Knowing what to watch out for will help you avoid the most common estate planning mistakes. Understanding common Estate Planning mistakes can help you avoid them in the future. Learn what can trip you up when creating or updating your estate plan, so you can safeguard your legacy and achieve everything you envision.
We've put together this guide to help you make the most of your estate plan.
Making an Estate Plan is important, but it is equally important to avoid expensive pitfalls and mistakes. You don't want to spend all that time creating a plan to protect your loved ones, only for it to be riddled with errors that cause them stress and headaches later on.
In this guide, we will examine some of the most common Estate Planning mistakes out there, including:
In terms of Estate Plans, the biggest mistake you can make is not taking the time to prepare one. By not prioritizing your Estate Plan or not making sure it is complete, you are ultimately risking the financial future of your estate, your legacy, as well as the future of your loved ones. Following the death or incapacity, having a legally valid estate plan in place provides those you care about with clear guidance and peace of mind.
The solution: If you have not yet started your Estate Plan, now is the time to get started. It is also important to review your plan every five years or after major life events to make sure your plan is updated.
Estate Planning isn't something you should set and forget. You should update your estate plan and ensure that it reflects all the changes in your life as they happen. Updating may be needed following a major life event such as the birth of a child, death of a beneficiary or trustee, marriage, divorce, starting a new business, or purchase of new real estate.
If you have a comprehensive estate plan, you will want to update each of your documents regularly. This means reviewing and updating not only your will and trust documents but also your power of attorney, health care directives, trust schedules, and more. Some other things that may be included are life insurance, retirement plans, bank accounts, investment accounts, real estate, and business plans if you own a business.
The solution: It is important to do a complete review every three to five years. If a significant life event happens, such as marriage or buying a house, you should update your estate plan even sooner. If you update your estate planning documents as things change, then the process will be much easier and quicker.
Comprehensive estate plans should consist of at least two components, death planning, and disability planning. When taking steps to plan for potential disability, it is important to name an agent with Power of Attorney to make medical and financial decisions on your behalf during your incapacity. You should choose a person that you trust to grant powers of attorney to make decisions for you if you are unable to do so for yourself.
The solution: Make sure you have documents that appoint someone you trust to make important financial and medical decisions for you. They should be people who care for you and are able to make good decisions. It is not necessary for them to be medical, financial, or legal experts.
A trust is one of the most important parts of an estate plan. Trusts can help protect your assets from creditors, ensure your estate gets distributed to the right people the right way, and keep details of your financial affairs private – to name only a few benefits.
But as valuable as trusts are, they can’t do their job if you don’t transfer your assets into them the right way. Your trust cannot protect your assets from probate unless the assets are actually titled in the trust. This is true for both revocable living trusts and irrevocable trusts.
The solution: The process of transferring your assets into your trust is called “funding” your trust. Funding your trust includes placing your accounts in your trust's name and transferring your home and investment property into your trust. This is a critical step in completing your estate plan.
When you pass away, your retirement plan, such as IRAS and 401ks and life insurance policies will go to the person you've named as beneficiary. If you don't name a beneficiary, your retirement plan and life insurance policy may have to go through probate to be distributed as if you had died intestate.
The solution: Make sure you name primary and secondary beneficiaries of your retirement plans and life insurance policies.
Choosing the right executor for your estate, successor trustee of your trust, or a guardian for your children can be very difficult. Sometimes selecting a child or sibling may be the perfect choice. Other times a child or sibling will not make a good choice. You do not want to be concerned that they may be too overwhelmed to manage your estate, disagree with decisions you have made, or fail to fulfill the terms of your documents.
The solution: When deciding who should fill these important roles, you should choose individuals that you trust. They do not need to be experts, but they should be people that you feel will honor your wishes and make good decisions. This choice can be overwhelming but remember that they can always reach out to an estate planning attorney to help guide them in their roles if needed.
Also, keep in mind your choice is not permanent. The person you choose today, might not be the right person in five years. You can always update your documents.
If you cannot think of anyone who would be appropriate, another option is hiring a professional fiduciary to fill these roles. Obtain referrals from several professional fiduciaries and make an appointment to speak with them to make sure they are a good fit.
An important part of estate-planning and life-planning is tax-planning. A life insurance trust can be a great tool for reducing the impact of estate taxes.
The estate tax applies to everything owned by a person at the time of their death. While life insurance death benefits are not subject to federal or state income taxes, the proceeds may still be subject to estate tax.
If a life insurance policy is owned by an irrevocable life insurance trust (ILIT), its proceeds are not taxed as part of the estate.
The solution: If you are concerned about your estate tax burden, you should consider creating an irrevocable life insurance trust and transfer your life insurance policies into that trust. Otherwise, the death proceeds may be penalized as part of your taxable estate. You should consult an estate planning attorney for advice on legally reducing these tax burdens.
A common estate planning mistake is failing to take advantage of yearly gifting to reduce your estate taxes. Currently, you can give $16,000 per person, per year, without having to pay any gift tax or estate tax. Both you and your beneficiaries can benefit from these gifts.
During your lifetime, larger gifts can also be made before a gift tax or federal estate tax is applied. For 2022, an individual's combined lifetime exemption from federal estate taxes is $12.06 million. The exclusion is doubled to $24.12 million for married couples.
The solution: Generally, estate tax liability isn’t going to be a big problem unless you have a very large estate. However, it’s important to note that in not too many years, unless an extension is put into place, the law will revert back to the former $5 million exemption limit. Because of this, you should not wait to take advantage of yearly gifting to reduce the potential impact of estate taxes. Using the annual gift tax exclusion ensures that every penny of your annual gift is excluded from your lifetime gift and estate tax exemption. Annual gifts reduce the size of your estate, and they also reduce the potential tax liability for your heirs.
When it comes to estate planning, you don't have to wait until you are rich, retired, or elderly to take advantage of the benefits of setting up your estate plan.
Here are some examples. Individuals with children should name a guardian. College students can create a will and medical power of attorney to give a trusted person the authority to make medical decisions on their behalf if they become incapacitated while at school. A business owner planning a surgery or trip overseas may want to give temporary power of attorney to allow someone to make decisions for them while they are away.
The solution: You can start creating the estate planning documents that fit your specific needs today. Estate planning provides you and your family with peace of mind during your lifetime and following your death.
Naming only one beneficiary for your estate is a bad gamble. If the beneficiary passes away before you do, your whole plan is jeopardized. Instead, you should name one or more backup beneficiaries, also known as “contingent beneficiaries.” Contingent beneficiaries are the individuals that will receive your estate or assets if your primary beneficiaries cannot. It is also important to review your beneficiary designations often. For example, forgetting to remove an ex-spouse as an IRA beneficiary can have devastating consequences for your new spouse or family.
The solution: You should list a primary beneficiary and at least one contingent beneficiary for each account, policy, and asset. You should always name a contingent beneficiary on retirement accounts and insurance policies and review your beneficiaries often.
A “Residuary Clause” deals with everything you didn’t specifically name in your estate plan. This can be something you forgot you have or things you don’t own yet. You can think of the residuary clause as a “catch-all” provision that will ensure that nothing gets left behind in your plan. This estate planning mistake happens often and can have overwhelming consequences, but if fixed in time, it can save you and your loved ones from a lot of headaches and costs down the road.
The solution: If an estates attorney has created your estate plan, it's likely that a residuary clause already exists in your documents. Review your estate plan to make sure that there is a residuary clause that passes the residue of your estate to the beneficiaries identified in your will and/or trust.
One of the kindest things you can do for yourself and your loved ones is to create an estate plan. Don’t let your hard work and noble intentions go to waste because of these common estate planning mistakes. Are you ready to set up your estate plan correctly?