3 Costly Errors You Should Avoid with Death-Bed Planning

Tony Perrone

It’s the inevitable moment people don’t like to think about – or talk about.

Eventually, life comes to an end. And too often when that day arrives, people have failed to put their financial houses in order – which could prove costly for their survivors.

“Most people know their death will be an emotional blow to their loved ones, but it’s likely to be a financial blow as well,” says Tony Perrone, president of the Estate and Business Planning Group and author of I Didn’t Know I Could Do That: 9 Financial Strategies That Can Save or Make You Money

Perrone says he routinely sees at least three costly mistakes people make when it comes to money and death:

Giving away stocks or other appreciating assets as gifts. Older people often like to give some of their wealth to their children or grandchildren as gifts before they die. But Perrone says that can be a mistake when it comes to stocks and other appreciating assets. Here’s why: Let’s say you bought $100,000 worth of stock 30 years ago and it’s worth $1 million today. If you sold it, you would have to pay a capital gains tax on the $900,000 the stock earned. If you gave someone that stock as a gift, they would get smacked with that same tax burden. Leave an heir the stock in your will, though, and something called stepped-up cost basis allows them to avoid that big tax burden. With stepped-up cost basis, the stock gets a fresh start and the person only has to pay capital gains tax on what it earns after they inherit it.

Keeping all your assets under joint ownership. When you’re married, it’s natural to put everything in both your names. But it’s not the prudent approach when it comes to appreciating assets, such as brokerage accounts, individual stocks and investment real estate, Perrone says. That’s because when one of you dies, the surviving spouse loses half of the stepped-up cost basis benefit. Take that $1 million worth of stock that was purchased for $100,000. If it was under joint ownership, when you died the $1 million would be added to $100,000, then divided by two. The resulting $550,000 would be the new cost basis for the surviving spouse. If the spouse tried to sell it at the $1 million value, he or she would pay taxes on $450,000. If the ownership hadn’t been in both names, the spouse would owe no taxes. Instead of joint ownership, you could title the account to read POD (Paid on Death) or TOD (Transfer on Death) or ITF (In Trust For), which allows the spouse to receive it without losing the stepped-up cost basis benefit.

Failing to plan at all. This goes back to that hesitancy about talking about death. That’s where a financial professional could come in handy. That person won’t bring the emotional baggage to the subject that you do. “They can provide you with an objective look at the facts, pointing out what you should be doing and how to go about doing it,” Perrone says.

“One other mistake people make is they wait until death is knocking at their door before they start looking into what to do with their estate,” Perrone says. “But tax laws won’t allow some last-minute switches you might want to make.
“And planning under duress and with a deadline isn’t the same as calmly considering your options, taking the time to truly understand them and then acting on them.”

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