Five Trivial Mistakes with Large Impact Busy Business Owners Make

Key Takeaway: It is easy to neglect your personal finances when focusing on building a business. The trivialities of life just get in the way. But the impact of those overlooked details can leave more than a ripple effect on your family.

How would you feel if an ex got $1 million when you died? A recent article shares a story of someone who died, and when the family started settling the estate, they found that the beneficiary on a retirement plan gave it all to an ex-girlfriend (and they had broken up in 1989).

This may sound like a one-off scenario, but I see this kind of stuff more than I care to. People forget to follow through on tasks or simply neglect them because they do not know they are creating a large problem. I find the busier someone gets, the more neglect can happen.

Business owners especially tend to neglect their personal finances because they are so focused on building their business. Below are five details many business owners forget that can lead to big headaches.

1. Titling and Beneficiary Designations

As mentioned in the above article, beneficiary designations are often missed. Too often, people fill out paperwork quickly and default to whoever they are with at that moment. However, beneficiary designations supersede your will or trust. Therefore, it is vital to coordinate your beneficiary designations with your overall estate plan when you implement it.

It is also important to consistently review your estate plan and beneficiary designations every three to five years to ensure you catch errors. Errors I commonly see include naming a former spouse, someone who has passed away, or a former friend you no longer talk to.

Just as important as the beneficiary designation is how you title your accounts. You can accidentally transfer ownership to people when you are simply trying to make things easier. For example, I often see a son or daughter added to a parent’s bank account or the title of their home to help make transfer easier later. What is often misunderstood is that the parent is transferring ownership of the asset to the child, which can create a tax issue that will not come to light until the parent passes away or the asset is sold.

A second way that titling can get messed up is if you do not retitle assets correctly after an attorney updates your estate plan. Once an estate plan is completed, retitling accounts and beneficiary designations is just as important as implementing that plan. If you skip this step and don’t complete the account retitling or change-of-beneficiary designations, the estate plan is ineffective, and you wasted money on the attorney who drafted the plan.

2. Updating Your Property Casualty Insurance

No one likes insurance. However, if you think about it, insurance is meant for those moments when we have a catastrophe. In those moments, you do not want to find out you could have done something minor to make the event less agonizing. Updating your property casualty insurance annually, and mid-year if specific issues arise, is extremely important.

When reviewing your property casualty insurance annually, it is important to continually look at the cost of doing business. It might seem like you want to keep your premiums as low as possible. But for many, it means you want to make sure that when you have a claim, you have the right coverage, which may mean you will increase your premium slightly. With inflation rising over the past few years, the cost of rebuilding, both in labor and materials, has risen quickly. If you are consistently reviewing your policy, you and your agent will catch this increase and adjust appropriately so that you do not have a fight on your hands if you need to make a claim.

A quick note on keeping costs down: As I mentioned, insurance is not meant for maintenance; it is meant for catastrophes. To help keep costs down a bit, consider raising your deductibles. Making claims too often in the current insurance market will just get your policy canceled. Increasing deductibles to keep premiums down will also, naturally, keep you from claiming small incidents as well.

I mentioned that midyear reviews should also occur as needed. An example is when you do your estate plan, and your attorney recommends you put your home in a trust. Notifying your insurance agent of this is important because they will list the trust as another insured and thereby make sure that the new owner of the home (the trust) is adequately insured. This step often gets missed.

3. Durable Power of Attorney

Financial planners often write about getting an estate plan done. I want to emphasize here that you should have an adequate durable power of attorney (this is often done at the same time as drafting an estate plan). The durable power of attorney gives someone (usually a family member) the ability to help manage your finances from the minute it is signed. Thus, upon signing the durable power of attorney, if you do not want someone to use it right away, keep it somewhere safe, like a safety deposit box, but make sure the person you’ve named knows where it is kept.

The durable power of attorney is so important because as we age (I speak of this from the perspective of someone in their 50s), health concerns can suddenly occur. I have seen families struggle with basic issues like trying to get cash to pay bills from the sick person’s bank account or verifying beneficiary designations while someone is in a coma. These situations might sound extreme, but I am acutely aware of how quickly life can change for families.

4. Ignoring Taxes

Business owners, and most others, are always thinking about how to keep their tax bill low when considering taxable income annually. However, they often miss the larger tax strategy as they build an investment portfolio.

This step is not just about using tax-favorable accounts [IRA, Roth IRA, 401(k)] versus brokerage accounts. It is also about the nuance of what types of investments kick off more taxable income when it isn’t needed, or when higher taxed investments are purchased (located) in an inefficient manner (like taxable bonds in a brokerage account), or when someone doesn’t understand holding periods and sells something just shy of having it for 12 months so they pay a higher tax rate (income tax versus capital gains tax).

As with any specialty in life, there are many reverberations when making investment decisions. Unless you deal with investing daily, you may not even know how short-term decisions have longer-term ramifications.

5. Communicate the Why and How

I find communication within families interesting because some families share everything, and others are more stoic. I will not advocate for sharing everything if you do not want to, but I will advocate for communicating the “why” and “how” of things. How is the estate transition supposed to work? How is everyone being treated? Why is someone treated differently? How do I get into the safety deposit box where the gold coins are? How does the family find all your stuff?

That last “how” is important. In our world of electronic everything, from social media to phones to financial accounts to crypto, it is important to leave instructions with your family about how to find everything. An effective way to do this is to create one document explaining the why and the how. In addition, use password software to store all your passwords, and make sure someone (usually the executor or trustee) can get into the software. Some software programs even offer a way to access passwords when you can show someone has passed away.

I have seen many surviving spouses get very upset with the person who passed because that person did not leave good instructions.

DIY or Delegate

I have plenty of friends who do their own landscaping, but I don’t. I delegate that task to others (I know, at a cost) so that I can use my free time for my family. The five things I mentioned above are part of a much longer list of intricate details that mess up people’s lives. Each of us gets the choice of whether we want to use our free time to figure all this out (DIY) or delegate it to professionals (and then find the right ones, which is a whole different matter). Doing what I do, I obviously would advocate for delegation because the world changes so fast that the details are easily missed. But whatever you decide, revisit this list annually for any minor changes in your life.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.

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