Home Radio Segments Steve's Market Commentary A Checklist For Avoiding Financial Mistakes

A Checklist For Avoiding Financial Mistakes

Financial Checklist for Avoiding Mistakes

Engage your financial advisors early in the process… much as you bring in an architect before a single brick has been laid…

Over the years I’ve been accumulating checklists to make sure all the bases are covered when counseling clients.  Lists in areas as diverse as insurance planning, improper document storage, identity protection and more.  I’ve officially put together these checklists into a very organized system and I thought I would share some of the items from the list to help you accomplish some of the important things in your life that you need to do financially in order to succeed.

These lists are important because all too often we are called in as advisors when decisions have already been made.  The trusts have been executed, insurance has been issued, or individuals have died and it’s at a point in time when we have to move into a reactive damage control mode to minimize attorney’s fees, taxes, probate charges, etc.

As you can imagine, bringing a financial advisor in at the end of the process is very inefficient.  I want to make this point clearly – you need to engage your financial advisor early in the process- not after everything has been done, much as you want to bring in an architect before a single brick has been laid. You don’t bring the architect in at the end, you bring them in at the beginning so they can plan and organize everything correctly for you.

Let’s begin with some of the most common mistakes:

The Checklist


After they’ve made their Trusts, many people never revisit beneficiary designations they made perhaps 20-30 years ago. This can be problematic – in cases such as when an ex-spouse receives death benefits on a life insurance policy or where minors are named. For example, if a minor is an intended beneficiary, should consider naming a trust or custodian as beneficiary to avoid potential court interference.

Also take care when naming a trust or estate as the beneficiary of an IRA, 401(k) or other qualified plan so as not to jeopardize the option to stretch payments over the beneficiary’s life expectancy.


Many times, we see situations such as where the husband has a spouse, child or other family member own a life insurance policy on the husband’s life – to avoid inclusion of death benefits in the insured’s estate and the cost of executing a trust. While this is okay in some situations, there are potential pitfalls – such as:

Out-of-Order Deaths where the policy owner (not the husband) dies first and a will or intestacy laws (where there is no will) typically deem the insured as the new policy owner.

Creditors: Trusts provide more substantial creditor protection than individually owned policies in most instances.

Unintended Gifting: This problem usually occurs when there are three parties involved: the insured, the owner and the beneficiary. For example, a son may own an insurance policy on his mom’s life for the benefit of the son and his two siblings… but, under this arrangement, death benefits may be deemed as gifts made by the son to his siblings – which is not what you want.


Often, in life insurance trusts, the grantor pays the premium on a life insurance policy owned by the trust and intends that contribution to qualify as an annual exclusion gift (subject to annual gifting limitations). However, if beneficiaries are not properly alerted to their right to withdraw amounts contributed or if the grantor pays the premium directly to the insurance company, such amounts may not qualify for the annual gift exclusion and you may end up paying a gift tax. So make sure your advisor does not ignore trust formalities.


Proper business succession planning extends beyond the creation of a plan document. You must also update the document periodically, ensure that it is part of a comprehensive estate plan, and considers proper ownership of life insurance.


While a lot of people focus on taxes, an estate plan provides several benefits beyond taxes such as creditor protection, divvying up assets across blended families where multiple marriages are involved, special needs family members, and divorce.


If you are the charitable type, make special considerations when using life insurance with charitable planning, particularly for income tax deductions. For example, the income tax deduction associated with a gift of an existing life insurance policy to a qualified charity is limited to the lesser of the contract’s cost basis and its fair market value. A gift of an existing policy worth more than $5,000 also requires a ‘qualified appraisal’ in order to receive an income tax deduction, which may be an unwelcome cost to the client. Even if you’re just making a cash gift to a charity, make sure you know the requirements to obtain a deduction.


Taxpayers can generally avoid recognizing gains when exchanging one life insurance policy for another through something called a 1035 Exchange. I don’t want to get into the details here but talk to your advisor about minimizing taxes on such life insurance transfers.

Also make sure your advisor minimizes taxes on insurance payouts to your beneficiaries – these codes are complex so make sure you hire an experienced, detail-oriented estate planner to sort through the various laws to cover you under different scenarios.


Generally, a property’s ‘Fair Market Value’ (FMV) is used for tax purposes. FMV is the price at which the property would change hands between willing buyers and sellers, without any compulsion and with both having reasonable knowledge of the relevant facts. But it is often difficult to assess the value of a life insurance policy because in most other situations, there are no clear rules or regulations on determining Fair Market Value.

The bottom line is this… estate planning, especially with life insurance, is arcane and complicated, and one-size does not fit all… so make sure you sit down with a good financial advisor – someone with a lot of knowledge and experience in the nuances of estate and tax planning – before you execute your trust – so you are covered under all eventualities, with minimal tax or probate consequences.