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. So what are the common mistakes that some people make? Read on for more about common errors and how to avoid them.
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Maybe you want to pass along the family home or lake cabin, a car, family heirlooms like jewelry or art, or even the money in your bank accounts. Creating an estate plan can help you pass property to beneficiaries with the fewest tax liabilities, reduce the chance of estate litigation among your heirs, and avoid the hassle of going to probate court.
While properly prepared estate planning documents may help maximize the value of your estate, unintended errors and oversights can prevent you from reaching your estate planning goals. Thankfully, many of these blunders are easily avoided if you already know how to steer clear of them. This article lists the most common estate planning mistakes, and how to avoid them.
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 are dealing with shock and grief. Business partners are 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 brings peace of mind.
2. Not Naming Contingent Beneficiaries
A contingent beneficiary (also referred to as a secondary beneficiary), is the person or entity who receives an asset in your will or trust in the event that the primary beneficiary passes away before you do. Naming contingent beneficiaries for each asset is vital because if the primary beneficiary dies and a contingent beneficiary has not been designated when it is time to distribute the asset, the asset goes back to the estate and your loved ones may have to go through a long, costly battle in probate court.
To avoid family disputes and keep control over who receives your assets when you pass away, you should name at least two contingent beneficiaries on each asset in your will or trust.
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.
Consider drafting a revocable trust (also called a living trust). This estate planning tool allows you to plan for your property’s management while you are still living and after your death. An added benefit is that because the trust is revocable, you can cancel or change it as you see fit.
Another way to plan for disability is to appoint a trusted individual as your durable power of attorney. You can grant this individual the authority to make medical, financial, and business decisions on your behalf if you are ever unable to do so for yourself. You should also consider assigning someone as your temporary power of attorney to make manage your affairs for the duration of your incapacitation.
4. Not Pre-planning for Nursing Home Care
It is a good idea for some people to include pre-planning for nursing home care in their retirement plans. Many people who need nursing home care will end up using Medicare funding, but they can only do so if they exhaust their financial resources first. For the spouse remaining at home, this often creates financial hardship.
Planning for nursing home care in your estate plan gives you the opportunity to guide your financial decision-making over a number of years. One useful tool for this purpose is a special needs trust. By setting up a special needs trust, you can plan for the protection of the spouse at home while also ensuring the spouse needing medical care qualifies for Medicare funds.
5. Putting Your Child’s Name on the Deed to Your Home
Parents sometimes put their adult child’s name on the deed to their home to protect their home from creditors or because they believe this is the safest way to transfer property. Unfortunately, this kind of “do-it-yourself” solution can backfire because by listing your child’s name on the deed, you are essentially giving them title to your home.
The worst-case scenario is that the child records the deed with the proper municipal authority. After properly recording the deed, they can kick you out of your home or sell the home and keep the profit for themselves. Ultimately, you lose control of your asset.
Another scenario is that by putting your child’s name on the deed and titling the home in their name, you have given them a taxable gift. Good estate planning avoids this unnecessary tax and allows you to pass along a real estate or its value tax-free.
6. Choosing the Wrong Person To Handle Your Estate
It is often 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, what if they are too overwhelmed to manage a complex probate process? What if they do 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 might 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. If you have concerns, contact your estate planning attorney to brainstorm other 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.
A decedent’s estate includes everything they own at the time of death for applicable 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. This estate planning tool can also spare your spouse and beneficiaries undue hardship waiting for a pay-out from the insurance company.
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 and capitalize on tax exemptions. According to the IRS, gifts up to $15,000 a year (per spouse) may be exempt 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 recently went into effect more than doubled the value of assets that can be gifted before a gift tax or federal estate tax is applied. Once that limit is reached ($12.06 million for individuals and $24.12 million for married couples in 2022), any additional gifts before or after death are taxed. (Learn more about estate and gift taxes.)
Keep in mind that this tax reform is temporary and will expire on Jan. 1, 2026. After this date, estate tax limits will be half their 2022 amounts.
You don’t need to wait until you have more of an “estate” to begin thinking about the goals that estate planning tools can accomplish. Here are a few examples:
- A college student may want a living will to tell their family what medical decisions they want made 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 someone to make business and financial 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.
Start drafting the estate planning documents that fit your specific needs today. FindLaw provides estate planning forms and tools you can use to draft a last will and testament, healthcare directive & living will, and financial power of attorney.
10. Forgetting to Update Your Estate Plan Regularly
Drafting an initial estate plan is a big step but failing to review and update your plan is one of the worst estate planning mistakes you can make. Maybe you got divorced, but your living will appoints your ex-spouse are your healthcare agent. Do you still want your now ex-spouse to making your end-of-life decisions? You must make sure your estate plan stays up to date as your family and life changes. Consider the following major life changes:
- Marriage or divorce
- Birth of a child
- Death of your minor child’s guardian
- Death of a primary or secondary beneficiary
- Starting a new business
- Purchasing a new home
After any of these events you should ask yourself if your original will still works as intended. Failing to make necessary changes can result in negative consequences for both you and your loved ones. It’s wise to periodically review and update your will, trust, living will, life insurance policies, and individual retirement accounts (IRAs) to reflect current circumstances and new life events.