10 Common Estate Planning Mistakes to Avoid
Estate plans are not just for the rich. Most people have something of value that they want to pass along to loved ones or a favorite charity: the family home or lake cabin, a car, family heirlooms like jewelry or art, or money in the bank.
Creating an estate plan allows you to do that with the fewest tax liabilities for your beneficiaries and it reduces the chance of estate litigation among your heirs. Not only can properly prepared estate planning documents help maximize the value of your estate, but the process of working with an estate planning attorney gives you an opportunity to talk through important decisions.
An estate planning lawyer can help you avoid the most common estate planning mistakes, including:
1. Not Having an Estate Plan
Whether you have estate planning documents in place, or not, those closest to you will be left to manage your final affairs. A surviving spouse and minor children will be dealing with shock and grief. Business partners may be scrambling. From their perspective, the most serious — and most common — estate planning mistake is not having an estate plan at all.
In the turmoil that follows the death of a loved one, having a legally valid will or trust in place provides those you care about with clear guidance for handling your affairs. At a time when so much may feel uncertain, knowing there is an estate plan can bring peace of mind.
2. Forgetting to Update Your Estate Plan Regularly
Many families write a will and designate a guardian when their first child is born. Then life changes: more children are born, parents buy a home, someone starts a business, grandparents die, there may be a divorce. Does that original will still work as you intended?
- Your living will gives your spouse authority to make end-of-life medical decisions for you. Now you are divorced. Do you want your now ex-spouse to make your health care decisions?
- Do you need to change your beneficiary designations because you've added children or step-children to your family? Do you want to name contingent beneficiaries in case some heirs are no longer living or cannot be found when your will is executed?
It's wise to periodically review and update your will, trust, living will, and life insurance policies to reflect current circumstances and new life events.
3. Not Planning for Disability
When surveyed, most workers believe their risk for disability prior to retirement is only 1-2%. Unfortunately, that's a far cry from reality. According to the Society of Actuaries, one in seven workers will be disabled for five years or more sometime before they reach retirement age.
Most Americans are not prepared for an unexpected disability and its impacts, but this is an issue for which a comprehensive estate plan can help. Talk with an estate planning lawyer about a revocable trust (also called a living trust).
Give a trusted person durable power of attorney to make decisions on your behalf if you are unable to do so for yourself. A durable power of attorney provides lasting authority to make decisions. You also have the option of assigning temporary power of attorney for the time of your incapacity.
4. Not Pre-planning for Nursing Home Care
For some people, retirement plans should include nursing home planning. Many people who need nursing home care will end up using Medicare funding, but they can only do so once they have spent down their financial resources. This can create financial hardship for the spouse remaining at home.
Pre-planning for nursing home care can guide financial decision-making over a number of years. Pre-planning can protect the spouse at home while ensuring the medically needy spouse qualifies for Medicare funds. A special needs trust is one useful tool for this purpose.
5. Putting Your Child’s Name on the Deed to Your Home
Sometimes people put an adult child's name on the deed to their home in order to protect their home from creditors. Or they may think this is the safest way to transfer property. Unfortunately, this kind of “do-it-yourself" solution can backfire.
By putting your child's name on the deed you are essentially giving them title to your home. In a worst-case situation, they can record the deed with the proper municipal authority and can then kick you out of your home. They can sell the home. They can keep the profit and not share it with you or other beneficiaries. You lose control of your asset.
In the best-case scenario, which is still not good, by putting their name on the deed and titling the home in their name you have given them a taxable gift. That is unnecessary. There may be other estate planning documents that can pass along a family home or its value tax-free.
Get legal advice on the best way to protect and transfer real estate in order to minimize tax consequences.
6. Choosing the Wrong Person To Handle Your Estate
It can be hard to know who will make the best executor for your estate, the best trustee of a trust fund, or the best guardian for minor children. While a surviving spouse may seem like the obvious choice, they may be too overwhelmed to manage a complex probate process. They may not have the best understanding of finances, investments, or tax laws to manage a trust or large estate.
There are times when a spouse or child will not make a good fiduciary because they disagree with decisions you have made about beneficiaries and bequests. You may be concerned that as your executor, they will not fulfill the terms of your will.
They may be a spendthrift who can't be trusted to act responsibly as a trustee or a guardian.
You do not have to name a family member for these critical roles. Talk with your estate planning attorney about your concerns and he or she will help you brainstorm options.
7. Not Transferring Your Life Insurance Policies to a Life Insurance Trust
Tax planning is an important part of estate planning and a life insurance trust can be a key vehicle to reduce the impact of estate taxes.
Everything owned by the decedent at the time of death is included in their estate for estate tax purposes. If a life insurance policy is owned by an irrevocable life insurance trust, its proceeds are not taxed as part of the estate. Furthermore, it can spare your spouse and beneficiaries undue hardship waiting for a pay-out of the insurance proceeds.
8. Not Making Gifts To Reduce Your Estate Tax
A common estate planning mistake is failing to take advantage of yearly gifting to reduce the potential impact of estate taxes at the time of your death. According to the IRS, gifts up to $15,000 a year (per spouse) may be excluded from estate tax. That can provide a significant benefit to a beneficiary.
Larger gifts can also be made during one's lifetime. Tax changes that went into effect under the Trump administration more than doubled the value of assets that can be gifted before a gift tax or federal estate tax is applied. Once that limit has been reached ($12.06 million in 2022), any additional gifts before or after death are taxed. (Learn more about estate and gift taxes.)
This Trump tax reform is temporary and will expire in 2026.
You don't need to wait until you have an “estate" to begin thinking about the goals that estate planning tools can accomplish.
- For example, even a college student may want a living will to tell their family how to make medical decisions for them, and a medical power of attorney to give someone authority to make decisions.
- A business owner planning a trip overseas may want to give temporary power of attorney to allow someone to make decisions for them while they are away.
- A young couple with children, even if they don't yet own a home or have significant assets, will at least want to name a guardian.
You can start today to draw up the estate planning documents that fit your particular needs. FindLaw has provided estate planning forms and tools you can use to meet these basic goals.
10. Not Meeting With an Experienced Estate Planning Professional
If you have more complex assets or specific bequests, or you suspect there may be conflicts among your beneficiaries, it pays to meet with an estate planning lawyer.
- An experienced attorney can provide you with tax-planning strategies, insights into state laws, and proposed changes in federal tax laws.
- They can ensure your estate planning documents are strong enough to stand up to legal challenges when do-it-yourself forms may not be sufficient.
Talk to an Attorney to Learn More About the Most Common Mistakes to Avoid While Planning Your Estate
An experienced estate planning attorney can help you make the right decisions and cover all of your bases. Get started on your estate plan today. Contact a local estate planning attorney.
Can I Solve This on My Own or Do I Need an Attorney?
- DIY is possible in some simple cases
- Complex estate planning situations usually require a lawyer
- A lawyer can reduce the chances of a family dispute
- You can always have an attorney review your forms
Get tailored advice and ask your legal questions. Many attorneys offer free consultations.