Being on the ball in regards to financial and retirement planning is key, but there are some mistakes that investors could make that could nullify those good intentions. Starting financial and retirement plans isn’t enough – consumers have to regularly pay attention to and update these plans to ensure they are optimizing the benefits.
One of the biggest mistakes is inefficient beneficiary design – for instance, not updating policies after divorce or death, not naming any beneficiary or not naming a contingent beneficiary. Another thing to remember is that if a policyholder wants to name a minor as the beneficiary, that person must have an appointed guardian or conservator. Similarly, if an investor names an estate or trust as a beneficiary of a retirement plan, there is a five-year payout period.
Improper individual ownership
If a spouse is named the beneficiary of a policy but they pass away before the insured, the policy will end up in the hands of the insured and incidence of ownership is established. Creditors also become an issue in instances of divorce and child support: Not all states protect the death benefit from life insurance and the cash value often is not protected from the policy owner’s creditors.
Ignoring the formalities of trust
Policyholders are best off if they send Crummey notices to beneficiaries, which detail their withdrawal rights to prevent maximum amounts of trust contributions from being subject to gift tax, according to the American Bar Association. It is most effective if trustees who send the written notice request knowledge of receipt in writing.
Failure to complete business succession planning
Creating and updating succession plans is key for business owners who want to guarantee the future success of their operations should they pass away. For optimum effectiveness, business plans should be integrated with estate plans. It also is of great importance for business owners to think about what will happen to the operations when they are sold or liquidated in the future.
Not complying with 101(j)
When working with a client to map out their financial future, investors need to keep in mind the Pension Protection Act of 2006, which includes provisions for corporate-owned life insurance (COLI). Better known as COLI Best Practices (Section 101j), the measures require business owners to follow specific notice and consent requirements. Business owners who fail to do so will have the death benefit in excess of the premium included in their income.
There are a number of other pitfalls that investors and financial planners can make when mapping out a client’s future, so it is necessary for all parties involved to be aware of potential mistakes and how to best avoid them. Other potential problems include:
- Unexpected gains recognition from 1035 exchanges;
- Improper valuation of policies;
- Triggering transfer for value;
- Under-appreciating charitable planning complexities; and
- Planning solely to respond to estate/gift tax laws.