple. But if you have multiple, then you want a Trust.

Jon: All right, we’ve heard of Irrevocable and Revocable Trusts. What are the benefits of using a Revocable Trust, Bruce?

Bruce: There are a number of benefits. Let me first share the main benefits that people seek by using a Trust. Primarily, they’re trying to avoid probate.

Jon: Mm-hmm.

Bruce: Probate can take months to settle. The cost of attorney’s fees over that time, and then also the fact that the records are public and your snooty neighbors can choose to get in your business and know what’s going on.

Also, there’s the benefit in community property states that you can take advantage of the community property laws, allowing a surviving spouse to get a full step up in basis, that’s a tax benefit.

Jon: Mm-hmm.

Bruce: So, that means on a real estate and on your investments and businesses and other assets that are highly appreciated. A surviving spouse could turn around after you pass away. And sell those assets and owe O zero capital gains tax. These are really big benefits.

Jon: Yeah, that step uping basis is a really huge thing. And if you’re not familiar with that, I would encourage you to reach out to Bruce and his team in Hosler Wealth Management.

Bruce, are there any other estate planning documents that our listeners should include in their estate plans?

Bruce: Yes, there’s eight of them that I want to cover and talk about. So, the first one, number one is you should have a Will and or a Pour-over Will, and that means the Pour-over Will, think of it like a picture of water where you’re pouring-over anything that you forgot to title in your Trust. You’re pouring that back over into the Trust with your Will. Number two, you need your Revocable Living Trust if you qualify and need that. Two important documents, number three and four are durable financial power of attorney, and a durable healthcare power of attorney, and the durable part is very important.

We’re gonna talk about that later, but those are while you’re living. So, you know, young people think, oh, I don’t need to do estate planning cuz I’m not planning on dying. You need those right now to cover yourself and protect yourself. You also need a Living Will, and this determines, you know, if you’re in a car accident, you become permanently in a vegetative state and you’re not improving, do you stay plugged in if that’s your wishes, they can do everything and take heroic efforts to keep you alive.

Or if you want to be let go, then you have to create those instructions in your Living Will. In Arizona, we have number six, which is a mental healthcare power of attorney. So as we get older, we have some clients that are, you know, with some dementia and Alzheimer’s. This allows your family to take care of you and step up.

And then finally, we have number seven in Arizona beneficiary deed. So, this is a way to avoid probate without having have a Living Trust . And finally, and very importantly, a lot of people forget those beneficiary designations. So, IRAs, 401ks, pensions, retirement plans, annuities, life insurance, long-term care, 529s, and certainly your bank accounts and investment accounts can have POD and TOD designations as well.

Jon: All right, POD and TOD, lemme stop you there for a second, Bruce. I’m not familiar with those. What do they mean?

Bruce: So, POD stands for Pay On Demand. T O D stands for Transfer On Death. So, you can have a Pay On Death designation added to any bank account, and a TOD designation are usually added to brokerage and investment accounts.

So, by adding those beneficiary designations, you trump the Will. You trump the Trust and you can direct who will receive those funds when you die. And they’re very nice because you don’t have to engage an attorney to prepare any fancy documents, you can just fill out a new beneficiary form if you change your mind.

So, if the kids upset you, you know, you can take ’em out of the beneficiary form very easily. Yep, and for that matter, it works the same for all those accounts or the beneficiary form. So, IRAs, 401ks, you just fill out a new beneficiary form and you change who you’ll receive the benefits.

Jon: I’m thinking of any one of those, uh, terrible movies where the guy yells or the woman yells, “You’re out of the Will.”

Bruce: That’s exactly right. Same with the beneficiary designation.

Jon: All right, I’ve heard of beneficiary designations using primary and contingent, but as we discuss this today, you also use a tertiary beneficiary designation. How and why would you use those designations for your clients, Bruce?

Bruce: So, first and foremost, if you’re married, your spouse should be your sole primary beneficiary on all of your IRA accounts, 401k, Roth IRA, and if your goal is to leave everything to the spouse, should you die, you want to name them as the primary. Now, you also wanna leave, or if you wanna leave some money to your children at your death, let’s break those funds out into a separate IRA account and name the children as beneficiaries of that account. And these IRA accounts, there are special benefits that go to your spouse that your children cannot get.

Jon: Mm-hmm.

Bruce: So, at that point, then you can name the children as contingent beneficiaries, and you can name your grandchildren as tertiary beneficiaries. Here’s an example of how that may work. You name your spouse as the primary, your children are the contingent, and the grandchildren are the tertiary. So, your spouse can disclaim if he or she doesn’t need or want the money and wants to pass it on to the kids.

Your children then can disclaim as well leaving those funds to grandkids. Who probably by that time, by the time you pass away, are old enough to be in college. Maybe they’re buying a first house or you can give’ em a little help when they need it most.

Jon: That really is some cool planning, Bruce. I’ve heard about funding the Trust. What does that mean and how do you do it?

Bruce: Funding your Trust, Jon is simply moving the assets into the name of the Trust, transferring the assets out of their current title. Which may be in your individual name or perhaps a joint name with your spouse, and then retitling them back into the Trust. Once that’s done, the Trust becomes the owner of those assets.

If it involves investment accounts, we have to set up a new account titled in the Trust, and then we transfer the assets into that new account.

Jon: This is why you’ll need to ask a professional, uh, to help you out with this kind of stuff. I’d imagine Bruce, that people mess this up all the time and stuff doesn’t get funded properly.

Bruce: Absolutely, all the time. It’s one of the biggest challenges we see when people refinance their house. The banks make ’em take it out of their Trust to refinance. Many times people forget to move it back.

Jon: Mm.

Bruce: The house back into the Trust after they refinance.

Jon: Okay. What about estate taxes? We’ve all paid and are a little familiar with income taxes, but I bet most people are not familiar with estate taxes.

Who, among our listeners, needs to worry about estate tax and what to do to avoid having to pay them?

Bruce: So, in 2023, right now as we record this, the estate tax exemption is 12.9 million per person. Most people don’t have to worry about an estate tax if they don’t have an estate over 25 million, let’s say 26 million for a married couple.

But in 2025, the tax Cuts and Jobs Act of 2017 sunsets and the estate tax exclusion amount will lower back down to just 5 million per person adjusted for inflation. So, we suspect that that’ll be around $6 million per person. In 2026.

Jon: Mm-hmm.

Bruce: So, now Congress doesn’t have to do a thing to change this. They can just leave it the way it is, and if you have an estate worth a net worth of let’s say over 3 million, you’re probably gonna need to be concerned about filing a 706 tax return in order to protect your portability and the exemption amount for your surviving spouse.

Jon: It’s funny, as we sit here, Bruce, you hear the terms like $3 million and it sounds like a lot of money, but if you’ve saved well for retirement, $3 million may not be that much to put you over that threshold. I’d imagine this is a way for the government to raise taxes with the estate tax.

Bruce: Absolutely, and Jon, you’re absolutely right. You know, I wanna reiterate that point. You know, you have a house, you bought it for $500,000, they’re now worth 800 to a million.

Jon: Mm-hmm.

Bruce: You saved well, and you, you maybe saved a million, $1.5 million in your retirement accounts. Your spouse saved a little bit. You may not start at $3 million when you retire.

Jon: Right.

Bruce: But 20 years into retirement, that could have grown to $3 million dollars very easily.

Jon: Sure.

Bruce: And yes, this is totally the way the government is raising taxes by just letting that exemption move away and they’re able to charge estate taxes on way more people.

Jon: How much is that estate tax rate, Bruce?

Bruce: It’s 40% of every dollar above the exemption amount, so it’s a big tax rate.

Jon: That is a big number. All right, so you alluded to this earlier, but we haven’t dug into this yet. Powers of attorney there are durable and non-durable powers of attorney. What’s the difference?

Bruce: So, when you create a durable power of attorney, it means that even if you’re incapacitated in some way, you’re in the hospital, you’ve been in a car accident, had a stroke, had a heart attack, that power of attorney is still effectual.

So, a power of attorney that is not a durable power of attorney. If you’re incapacitated, that power of attorney is no longer enforced. So, almost always, you wanna make sure you have a durable healthcare power of attorney, and a durable financial power of attorney. And those are the documents that most estate planning attorneys are preparing for clients these days.

Jon: So, Bruce, we’ve talked a lot about the what, let’s talk about the who. Who should our listeners include on their estate planning team? Cuz it takes a village, in this case.

Bruce: It does. There’s a number of professionals. So, certainly you want to start with your wealth manager, CERTIFIED FINANCIAL PLANNING™ professional. You want them as foundationally into your plan, and then you need a good estate planning attorney.

Certainly, you want to include your tax professional, EA or CPA, and in some cases it makes sense to include a professional fiduciary as well. Now in Arizona, we have Arizona fiduciaries that are licensed and they perform the duties of a fiduciary. So, if you don’t have anyone in your life that you want to fill that role, you can hire one of those Arizona fiduciaries.

Jon: They’re obligated to look out for your best interests. Another thing we haven’t talked about yet, Bruce is charities. If someone’s charitably inclined, what’s the best way to leave some money to the charities that they wanna support without that charity getting whacked on taxes?

Bruce: That’s beautiful, Jon, if you wanna leave money to a charity, the best way is to name them as a beneficiary of your tax deferred IRA and retirement account.

Now, I’m not talking about your tax free Roth account. I’m talking about your IRAs, 401ks that you haven’t paid the taxes on yet. When you leave that to the charity, the charity won’t pay any taxes. You don’t pay any taxes, and your family won’t pay any taxes because they’ll inherit the other funds that have received a step up in basis, and those funds will be tax free as well.

So, the only one that will not win in that scenario is the government. Because they’re not gonna be able to collect any taxes out of all of that planning. It’s fantastic.

Jon: The power of planning. I’m seeing it crystal clear right now. It sounds like great charitable planning.

Bruce: Yes.

Jon: Bruce, what about changes, how often do people need to update their estate plans?

Bruce: Certainly, when we have changes in our lives, we need to update our planning. A new grandbaby is born, someone dies or perhaps one of your children or you go through a divorce. Events like these can make it prudent to make changes and update your planning. So, it’s also important to keep up with the tax laws and the changes that the government may force on us as well. Because they change those laws from time to time.

Jon: They do. My last question today, Bruce, if I set up a Revocable Living Trust, who should I name as my successor trustee after my wife and I?

Bruce: Jon, let’s be clear. Being named as a successor trustee is not a privilege. It’s an obligation that comes with a lot of work, and sometimes it’s not easy when you’re having to deal with the family dynamics, taxes, and everything else that’s required to dispose of a lifetime of accumulation. So…

Jon: Family dynamics are complicated enough before you add money to it.

Bruce: Well, you put the money in there and people change. So, I want our listeners to know that when they select their successor trustees, they do it very carefully. They choose competent people that can make wise decisions, and that are trustworthy in every way.

Jon: Great advice, as always, Bruce. If you haven’t figured it out in the last 13 minutes or so, Bruce and his team at Hosler Wealth Management have a lot of experience in this area. If one of our listeners wants to contact you and the team Bruce, for estate planning or anything related to their financial future, how do they best find you?

Bruce: They can reach us on the web at https://hoslerwm.com. They can call us in Prescott at (928) 778-7666 or in Scottsdale (480) 994-7342.

Jon: Pleasure as always, Bruce. Be back in a couple weeks with part two of this podcast.

Bruce: Thank you, Jon. Great talk today.

Jon: Securities and advisory services offered through Commonwealth Financial Network® member FINRA/SIPC, a registered investment advisor.

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