Many people feel estate planning is just for the wealthy, or they have plenty of time before they need to worry about it. Maybe it’s the term “Estate Planning” that scares people off. It shouldn’t. Generally speaking, estate planning is simply being certain when you die, your assets get to who you want to get them too in the least costly and most efficient way, and if you become incapacitated, that you have a plan in place to be sure your wishes are carried out.
The impact of not doing any planning at all, or inadequate, or incorrect planning, can have any number of negative consequences, from unintentionally disinheriting family members, paying far more taxes than necessary at dearth, to creating family feuds, or costly legal battles that can last for generations to come.
Although some estate planning strategies can vary from state to state, namely in regards to estate or inheritance taxes, the probate process, and what happens if you die without a will, there are many useful planning guidelines and mistakes to avoid that can apply to most situations.
In my experience, here are the top 10 estate planning mistakes you want to avoid, with one “Bonus Mistake” #11, listed at the end of the article, that you won’t want to make.
1. Putting off estate planning.
Most people would rather discuss anything other than their mortality, and as such, estate planning is often put off until tomorrow. Unfortunately, sometimes, tomorrow never comes. And as a result of your death, any number of issues can arise that can have far-reaching consequences on your loved ones left behind.
Another common reason estate planning is put off is that, well, we don’t think we have an “estate.” This is particularly true for younger individuals or couples, who don’t realize that whatever it is that you own, your car, bank account, or even your bitcoin, are assets that can be passed to who you would want to get them by some simple planning.
Estate planning is essential if you want to have a say in how your property is divided after you pass away. If you die without a will, the state decides how to distribute your assets. The laws are different from state to state and can vary greatly depending on whether you were married, single, or had children.
2. Thinking that having a will allows you to avoid probate.
Just because you have a will doesn’t mean your heirs can skip the probate process. A will is a legal document, but it doesn’t have any legal effect until it goes through probate. In most states, the person you name as an executor–the one responsible for carrying out the wishes in your will–doesn’t have any power until your will has been filed and accepted by the local probate court. The courts’ job is to oversee the process of ensuring your wishes are carried out, and your assets are distributed to those that you intended them to be.
So why would you want to avoid the probate process then? Because it can be expensive, time-consuming (often a year or more), and it creates a public record that anyone can see. Not to mention that a will can be contested by a disgruntled heir that, if nothing else, will dramatically slow down the probate process, or worse, have your will tossed out all-together.
3. Missing or Incorrect beneficiary designations.
Many assets allow you to name beneficiaries, that if recorded properly, avoid the probate process altogether. These commonly include life insurance policies, IRA’s, 401(k)s, and other retirement accounts. Bank and brokerage accounts, savings bonds, and other assets can also name a beneficiary by establishing a “TOD” or transfer-on-death beneficiary designation.
But you can only avoid probate if you designate a person or trust to receive the asset. Naming your ‘estate” as the beneficiary or failing to name a beneficiary at all can mean a lengthy and potentially costly probate process.
4. Forgetting to fund a revocable trust.
Unlike a will, having a revocable living trust can help you avoid probate, although some wills will create a trust within them, called a testamentary trust, but your assets will have to go through probate first before making their way into the trust.
A living trust is a legal document that spells out how your assets are handled after you pass away, or if you become incapacitated. In a trust, you name a trustee to oversee that your wishes are carried out, versus the probate court, and as such, if properly funded before death, means skipping the probate process altogether for assets you “put into” the trust before you die.
Funding your trust simply means retitling assets such as real estate, bank, and investment accounts, vehicles, or other valuable possessions into the name of your trust, or having your trust named as a beneficiary on certain assets. Without “funding” your trust before you die, your assets will have to go through the probate process first before making their way into your trust, somewhat defeating one of the primary purposes of establishing the trust in the first place.
5. Naming a minor to receive assets.
If you’re a young family with minor children, leaving property, insurance proceeds, or other assets to them can be tricky. The trouble is that minors can’t legally take ownership of assets left to them because they’re underage. You will need to instead name a trusted person who will handle the money for them until they can do it themselves, and better still, establish a trust for their benefit that spells out exactly how you would want your assets used for their benefit. Failure to do so could result in the court deciding who should watch over these funds until they reach the age of legal majority.
6. Not considering the differing needs of your beneficiaries.
Many estate plans, and beneficiary designations, divide assets equally amongst family members, particularly when it comes to leaving assets to one’s children. Depending on the size of the estate this may not always be the best course of action, particularly if one or more family members are not very good at managing money, are now, or have had a drug dependency in the past, have a spouse who is a spendthrift, or who may be contemplating a divorce.
Often leaving assets in a trust for these family members may be a better way to ensure they are receiving their share of your estate, but in such a way that ensures the assets left for them aren’t squandered, lost in a divorce to that son or daughter-in-law you were never too fond of or used in a manner that is harmful to their well-being when you’re gone.
Leaving assets directly to a child or family member who is receiving Supplemental Security Income (SSI) is also not recommended as it may jeopardize their benefit payments until such time the funds left to them are depleted. As such, a Special Needs Trust may be a more suitable way to leave assets behind for them to help meet their specific needs without losing their SSI benefits.
7. Thinking a will is all you need.
Certainly, having a will is better than not having one, but a will is only one of the documents you need to cover all your bases. A will and the instructions you included therein only take effect after you are gone, what if you become incapacitated before then?
Not having a Durable Power of Attorney (DPA) in place, naming someone (a spouse, child, or trusted family member typically) who can help you manage your financial affairs in the event you are unable to do so, can be a major problem. Without having a DPA in place, a spouse or other family member would need to go to the local probate court to file a guardianship petition to be appointed as a guardian over your affairs, which often includes periodic reporting requirements to the court on how the guardianship was utilized.
In the event, you are incapacitated and unable to make medical decisions on your behalf, a Health Care Proxy (HCP), also sometimes referred to as a living will, is needed. An HCP can appoint your spouse or other trusted family member to act as your agent for medical decisions. The HCP ensures that your medical treatment instructions are carried out. Without an HCP in place, your family may disagree on what you would have wanted, and like not having a Durable Power of Attorney, may require a family member to go to court to gain specific court authority to make certain medical decisions on your behalf.
8. Failing to update your estate plan after major life events.
Forgetting to change beneficiaries on one or more accounts and insurance policies after a divorce, in addition to updating your will and other legal documents, is quite common. If your will removes your ex and now leaves everything to your children, yet you failed to update your beneficiary designations on your life insurance or retirement plans, your ex may end up with the proceeds, regardless of what your will says.
Besides divorce, you should always update your estate plan if you remarry or move to a new state, or if there’s a birth, death, or marriage of one of your beneficiaries.
9. Adding one of your children as co-owner of an asset.
You might add your child’s name to a bank account or on real estate as a way to avoid probate, without realizing the risks involved in doing so.
When you add one of your children or other family members, as a joint owner, the assets automatically pass to that child or family member at your death, even though you may have other children or family members you want that asset divided.
I have heard more times than I can remember a client saying they trust their child/family member to divide the account at their death between their siblings etc. Although hopefully, that will be the case, their child is under no legal obligation to do so. I have seen time and time again how money can change people. It’s not a pleasant thing to see families ripped apart after a parent passes away, and the joint owner child or other family member refuses to divide the proceeds as intended.
Further, as joint owners of the asset, the asset becomes susceptible to loss due to your joint owner child or other family members’ creditors, judgments, liens, and divorce, not to mention them simply withdrawing the funds for their benefit before your death.
10. Not considering the financial impact of a nursing home stay.
So, you drafted your will, got your durable power of attorney and health care proxy all set, and even set up a living trust to help to avoid probate, but what happens if you end up in a nursing home? All too often, the financial impact of losing one’s health is not adequately addressed in most estate plans.
Not considering the potential of losing your health and having to spend down the very assets that were meant to take care of you, or you and your spouse while your both alive and provide a legacy for your children and grandchildren at your death, is often the one mistake that most estate planners make.
Many people mistakenly believe that their planning is done when their documents are all signed and their living trusts are funded properly, only to find out, often when it’s too late, all that work might have been for not, as their estate has quickly dwindled away due to nursing home costs.
Working with a Fee-Only Financial Planner specializing in Estate Planning and Asset Protection Strategies alongside your attorney is critical in ensuring you have a solid understanding of the options and strategies available to protect your assets in the event you lose your health.
A good financial planner will typically act as the quarterback of your estate planning team, helping to coordinate with your attorney in ensuring your financial assets and beneficiary designations are properly aligned with your estate planning wishes and legal documents.
Let’s not forget about the potential estate and income taxes that may be due at death as well. Particularly if you own non-qualified annuities, savings bonds, and retirement plan assets, all of which can be subject to double taxation at your death. A financial planner can help ensure these taxes are minimized or even eliminated where possible.
Inadvertently leaving a large tax problem behind for your children, grandchildren, or other heirs due to improper planning is Estate Planning Mistake #11, you will want to avoid making.