#20 | Avoiding Estate Planning Mistakes, Part 2

Bruce Hosler and Jon Gay list eight mistakes in the second half of our 2-part series on Avoiding Estate Planning Mistakes.  They include:

  1. Failing to establish an estate plan.
  2. Failing to fund your trust.
  3. Failing to update beneficiary designations after life changes.
  4. Failing to plan for estate taxes, gift taxes, and a taxable estate.
  5. Annual gift tax exemption mistakes (gift-spitting).
  6. Improper titling (Community property states, including Arizona).
  7. “Do-It-Yourself” children that don’t seek professional guidance.
  8. Not knowing the newest inherited IRA rules under SECURE Act 2.0.

After you hear how costly these mistakes can be, you’ll want to steer clear of all of them.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.

Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.

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Podcast Host

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Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.

*2018-2024 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2024 based on data gathered from June 2022 to June 2023. 23,876 were considered, 8,507 advisors were recognized. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit.

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Jon “Jag” Gay: Welcome to episode 20 of Protecting and Preserving Wealth. I’m Jon Jag Gay, joined as always by Bruce Hosler of Hosler Wealth Management. Good to be back with you, Bruce.

Bruce Hosler: Jon, good to be with you today.

Jon: Part two of our podcast on avoiding estate planning mistakes. What do you have for our listeners today,

Bruce: Jon, I wanna review the eight big estate planning mistakes that I see people make.

Jon: All right, Bruce, I have the list here. I’m gonna lob them down the plate and let you swing. We’ll start with number one, failing to establish an estate plan. This one seems pretty straightforward. What do you mean here?

Bruce: So, when we run into people that haven’t done any estate planning at all, they don’t have a Will, they don’t have a Trust, or maybe they’ve just done a simple Will and they have a very complex estate and they should have done a Trust.

They can create a lot of work for their loved ones and their families, and they can create a lot of unwanted taxes by not having any documents. For example, if you have a house and you haven’t put a Arizona beneficiary deed or a Trust together, and now it’s in the Will, or maybe you don’t even have a Will. Now, it all has to be probated.

That can be delayed for months. The attorney’s fees in Arizona, they say on probate run roughly between 4% and 7%. Just figure if somebody has a million dollar house, how much money that’s gonna be, 40,000 to 70,000 in potential attorney’s fees. Just to probate that needlessly. So, failing to do any planning at all that’s the number one first mistake we wanna make sure our listeners don’t make.

Jon: That’s a pretty big umbrella. One, specifically, and we kind of alluded to this in the previous podcast on this topic, that is failing to fund your Trust. What do you want our listeners to know about this mistake?

Bruce: When I use that term, funding your Trust, people say, what is that? Really, it’s just simply, retitling your properties, retitling your assets, retitling your accounts into the name of the Trust. If you don’t move the assets into the Trust, the Trust does not own the assets, and so the rules of the Trust cannot apply to those. And then the client’s family ends up with a big mess trying to get these assets moved over and into their names, and so it can benefit their loved ones.

And we see this happen all the time. People will go into an attorney and they’ll get a Trust drawn up. They’ll bring it back, they’ll put it on the shelf. They’ll act like they’re, you know, praying to Allah and say, I’ve got my Trust, but they don’t do anything to fund it, and so they pass away and the Trust is unfunded.

It’s the second biggest mistake that we see. That people have not properly titled things, and you know, things change. You sell an expensive car, you buy an expensive car, you sell a house, you buy a house, you refinance a house and you forget to put it back in. You change advisors and the new advisor doesn’t put it in your Trust account.

They just put it in a joint account with you and your wife. Or worse yet, they put in an individual, in his account cuz the husband goes to the meeting alone. She doesn’t want to come. And now all of a sudden to transfer that into her name, she’s gotta probate that whole investment account.

Jon: Ugh.

Bruce: It can be a mess.

Jon: Sounds like a real nightmare. I think I know where you’re gonna go with our third one, but I will keep my mouth shut and let you answer it. Failing to update beneficiary designations after life changes. I have a clue where this might be going, Bruce.

Bruce: You know, it’s gotten better, but for example, I’ve seen families where there’s been one or two of the last grandbabies and they did not get included in the beneficiary forms.

Jon: Oof.

Bruce: Or perhaps, you know, your daughter, she divorced the jerk that she married, that you never approved of , but somehow you never updated your beneficiaries, right. And so that guy’s gonna try and get ahold of some of her inheritance. And or you know, after a divorce, there’s an article in New York Times, a number of years ago there was a Pension Pickle was the name of the article.

The wife before she got married was a school teacher and she filled out her pension form and she was married to her husband for 36 years and she put her mom and dad as the beneficiaries on there. She eventually passed away. Her husband, the account was well over a million dollars. He got disinherited for over a million dollars because she never updated that beneficiary form.

You gotta update those folks.

Jon: If that doesn’t scare you into making sure your stuff is updated, I don’t know what will. Mistake number four, Bruce – failing to plan for estate taxes, gift taxes, and a taxable estate.

Bruce: Just like we talked about Jon in the first podcast, a lot of people don’t think they’re gonna have a taxable estate because the estate’s tax exemption amount right now is so high. But it’s gonna drop back down to 6 million dollars approximately, most likely we believe, for most couples.

And that’s taking place in at the end of 2025.

Jon: Mm-hmm.

Bruce: Now, if you have 3 or 4 million today, in 10 years that could easily double. You could have a very taxable estate. The tax rate is 40%. You also notice that I’m talking about gift taxes here.

Jon: Yeah.

Bruce: And we see a lot of mistakes on that. If you give money away, you give too much away or you do it wrong, you can be subject to gift tax returns and gift taxes as well.

We don’t want our clients to do that. So, the way that you protect against paying these taxes on its state taxes, is you use a Revocable Living Trust, which will allow each spouse to have their exemption amount. So, if your husband and wife, his exemption’s 6 million, her exemption is 6 million. So, even if you have a 3 million and he passes away, he can leave his unused portion of 3 million to his wife.

Hers could grow as high as 9 million and not pay any estate tax. So, we wanna be sure that they’re planning for estate taxes, if there’s any chance at all that they’re gonna owe those.

Jon: All right. You mentioned gift taxes, and that leads us to number five on our list of mistakes. That’s annual gift tax exemption mistakes, also known as gift splitting.

Can you walk me through that?

Bruce: Yeah, so, the gift splitting is one specific mistake in there, and it’s the one I see most often. So, the annual gift tax exemption amount in 2023 stepped up to $17,000. So, $17,000 is how much I’ll pick on you, Jon, that you could gift to me if you wanted to write me a check.

Now, if you and your wife wanted to give me more than the $17,000, you cannot do that in one check. So, let’s just say there’s a grandparent and they want to help their child out, husband and wife, and they write ’em a check for $20,000 dollars. Eeee, you just blew it. You made a gift-split, and when you did that, you are now required to file a gift tax return as 709.

If you would just have written two checks, even $10,000 from you and $10,000 from your wife to your child, you would’ve not crossed the gift tax, gift-splitting rule. But that’s the one you have to gift individually. You cannot gift as a couple. So, if everybody remembers that, it’s one individual check per person up to $17,000 in a year. If someone has a big taxable estate and they’re trying to get it down below the limit, they can gift to both the husband and wife, you know, your son, gift to him, gift to his wife. Each of you can give each of ’em $17,000. You can lower your estate by a lot of money each year by gifting, but the gift-splitting, that’s a big mistake that I see people make.

Jon: Bruce, I’m really enjoying this podcast with you 20 episodes in, but I’m not ready to send you a check just yet. Just fyi.

Bruce: Oh, I was wanting a gift if you could give it Jon, but Okay.

Jon: No gift yet. Well let’s, let’s talk after episode 200.

Bruce: All right.

Jon: Mistake number six is improper titling, Arizona community property law, specifically to your state of course. Does this one apply to community property states?

Bruce: Yes. So, there are nine community property states in the United States. And when I say, community property, it’s really a tax law benefit, and the benefit to community property is the step up in basis. So, let’s just run a simple scenario. The couple bought a house for $500,000. It’s now worth a million.

Jon: Mm-hmm.

Bruce: It’s appreciated. The man dies first because they generally die first. The women are tougher, so she outlasted him. He dies first. In Arizona in a community property, if you’ve held this in a Trust and hold it as community property, not only does she get a step up on her half, so her cost basis is $250,000.

She gets a step up to $500,000 on her half, but she gets a full step up on his house, his half. So, that means that she could turn around – sell the million dollar house, pay zero, zero capital gains tax. That’s not available in any other states except for community property states, but I just had a couple, he had a joint account. He would not move it into their Trust. He passed away. She did not get a full step up on the stocks and investments we had in that account. There were a lot of capital gains.

Jon: Mm-hmm.

Bruce: She’s going to have to pay capital gains on those. That could have been taken care of if he would’ve just retitled that account into a Living Trust that’s held as community property with rights of survivorship.

Jon: And in case you’re wondering, Bruce mentioned there are nine community property states. They are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you didn’t get that quickly, you can Google it.

Mistake number seven, Bruce – “do-it-yourself” children that do not seek professional guidance. Oh boy. I think I might know where this one’s going.

Bruce: I think you do. Let me tell you this story of how this goes down. Mom and dad have been frugal all their lives. They save and they have 4 million dollars in his IRA account.

Mom and dad die. They leave the money to their son, who’s college educated. We’ll pick on attorneys, let’s say he is an attorney, whatever. He’s gonna do it on his own. So, he calls up Vanguard, Schwab, wherever the father had the account and says, send me a check. I wanna roll this over into my own IRA account.

Jon: Yeah.

Bruce: Vanguard sends him the check. He takes the check, he puts it into an IRA in his own name. What just happened? Well, number one, that should be an inherited IRA account, and you cannot fund an inherited IRA account with a rollover. All $4 million dollars is taxable in one year because the sun is under 59 and a half.

It also has a 10% early withdrawal penalty. Checkmate, no passing go.

Jon: No $200 or no 4 million dollars or much less of the 4 million dollars in this case.

Bruce: And you lost all the tax deferral on that 4 million dollar IRA. So, just getting some professional guidance to help your children and make sure that they listen to it and understand, these laws on these IRAs are complex.

You cannot just think you know them. I spend almost six full days a year in training just on the IRA rules alone, not including everything else to keep up to date on these. There’s no way your children can do that. So, help your children understand that they need to seek professional guidance with this estate planning.

Because it’s very complicated and it can get very expensive very fast.

Jon: I’m glad you mentioned the training Bruce, because the final mistake on our list number eight, these things are changing. The new SECURE Act, SECURE 2.0 was just passed new rules for inherited IRAs, new 10-year distribution rules. What can you tell us about that?

Bruce: So, we got SECURE Act part one at the end of 2019, and when they came out with those rules, it surprised everybody because now when you pass away with an IRA and you leave it to your children, if you’ve been past your RBD date, your required beginning date, which is when you have to start taking RMDs (required minimum distributions).

Your kids, when they inherit that IRA, they now have to take a distribution every year for the 10 years, and then in the 10th year, they have to distribute the whole IRA and pay the tax on it. Well, these are new rules. It used to be that they could stretch it out over their life, and if someone’s not paying attention, they’re gonna miss this.

And then they’re gonna be subject to that 10% early withdrawal penalty again, if they don’t watch it or some other penalty that they’re not taking. And so, usually in this case, when someone’s died, there’s not a 10% early withdrawal penalty, but they’re gonna be in trouble and they’re gonna be subject to penalties for not taking that IRA out.

And the RMD requirement was 50%. They just lowered it to 25%. But why have the kids pay any penalty at all if they don’t have to? Just be sure that you’re getting advice and that they’re getting advice and they get the help that they need to follow these rules and avoid the eight estate planning mistakes.

Jon: Think our listeners are gonna learn a lot from today’s podcast, that list of eight mistakes. We’ll have them, uh, listed in our show notes as well. And I would also encourage our listeners, if they haven’t heard it, to go back and listen to our previous episode, episode 19, where we cover more big picture stuff with these retirement planning mistakes.

Beyond that, Bruce, if our listeners still have questions on estate planning, how do they get in touch with you and your team at Hosler Wealth Management?

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

Jon: Always a pleasure, Bruce. We’ll talk again soon.

Bruce: Thanks, Jon.

Jon: Securities and advisory services offered the Commonwealth Financial Network® member FINRA/SIPC, a registered investment advisor. Forward looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties or 2) promoting marketing or recommending to another party, any transaction or matter addressed herein. The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed.

Accordingly, Hosler Wealth Management, LLC does not warranty, guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.

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