Common Estate Planning Mistakes
Estate planning is not the most upbeat subject. You decide who will handle your money and property, who will raise any minor children you have, and who will make health care and make other imporant financial decisions for you if you become incapacitated or die.
However, your estate plan must be addressed promptly, correctly, and regularly.
Every estate plan is unique, but the same issues and mistakes arise. Many errors are unaffected by the value of an estate or other factors. Each of the classic blunders can be avoided. All that is required is knowledge of what to avoid and some time spent working with your planner.
While properly prepared estate planning documents can help you maximize the value of your estate, unintentional errors and oversights can prevent you from achieving your estate planning objectives. Fortunately, many of these blunders are easily avoided if you already know how to prevent them.
To help you prevent future problems that can cost you, we made a list of the most common errors related to estate planning.
1. The total absence of an Estate Plan
Whether or not you have estate planning documents in place, those closest to you will be in charge of your final affairs. A surviving spouse and their minor children are in shock and grief. Business partners are scrambling. From their perspective, the most serious (and most common) estate planning mistake does not have an estate plan.
Having a legally valid will or trust in place provides those you care about with clear guidance for handling your affairs during the turmoil that follows the death of a family member. Having an estate plan provides peace of mind when so much is uncertain.
2.Not Involving Family in Your Plans
Having a brief conversation with your friends and family is usually a good idea. Setting expectations now, where there is room for discussion if necessary, may reduce the likelihood of contention or disagreement after your death. If this isn’t an option, you can include language in your Estate Plan stating that anyone who contests anything will be written out.
3. Beneficiary designations that are no longer valid.
Remember that your will does not affect who inherits certain assets. These assets have separate beneficiary designation forms, and who inherits is determined by these forms. Retirement accounts, annuities, and life insurance are examples of these assets.
Sometimes an ex-spouse, the estate of a deceased person, or other unintended beneficiaries receive the asset. Other times, someone is mistakenly excluded because they were born or married into the family after you filled out the form.
4. Wills that include investment provisions
Experts advise that you still own any investments named in your plan that you want to leave to one or more of your beneficiaries. If not, your estate may be forced to purchase them at current market prices, which would be detrimental to your beneficiaries. That purchase could deplete most or all of your estate’s assets in the worst-case scenario.
4. Not including health care in your estate plan
If you fail to include health care in your estate plan, important medical decisions will be made for you if you cannot make them yourself. These issues are addressed in an advanced healthcare directive known as a living will.
The advantage of having a living will is that it guides your doctors and healthcare workers in making critical medical decisions about your care if you cannot do so for yourself. It also relieves loved ones of making these decisions for you.
5. Absence of a residual clause.
A residuary clause deals with anything you didn’t specifically name in your will, anything you forgot to put in your will/trust/etc., anything you don’t yet own but will before your death, and anything you may not be aware you own.
6. Neglecting to pay into revocable trusts.
Revocable trusts, also called living trusts, are a common component of estates. The assets owned by the trusts help with disability planning, avoiding probate, and a few other issues. Typically, they are not developed to reduce taxes.
Many estates have a problem with the owners skipping a step. The trust is established after the agreement is drafted by an attorney and signed by all parties involved. The trust must then be funded after that. As a result, assets must be given legal title to the trust.
7. Having no disability planning
Most workers who were surveyed thought their chance of becoming disabled before retirement was only 1% to 2%. Unfortunately, the reality is very different from that. One in seven workers will become disabled for five years or longer before reaching retirement age, according to the Society of Actuaries. Most Americans are unprepared for an unexpected disability and its effects, but a thorough estate plan can help with this problem.
8. Not coordinating retirement plans with trusts.
Beneficiaries of retirement plans are frequently named as living trusts or other trusts by many people. A trust may be named as the beneficiary of an IRA or other retirement plan for legal reasons. But there could also be issues. The wrong kind of trust being listed as an IRA beneficiary can cause taxes to be paid more quickly due to IRS rules.
9. Not considering the future of your children.
Even though your instructions may be well-intended, there are times when the way you phrase something could end up haunting your children or heirs. If your kids are very young, specify how their guardians should use the money to care for them or otherwise benefit them.
10. Not regularly updating your estate plan
Although drafting an initial estate plan is a significant step, one of the worst estate planning errors you can make is to neglect to review and update your plan. Even though you may have divorced, your living will name your ex-spouse as your healthcare agent. Do you still want your ex-spouse to decide how you’ll spend your final days? As your family and your life change, you must ensure your estate plan is updated.
Estate plans are intricate, and while some errors may only have minor repercussions, others may have significant ones. To avoid them, ensure that your plan accurately reflects your wishes by seeking professional assistance.