- The Top TSP Mistakes & How to Avoid Them | The Military Money Expert®
- 1. Getting Your TSP Started
- 2. Deciding on Your TSP Allocation
- 3. Not Increasing Your Contributions
- 4. Review Your Thrift Savings Plan
- 5. TSP Loans and Withdraws
- The Most Common Student Loan Scams (And How To Avoid Them)
- Loan Consolidation Scam
- Law Firm Lawsuit Student Loan Scam
- Student Loan Debt Elimination Scam
- Scam Or Bad Service?
- Student Loan Relief Red Flags
- Is There Any Company You Can Trust To Help You?
- Worried You're Being Scammed?
- Inherited IRA Rules: 6 Things All Beneficiaries Must Know
- How an inherited IRA works
- 1. Spouses get the most leeway
- 2. Choose when to take your money
- 3. Be aware of year-of-death required distributions
- 4. Take the tax break coming to you
- 5. Don’t ignore beneficiary forms
- 6. Improperly drafted trusts can be bad news
- Where to turn for help
- Bottom line
- Learn more:
- Carol Roth: Here are the top estate planning mistakes to avoid
- 1. Not having a will (or one that can be found)
- 2. Neglecting to choose and update appropriate beneficiaries
- 3. Overlooking the importance of powers of attorney for kids over 18 years old
The Top TSP Mistakes & How to Avoid Them | The Military Money Expert®
Posted at 12:52h in Invest by Lacey Langford, AFC®
You’re doing the right thing, saving for your retirement—it’s important! The Thrift Savings Plan (TSP) is a great tool to use for earning more money for your future.
Because making money is what you want to do. But there are mistakes you can make that’ll reduce the money you have in the future. As a financial coach, there are five common TSP mistakes.
Here are the top TSP mistakes and how you can avoid them.
1. Getting Your TSP Started
You should be saving for retirement. Right now, you’re working to earn money for two people—you and your 80-year-old self.
To cover room and board for both of them, you’ll need to save part of your current income to use years from now.
So, it’s a mistake not to be using your TSP or another tax-advantage account to assist in amplifying the money you’re saving for future self. If you haven’t been contributing or set-up an account, now’s the time.
Read more about the Traditional vs. Roth TSP decision.
2. Deciding on Your TSP Allocation
When you sign up for the TSP, they snail mail your account login information. Once you have the information, you may log in and select the investments you want. If you don’t select your investment options, the TSP will automatically select them for you. All the money you allot from your paycheck will go one of two ways.
Signed up before September 5, 2015, all money goes into the G Fund.
Signed up after September 5, 2015, all the money goes into the Lifecycle Fund closest to when you will turn 62.
That is a TSP mistake because the investment options the TSP defaults to may not be the best for you.
They may have more or less risk than you are comfortable with, or they may be in funds you don’t want. That’s why it’s important you educate yourself and make the selection.
To help with those decisions, the website for the TSP has plenty of information on investment strategy and calculators.
The TSP mistakes you could be making!
3. Not Increasing Your Contributions
As your income increases, so should your retirement savings. Almost every year, the military receives an increase in their pay. This year, the National Defense Authorization Act for FY 2017, approved a 2.1% increase in military pay for 2017. It would be a TSP mistake not to go into MyPay and increase your TSP contribution by at least 1.1%.
As your salary increases, you’ll want your quality of life to improve as well. The other half of your 2.1% pay increase can go towards improving your quality of life. One percent could be more money for entertainment each month or to help pay down any debt you have.
But the most important part it to keep increasing your retirement savings as your income goes up.
4. Review Your Thrift Savings Plan
If you’re using the TSP, then you’re on the right track. That’s the biggest part of saving for retirement. But, the other part is reviewing and adjusting your investments every six months to a year. If you are not reviewing your account, it is a mistake.
I coach many people who are getting ready to retire that have not earned any money on their contributions because it sat in the G Fund for 20 years. They set up the TSP but forgot about it after that.
There needs to be a review to adjust your investments and to check for errors to your account. Also, remember to confirm the person you selected to be the beneficiary of the account is still accurate.
I’ve seen cases where a Servicemember was killed, and their TSP went to the ex-spouse instead of their current spouse. Your TSP isn’t something to set and forget.
5. TSP Loans and Withdraws
I’ve already mentioned that right now you’re earning money for two people. So when you borrow or withdraw money from your retirement savings, it’s the same as taking money or a loan from your 80-year-old self.
And since your TSP account is also the money you’re saving for your 80-year-old self, you won’t have that money in the future to live. And that’s a huge mistake—you will need that money later.
Of course, there may be times when it is necessary to borrow money from your retirement savings. For example, if you needed to pay for a catastrophic medical bill. But taking money out to go on vacation or to pay for your child to go to college isn’t a good idea.
I’ve seen too many people who are ready for retirement but unable to do so because they kept spending their retirement savings.
Now that you know the TSP mistakes you could be making. Have you been making one of these TSP mistakes or is there a mistake you think should be added to the list. Put it in the comments below because I want to know!
The Most Common Student Loan Scams (And How To Avoid Them)
Right now there is over $1.5 trillion in student loan debt. With billions of dollars being loaned to students each year, there is no doubt that there are scammers trying to get your money that are offering services that they do not follow through on, or have no real idea about.
In fact, the Consumer Finance Protection Bureau (CFPB) has even issued multiple warnings about what to look out for when it comes to getting help with your student loans. (For example, this one and this one).
Here are some common scams that are happening right now that you should be aware of when looking for student loan help.
This article is pretty long – we cover a lot of ground here. If you're looking at a specific company, jump to our section on “Is There Any Company You Can Trust To Help You”.
Before we dive into different types of student loan scams, it’s important that we talk about getting help for your student loan debt.
There are a lot of companies that advertise that they can help you with your loans – you might see the ads on , on Google, or even in the mail (yes, people still get mail). And these companies might promise you things or advertise some type of help for your student loan debt which might entice you to call or sign up.
Before you take any action with these companies, remember this: you don’t ever have to pay someone to get help with your Federal student loans if you don’t want to. Not that help is not available, but it’s up to you to decide if you want to do it on your own, or hire a professional organization to handle it for you.
- Enrollment in repayment programs is available at no cost to Federal student loan borrowers and can be done for free at StudentAid.gov
- Debt relief companies do not have the ability to negotiate with your Federal student loan creditors in order to get you a better deal.
- Payment amounts, qualifiers, requirements under IBR, PAYE, and other repayment programs are set by Federal law
But that doesn’t automatically mean paying someone for help is a scam. While these programs are free, signing up can be confusing for some people. Or they may have complex situations and want someone to help them. Just some people do their taxes themselves, while others hire a CPA, the same applies to student loan debt help.
You can do it yourself. Or you could pay someone to help you (if you want to see who we recommend, scroll to the bottom). However, if you pay someone to help you, you need to make sure you’re not going to be ripped off and the company is reputable.
Here are the warning signs to help you avoid student loan debt relief scams.
This scam involves a student loan company that tells you they can get you the “best” interest rate and loan terms, but you have to pay a “small” fee up front for this service. The fee can be anywhere from 1-5% of the loan amount. Sometimes the fee is a flat rate up front (say $1000).
If you come across this offer – RUN! There are no circumstances in which you should have to pay money to get money. Legitimate student loans, even from private lenders, do not require any fees up front. If there are any fees, they are deducted from the disbursement check or they are included in the repayment amount and are amortized over the repayment period.
There are two common fees that will be paid with the loan, but once again, never up front. Federal student loans charge a 1% default fee, but charge no origination fees. Most private loans charge some type of either disbursement fee or origination fee, but these are usually negotiable and vary widely from lender to lender.
If you are working with a third-party company to help you with your student loan debt, they might take a fee up front. But this fee should go into an escrow account (or third party account) and the company should only get paid once they prove they’ve helped you sign up for a program. Look for wording “we only get paid once you’ve made your first payment on your new repayment program”.
Note: A new variation on a theme has emerged in the last year.
Instead of charging a direct advanced fee, some companies are offering a second personal loan – which is basically a fee in the format of a loan.
Most borrowers who get involved in this don't realize they took out a new loan, and there are repercussions if you cancel or don't pay (such as interest and collection fees).
The bottom line is, if you use a third party company, make sure you fully understand the pricing and payment structure.
Loan Consolidation Scam
After you graduate, it might be a good idea to consolidate your student loans. This is another area that is ripe with scams. The most common student loan consolidation scam is one in which the company charges a consolidation fee, but actually does nothing. The fee is sometimes called processing fees, administrative fees, or consolidation fees.
If you have a federal student loan, there are no fees whatsoever for student loan debt consolidation. You can do it yourself for free at StudentAid.gov.
If you have a private student loan, there are a number of lenders who will refinance your private loans, federal loans, or both.
Refinancing differs from consolidation in that rather than simply combining all your loans into one, you are actually taking out a separate loan with a new lender who pays off your existing loans.
Credible is a comparison tool that allows you to fill out one form and see personalized offers from multiple lenders in the space. Going through any lender on the Credible platform is NOT a scam.
Plus, College Investor readers can get up to a $750 bonus when they refinance through Credible!
Finally, if you are considering consolidation, make sure you read our guide on The Right Way To Consolidate Your Student Loans.
Law Firm Lawsuit Student Loan Scam
This is a scam where a law firm will claim to be able to settle your student loan debt. There are a lot of variations on this scam, but typically a borrower is referred to a law firm by a “student aid company”. The student aid company promises that this law firm can settle your student loan debt for thousands less than you owe.
Many times the law firm will ask you to make your full student loan payment to the the law firm itself (or whatever amount you can afford to pay). The law firm says they'll then negotiate a settlement with your lender.
However, what typically happens is that this law firm doesn't make any payments while negotiating with your lender – as such, you go into default on your student loans. At that point, the law firm will then claim you can't pay your bills, and try to negotiate a settlement that.
What happens to you, as the borrower, is that your credit score is trashed, and you made thousands of dollars in payments to the law firm. In the end, there is no guarantee that you will be able to settle your loans. And even if you do, the process may take years, and you'll still have to deal with the settlement in the end.
If you're considering speaking to a lawyer about your student loan debt, learn about what a lawyer can do for your student loans.
Student Loan Debt Elimination Scam
The important thing to remember about student loan debt is that it must always be repaid – it cannot be eliminated unless you have a federally qualifying reason (death, permanent disability, school closure, falsification of documents or identity theft). If you come across a company that promises to get your student loan debt eliminated, it is a scam!
We see these scams a lot relating to closed for-profit colleges and universities. Companies will advertise that, simply because you attended a certain college or university, you can get your student loans eliminated. This is usually false.
There are many potential student loan forgiveness programs that you can read about here. If your school closed or is facing lawsuits, you can potentially do what’s called Borrower Defense to Repayment. But if you’re paying a company for help, ask them specifically what they are doing for you.
Scam Or Bad Service?
There are times when it's not a scam, but it just seems one because the customer service is bad or paperwork gets “lost”. For example, I get a lot of readers asking about the FedLoan Servicing Scam. FedLoan isn't a scam, but just a poorly run student loan servicing company that is looking out for their own best interest.
Student Loan Servicer is actually the code word for “Student Loan Collection Agency.” Another one I get asked a lot about is NelNet, especially when it comes to their KwikPay Service. Once again, not a scam, just a poorly run program that is incentivized by the collection of full payments.
I hope this helps you navigate the world of student loans a little better and avoid getting played. If you want to know more, don't forget to check out my Definitive Guide to Student Loan Debt.
Student Loan Relief Red Flags
Now that you know some of the main types of student loan relief scams, what are some red flags to look for?
talking to consumers for several years, these themes have emerged:
- Any company that claims to have a relationship with the Department of Education (third-party companies do not have any relationship with the Department of Education)
- Any company that promises you a set payment or forgiveness (companies cannot promise forgiveness or guarantee an income based repayment because both will change your income)
- Any promise of immediate loan forgiveness or cancellation
- Any promise that a buyer will buy the loan and settle it for a set amount
- Any promise that because your school closed or is being sued, you an get forgiveness
Is There Any Company You Can Trust To Help You?
Even though I’ve said countless times you can do it for free at StudentAid.gov, there are still people who’ve asked me “that’s great Robert, but I still want to pay someone to help me – who can I trust?” That’s a fair question, so who can you trust?
Next, call your student loan servicing company. I know this sounds counter-intuitive, but 80% of issues and concerns can be resolved by simply calling your loan servicer. These free options are usually your best bet for help with student loans.
If you're still not quite sure where to start or what to do, consider using talking to a financial planner that specializes in student loan debt. A real financial planner with have a CFP or similar designation, AND they will have a fiduciary duty to you. We recommend the Student Loan Planner. Check out our Student Loan Planner review here.
Worried You're Being Scammed?
I hope this helps you navigate the world of student loans a little better and avoid getting played. If you want to know more, don't forget to check out my Definitive Guide to Student Loan Debt.
Are you worried that you could be dealing with a scammer? Stop by our new Student Loan Forum and post about it in the Student Loan Scams section. Protect yourself and protect others as well!
Readers, have you ever been the victim of a student loan scam?
Inherited IRA Rules: 6 Things All Beneficiaries Must Know
The devastating impact of the COVID-19 pandemic has forced many families to unexpectedly settle an estate after an untimely death occurred to a loved one.
If you’ve recently inherited an individual retirement account, or IRA, you can find yourself at the tricky three-way intersection of estate planning, financial planning and tax planning. One wrong decision can lead to expensive consequences, and good luck trying to persuade the IRS to give you a do-over.
Here’s how you can avoid some costly decisions around an inherited IRA.
An inherited IRA is an IRA opened when you inherit a tax-advantaged retirement plan (including an IRA or a retirement-sponsored plan such as a 401(k)) following the death of the owner. An heir will typically have to move assets from the original owner’s account to a newly opened IRA in the heir’s name. For this reason an inherited IRA may also be called a beneficiary IRA.
Anyone can inherit an IRA, but the rules on how you must treat it differ depending on whether you’re the spouse of the original owner or someone else entirely. However, a few exceptions to this treatment do exist, as explained below.
How an inherited IRA works
Any type of IRA may be turned into an inherited IRA, including traditional and Roth IRAs, SEP IRAs and SIMPLE IRAs. Importantly, the tax treatment of the IRA remains the same from the original account to the inherited IRA. So accounts made with pre-tax dollars (as in a traditional IRA) or after-tax dollars (as in a Roth IRA) are still treated the same way in an inherited IRA.
Unfortunately, this rule is one of only a few straightforward things about inherited IRAs.
When you inherit an IRA, you have many – too many! – choices to make depending on the situation:
- If you inherited an IRA, and you’re the spouse of the original owner, a minor child, chronically ill or disabled, or not less than 10 years younger than the original owner, you have one set of choices. But anyone else has a different set of options.
- Whether the original account owner had to take required minimum distributions can also influence what you can and should do with the IRA.
- Should you try to minimize taxes or maximize cash distribution from the account?
These are a few of the complex questions that an inherited IRA presents to the recipient, and the SECURE Act shook up long-standing practices, creating more confusion.
Some experts advise IRA beneficiaries to do nothing until they’ve met with a financial advisor who can explain their options.
“The worst thing to do would be to cash out the plan, put it in your account, and then go see an advisor and say, ‘Now what?’” says Natalie Choate, lawyer and author of the retirement plan guide “Life and Death Planning for Retirement Benefits.”
At that point, you’re in trouble. Before that happens, learn these six must-know tips for handling an inherited IRA.
1. Spouses get the most leeway
If someone inherits an IRA from their deceased spouse, the survivor has several choices for what to do with it:
- Treat the IRA as if it were your own, naming yourself as the owner.
- Treat the IRA as if it were your own by rolling it over into another account, such as another IRA or a qualified employer plan, including 403(b) plans.
- Treat yourself as the beneficiary of the plan.
Each course of action may create additional choices that you must make.
For example, if you are the sole beneficiary and treat the IRA as your own, you may have to take required minimum distributions, depending on your age. But in the right circumstances, you may have the option of not withdrawing money.
“If you were not interested in taking money out at this time, you could let that money continue to grow in the IRA until you reach age 72,” says Frank St. Onge, an enrolled agent at Total Financial Planning, LLC in the Detroit area.
In addition, spouses “are able to roll the IRA into an account for themselves. That resets everything. Now they are able to name their own beneficiary that will succeed them and be able to deal with the IRA as if it is their own,” says Carol Tully, CPA, principal at Wolf & Co. in Boston.
The IRS provides further rules around your options, including what you can do with a Roth IRA, where the rules differ substantially from traditional IRAs.
2. Choose when to take your money
If you’ve inherited an IRA, you’ll need to take action in order to avoid running afoul of IRS rules.
Your available options as an inheritor depend on whether you’re the spouse of the original IRA owner, chronically ill or disabled, a minor child, or not less than 10 years younger than the original owner. If you’re not someone in one of these categories, you have a different set of rules.
If you’re in the former group, you have two options:
- You can choose to take distributions over your life expectancy, known as the “stretch option,” which leaves the funds in the IRA for as long as possible.
- Otherwise, you must liquidate the account within five years of the original owner’s death.
The stretch IRA is the tax equivalent of the treasure at the end of the rainbow. Hidden beneath the layers of rules and red tape is the ability to shelter funds from taxation while they potentially grow for decades.
In the second option, the beneficiary is forced to take the money the IRA over time as part of the five-year rule. For substantial accounts, that can add up to a monstrous income tax bill — unless the IRA is a Roth, in which case, taxes were paid before money went into the account.
Before 2020, these options for inherited IRAs applied to everyone. However, with the passage of the SECURE Act in late 2019, those who are not in the first category (spouses and others) have to withdraw the IRA’s full balance in 10 years. They are not subject to annual required minimum distributions, but the account must be closed out at the end of the 10-year period.
The IRS website has more information on the topic of required minimum distributions.
3. Be aware of year-of-death required distributions
Another hurdle for beneficiaries of traditional IRAs is figuring out if the benefactor had taken his or her required minimum distribution (RMD) in the year of death. If the original account owner hasn’t done this, it’s the responsibility of the beneficiary to make sure the minimum has been met.
“Let’s say your father dies Jan. 24, leaving you his IRA. He probably hadn’t gotten around to taking out his distribution yet. The beneficiary has to take it out if the original owner didn’t. If you don’t know about that or forget to do it, you’re liable for a penalty of 50 percent” of the amount not distributed, Choate says.
Not surprisingly, that can cause a problem if someone dies late in the year.
“If your father dies on Christmas Day and still hasn’t taken out the distribution, you may not even find out that you own the account until it’s already too late to take out that year’s distribution,” she says.
The last day of the calendar year is the deadline for taking that year’s RMD.
If the deceased was not yet required to take distributions, then there is no year-of-death required distribution.
4. Take the tax break coming to you
For estates subject to the estate tax, inheritors of an IRA will get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased) is called “income in respect of a decedent.”
“When you take a distribution from an IRA, it’s taxable income,” says Choate. “But because that person’s estate had to pay a federal-estate tax, you get an income-tax deduction for the estate taxes that were paid on the IRA. You might have $1 million of income with a $350,000 deduction to offset against that.”
“It’s not necessary that you were the person who paid the taxes; just that someone did,” she says.
For 2021, estates worth more than $11.70 million are subject to the estate tax, up from $11.58 million in 2020.
5. Don’t ignore beneficiary forms
An ambiguous, incomplete or missing designated beneficiary form can sink an estate plan.
Many people assume they filled out the form correctly at one point.
“You ask who their beneficiary is, and they think they know. But the form hasn’t been completed, or it’s not on record with the custodian. That creates a lot of problems,” says Tully.
If there is no designated beneficiary form and the account goes to the estate, the beneficiary will be stuck with the five-year rule for distributions from the account.
The simplicity of the form can be misleading. Just a few pieces of information can direct large sums of money.
“One form that can control millions of dollars, whereas a trust could be 50 pages,” says M.D. Anderson, founder of InheritedIRAHell.com and president of Arizona-based Financial Strategies, which specializes in inherited IRA issues. “People procrastinate, they don’t update forms and cause all kinds of legal entanglement.”
6. Improperly drafted trusts can be bad news
It is possible to list a trust as a primary beneficiary of an IRA. It is also possible that this will go horribly wrong. Done incorrectly, a trust can unwittingly limit the options of beneficiaries.
Tully says that if the provisions of the trust are not carefully drafted, some custodians won’t be able to see through the trust to determine the qualified beneficiaries, in which case the IRA’s accelerated distribution rules would come into play.
The trust needs to be drafted by a lawyer “who’s experienced with the rules for leaving IRAs to trusts,” says Choate.
Without highly specialized advice, the snarls can be difficult to untangle.
Where to turn for help
Inherited IRAs present many complications, even more so than the already-strict rules of an IRA plan. But you have several options, including some free ones, that can get you going in the right direction so that you can avoid costly mistakes.
First off, you can search for help on the IRS website. The site offers comprehensive rules on distributions from IRAs, and it’s a good first resource to answer your questions.
But what the IRS doesn’t offer is advice on which course of action you should take or what might be best for your individual situation.
So your next move is to consult with your IRA custodian, who will have more detailed info on your plan and how you can proceed.
But some IRA custodians are more versed than others in the complex rules surrounding inherited IRAs.
“Talk about it with the custodian ahead of time,” says Tully. “Plans are great, but only as far as the ability to have them properly implemented.”
The problem is that a mistake, or bad advice, made on the part of the custodian can create difficulties for the beneficiaries, and the IRS will not be sympathetic.
“The malpractice is irreversible. You cannot argue abatement of penalty and interest and taxation in an inherited IRA case. There is no justice other than a private letter ruling,” says Anderson. A private letter ruling involves handing over an IRS fee of about $6,000 to $10,000 and then waiting six months for an answer, he adds.
Finally, you have the option of hiring a lawyer or financial advisor, but be sure to select one with experience in this specific field. In the case of a financial advisor, pick a fee-only fiduciary, because they will put your interests first and you – not someone else – are paying them to do so.
This kind of advisor will help you make a decision that meets your needs and fits your specific situation. That’s especially important when the issues here are complex and it’s easy for unscrupulous advisors to do what’s in their best interest rather than yours.
If you’re getting conflicting advice or something seems wrong, don’t sign anything that could lead to something irreversible. Get a second opinion from someone with expertise specific to inherited IRAs. It really can be that complicated.
An inherited IRA can be a windfall, especially if you’re able to take advantage of decades of tax-advantaged compound growth.
But as you’re navigating the process you’ll want to make sure that you avoid the pitfalls, which unfortunately seem all too easy to fall into.
While relatively easy questions can ly be answered online, it could be well worth the cost to hire an advisor to help you maximize your decision and make sure it’s the best option for you.
Carol Roth: Here are the top estate planning mistakes to avoid
Nobody s to plan for events aging, incapacitation or death. But failing to do so can cause families burden and grief, thousands of dollars, and hundreds of hours.
It is estimated that more than 50 percent of all Americans don’t have a will, and in our Future File business, we have estimated that less than 10 percent of the U.S. population has a complete legacy and wishes planning system.
Preparing for life’s unexpected events is crucial but can often be a difficult process to navigate. Here are the top estate planning mistakes to avoid, according to industry experts:
1. Not having a will (or one that can be found)
The leading mistake is simply not having a will in the first place.
As Kelly Dancy, an attorney at Walny Legal Group, says, “Estate planning is critically important to protect an individual, their family, and their hard-earned assets, during their lifetime, during any period of incapacity and upon their deaths. Everyone needs estate planning documents, regardless of the amount of assets that they have.”
Despite knowing this, too many people put off gathering key documents together. Tim Hewson, president of USLegalWills.com, believes that “waiting for a ‘more appropriate time’ to put together your will is a mistake. Everybody should have a will. It should be written when you are young and updated throughout your life as your circumstances change.”
In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning mistake is simply losing a will. Make sure your family has access to the documents that express your future wishes.
2. Neglecting to choose and update appropriate beneficiaries
When you have an asset that has a beneficiary designation, that will supersede anything written in a will. Ryan Repko, a financial advisor at Ruedi Wealth Management, suggests that you review your 401(k), IRA, life insurance and any other accounts with beneficiaries after major life events.
He says, “The most grievous example [of a beneficiary issue] is when a married couple divorces, then remarries without changing the beneficiary to the new spouse. In this all-too-common and completely avoidable scenario, the ex-spouse is legally entitled to the assets, and a lengthy legal battle ensues on behalf of the new spouse and/or the children to claim the assets.”
There are financial implications to think through as well. Sheri E.
Warsh, a partner at Levenfeld Pearlstein, LLC also shares, “Without a proper beneficiary designation, income tax on retirement accounts may have to be paid sooner, which may lead to a larger than necessary income tax liability, and the designation of a beneficiary on a life insurance policy can impact whether the proceeds are subject to claims of creditors.”
Daci L. Jett, managing attorney at Daci Jett Law LLC, identifies another mistake that impacts people with minor children.
“A mistake people make is choosing a guardian for their minor children and then naming that person as beneficiary of their life insurance instead of leaving it to a trust for their child.
A named beneficiary becomes the legal owner for all purposes of the life insurance proceeds and your minor child has no recourse to get that money. Plus, it exposes the money to the beneficiary's creditors and spouse.”
Hilary Fuelleborn, an estate planning attorney with Luskus & Fuelleborn P.C., also says that not being clear about beneficiaries or ownership can create issues with the way the assets pass on to their heirs. She notes, “As parents get older, they will often put an adult child on a bank account to allow the child to pay bills for the parent. This can be a big mistake.
Upon death of the parent, that joint account automatically becomes the property of that adult child, regardless of the will that may designate all property to be divided equally amongst all children.
So, if there is $100,000 in a bank account that is joint with one child, upon the parent's death, that $100,000 belongs to that one child, regardless of whether that was the parent's intent.”
3. Overlooking the importance of powers of attorney for kids over 18 years old
While you may think that your kids are your kids, if they are adults in the eyes of the law and something happens to them, you may be left without power – literally. Sheri Warsh advises, “If an 18-year-old becomes ill or has an accident, a doctor will not speak to a parent if a power of attorney for health care is not in place.
Similarly, unless a power of attorney for property is in place, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could be very difficult when a child is in college, especially if they are the country.
” It is imperative that when your child turns 18 that you get those powers of attorney put into place.
Carol Roth is the creator of the Future File legacy planning system, “recovering” investment banker and host of The Roth Effect podcast.