Common Estate Planning Mistakes to Avoid

Birds Eye View of 3 Houses

Member Blog By: Monique Sadarangani of estateandfamilylawyer.com

An estate plan should be an official, fool-proof way to ensure your family and loved ones are taken care of when you pass. However, a poorly executed plan or no estate plan at all can lead to loved ones being left out of inheritances, having to pay large taxes, or struggling with unnecessary and unexpected legal battles. Here are ten common mistakes to avoid when you’re planning for the inevitable.

1. Not hiring an experienced legal, financial, or tax professional.

This may sound simple enough, but it’s one of the most common mistakes people make; assuming a basic will is all they need to cover their assets upon their death. Hiring an estate planning attorney is essential for properly taking care of any complicated assets and can provide you with better tax-planning strategies based on the particular needs of your estate.

2. Not understanding your plan.

Many people blindly rely on their attorneys to make sure everything is done properly and then check out of the process. They rarely know what they’re signing or agreeing to when all is said and done. Part of your estate planner’s job is to make sure you understand the fundamentals of how your plan works, how it will affect your beneficiaries later down the line, and what you need to do to implement or maintain the plan. It’s your job to take notes, ask questions, and follow up if you find something about the details that isn’t making sense to you. It’s also good to note why you made certain decisions if you’re confused while reviewing.

3. Not updating your plan.

Over time, your original estate plan may become obsolete. Laws may change or your goals may change. You may have a major life event in your family such as a birth, death, marriage, or divorce. Changes in your net worth, your estate, job status, residence, and many other factors require a review of your plan.

4. Not updating beneficiaries.

As previously stated, a will won’t cover you in every circumstance. There are assets that have separate beneficiary designation forms, like retirement accounts or life insurance. These affect the beneficiary regardless of what your will says. Make sure that if there are any changes in your family, like a new spouse, the death of a parent, etc., that you review these forms every couple of years. Otherwise, your assets could go to an ex-spouse by accident, for example.

5. Not planning for the death of a beneficiary.

If a beneficiary dies while the estate is still being probated, their share of your estate will typically become part of their own. If your beneficiary doesn’t have a will, their share would pass to any next of kin eligible to inherit from the decedent. You may wish to list multiple beneficiaries so that your assets are equally split amongst your surviving loved ones if one should pass.

6. Putting your child’s name on a home deed.

Some people think adding their child’s name to the deed of their home means it will go to them if they pass. Unfortunately, it’s not that easy. For starters, you risk losing your assets if your child files for divorce, bankruptcy, or is sued before you pass. This type of transfer is also considered a gift, making it reportable to the IRS. In addition, there are also income tax considerations with gift transfers. For example, while you can get a step-up in basis for the property for transfers on death, your child takes a carry-over basis on the property for any gift of the property. Therefore, when you pass, and if your child wishes to sell the property afterwards, there will likely be more severe income tax consequences.

7. Leaving assets to a minor without determining guardianship.

This is a big one! Not only should you be thinking about who will speak on your behalf or take care of your assets and affairs, but you need someone trustworthy to represent your children and their assets until they come of age. You need assurance that your children will be taken care of, that they’ll get their inheritance, and that someone can help them make sense of their assets and manage them when they’re ready. It’s heartbreaking, but cases where a child’s inheritance is snatched up by a greedy family member, never to be seen again, are extremely common. In addition, there are mechanisms that can be put into place to ensure that your minor child does not need to go through the guardianship process through the courts in order to receive their inheritance. Speaking to an experienced legal professional can save you and your children money, time, and also give you additional peace of mind.

8. Choosing the wrong people to handle your affairs.

Every estate plan should include powers of attorney. Ideally, you should have one for financial matters and one for medical care. Your first instinct may be to appoint a spouse or child to be the person to make financial and medical decisions in the event of your incapacity or death. However, a family member may not be the best person to manage your affairs, depending on the situation. You also may wish to appoint different people to manage your person and another to manage your property. Either way, it’s good practice to review your existing estate planning documents every few years to ensure that the people you have listed will truly have you and your best interests at heart.

9. Not transferring life insurance policies to a life insurance trust.

For those with a potential taxable estate, an irrevocable life insurance trust (ILIT) that owns your life insurance policy is a tool that can be utilized to avoid Federal estate taxes upon your passing, while also passing the death benefit to your loved ones. Many people fail to set these trusts up at all (or properly). An ILIT may help you avoid substantial estate taxes, while also allowing you to pass these proceeds to your beneficiaries in a more protective manner.

10. Not having a residuary clause.

A residuary clause covers assets that are not specifically gifted in a will or trust. It also determines who inherits these assets and what to do if a beneficiary dies before they’re able to inherit or doesn’t want the gift and there isn’t another beneficiary listed. It acts as a catch-all for anything that you may forget to add to your plan, or didn’t have time to add before your death.

There are plenty of things that can go wrong after someone dies. A proper and thorough estate plan will cover all of your bases and any unique or complicated assets. Hiring an experienced estate planning attorney can save your family added financial or emotional grief and ensure they’re taken good care of when you’re no longer able to care for them.

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