25 Common Estate Planning Mistakes
A properly designed and maintained estate plan can be a very positive legacy. The benefits and services provided by the Legacy Assurance Plan were designed to assist you with avoiding these common mistakes.
1. Not Creating an Estate Plan
The biggest estate planning mistake is failing to plan. The result is that if you become incapacitated, your family will need to petition the court for the appointment of a guardian. When you pass away, your estate will be subject to probate via your state’s intestacy laws. Intestacy laws are state statutes that create a will for those who fail to plan. The statute names one or more family members as the heir(s) who receive your assets in the amounts / percentages provided. They are very inflexible and are unlikely to reflect how you want your estate distributed. Planning is needed if you want to avoid guardianship, avoid probate and give specific assets to specific people or charities.
2. Limiting Estate Planning Documents to a Will
For many people, estate planning begins and ends with the signing of a will. A will is not an estate plan. A will can, in suitable situations, be part of an estate plan. In addition to a will, a complete estate plan should include, at least, a power of attorney for finances, a power of attorney for health care and an advanced directive. Wills are, however, subject to probate. You may want to consider using a revocable living trust to avoid probate and the need for guardianship.
3. Limiting Your Estate Planning Documents to a Living Trust
A living trust is just a part of a complete estate plan. In addition to your trust, your legal documents should include, at least, a pour-over will, a power of attorney for finances, a power of attorney for health care and an advanced directive. Estate planning also includes financial planning and account beneficiary review. For example, the beneficiary designations on your financial and retirement accounts are part of your estate plan. These beneficiary designations need to be carefully coordinated with the provisions of your legal documents.
4. Failing to Plan for Incapacity
Estate planning includes much more than just determining the distribution of your property at your death. It includes planning for your physical care and management of your property at your incapacity as well. Planning for incapacity includes powers of attorney for health care and finances and an advance directive. It may also include a revocable living trust. If you don’t plan for incapacity, for example if your estate plan consists of just a will, your family will need to petition the court for the appointment of a guardian if you become incapacitated.
5. Not Funding Your Living Trust
Living trusts must be funded to avoid probate and the need for guardianship. “Funding” a living trust means completing the process of retitling your assets from your individual name to the name of your trust. Funding includes both assets with titles (like real estate) and those without titles (like household furniture). When the funding process is not completed, one of the primary benefits of a living trust, avoiding probate, will be lost since the unfunded assets are subject to probate.
6. Not Working with an Experienced Estate Planning Attorney
Many people attempt to save money on estate planning by getting a do-it-yourself trust agreement online. Or selecting the attorney who offers the lowest price, regardless of experience. A better value is to work with an experienced estate planning attorney who will craft your estate plan to meet your needs and goals. If your estate planning documents are not properly drafted, they will not achieve your objectives. Additionally, an experienced estate planning attorney will be able to counsel you about how you can benefit by including a living trust in your estate plan.
7. Naming the Wrong Successor Trustee / Personal Representative
Your properly drafted and fully funded living trust may not achieve your goals if your successor trustee fails to follow (or understand) its provisions. Many people name one or more of their adult children as successor trustee without fully considering whether he or she is best suited to administer their trust following their incapacity and after their passing. While it may seem appropriate to name your oldest child as successor trustee, you need to carefully consider whether he or she has the knowledge, time and experience to properly administer your trust. If you expect a disagreement within your family about the trust’s administration, you may wish to consider naming a third-party or professional successor trustee.
Many of the same concerns apply to your Personal Representative. In addition to understanding the terms of your will, your personal representative will need to understand the probate process. Your personal representative also needs to have the time to meet with attorneys and prepare and submit required court filings on time. A poorly chosen personal representative will increase the stress of the probate process, as well as the time and expense to complete the process.
8. Failing to Name More Than One Successor Trustee / Personal Representative
Estate planning is about “what if?” Your plan should include designated backups / alternatives for all of the key players, including successor trustee / personal representative. Estate plans fail because people make presumptions about the order of death and availability of people to take on certain roles. By providing alternates, you give your plan additional strength and flexibility to continue to function if the unexpected happens.
9. Not Discussing Your Estate Plan with Successor Trustee / Personal Representative
You may wish to keep your estate plan confidential, but that is likely a mistake. A lack of communication is a frequent cause of estate plan failure. Living trusts and wills are written in technical legal language. Your successor trustee / personal representative may not be able to determine your intent and their duties from reading the documents alone. You can increase the odds of your estate being successfully administered by speaking with your designated successor and explaining what you want.
10. Not Discussing Your Estate Plan with Your Family
Many people make the critical error of not discussing their estate planning, and why certain choices were made, with their family prior to their passing. Communication is especially important when your plan includes unequal asset distributions among your children. A failure to communicate often causes hurt feelings and misunderstandings resulting in a considerable amount of unneeded (and costly) litigation. Many of these problems, and the associated expenses, can be avoid by discussing your estate plan, and its goals, with your family. You are the best, and in many ways, only person to explain your estate planning choices to your family.
11. Neglecting Your Digital Assets
Increasingly, people are living more and more of their lives in the virtual / digital / online world. However, many estate plans fail to include directions regarding these digital assets. Many bank accounts, social media and email accounts are assets with financial or sentimental value which can only be accessed online. Your power of attorney, successor trustee / personal representative will need specific authority and information to access and manage your digital assets. You need to indicate which accounts should be closed, deleted and transferred. Your successor trustee / personal representative will need a comprehensive and updated listing of all digital accounts with usernames, passwords and security questions to access your online accounts. Without this information, it will be impossible to administer your digital estate, causing potential financial loss and emotional hardship.
12. Failing to Update Beneficiary Designations
Retirement accounts, life insurance and annuities all avoid probate with a designated beneficiary for each account. These benficiary designations will override any contrary instructions in a will or trust. These accounts can represent a substantial portion of an estate and need to be coordinated with other aspects of your estate plan. A common error is failing to update these beneficiaries in response to life events, resulting in funds being distributed contrary to your intent. The beneficiary designations on all accounts need to be periodically reviewed, and updated as needed, to reflect changed circumstances and life events to remain coordinated with your estate plan.
13. Not Conducting Periodic Reviews of Your Estate Plan
Estate planning is not a static process. You cannot place your estate plan on a shelf and expect everything to work out. Estate plans require maintenance. Every 18-24 months you need to review your estate plan’s legal documents and the beneficiary designations on your financial accounts to confirm that everything is in order and properly coordinated. A periodic review also offers an opportunity to determine if your needs, circumstances or laws have changed since last review.
14. Not Updating Your Estate Plan to Reflect Life Events
Estate planning is impacted by life events (divorce, marriage, death of family member, birth of family member, substantial change in health, diagnosis of serious illness, change in financial circumstances) and needs to be revised accordingly. After a life event, you need to review your estate plan, including your trust agreement, to determine what needs to be amended to reflect the change. One of the benefits of a revocable trust is that it can be amended to reflect changed circumstances following a life event.
15. Forgetting About Man’s Best Friend
Your estate plan can include provisions for your pet. Sadly, many pets end up living out their lives in shelters after their owner’s death because no plan was in place. You can plan for your pet by designating someone who will have custody and providing them with financial support to pay for the pet’s food and veterinary care. In many states, your plan can include a separate “pet trust” to provide financial support for your pet after your incapacity or death. Planning for a pet is especially important if you have an exotic or unusual pet.
16. Failing to Consider Using an Irrevocable Trust
Revocable living trusts are designed to avoid probate. They can also eliminate the need to have a guardian appointed if you become incapacitated. They do not, however, protect assets from creditors or shield them from the Medicaid spend down process. Irrevocable trusts, however, if properly drafted and funded, can do both. If either of those objectives are part of your estate planning goals, you should speak with an experienced estate planning / elder law attorney about adding an irrevocable trust to your estate plan.
17. Failing to Plan for Long Term Care
As people live longer, the number of people who spend some time in a nursing home continues to increase. With costs nearing $100,00 per year, a nursing home stay can destroy your estate and financial plan. Yet many people fail to plan for this increasingly likely event. The result is that you will be forced to use almost all of your assets to pay for your nursing home care until you qualify for Medicaid (usually referred to as Medicaid spend down). A number of financial planning options exist to leverage your financial resources to cover your long-term care expenses. Several estate planning options also exist to protect assets from Medicaid spend down.
18. Failing to Plan for End-of-Life Issues
End of Life Planning is needed so that you retain control of your person. One of the fears shared by many people is a slow death with their life being artificially and mechanically prolonged following an accident or other medical issue. You can avoid this fate with proper planning. The default treatment for medical professionals is to provide the necessary treatment to keep the patient alive, even if recovery is not possible. Part of estate planning, regardless of age, is to plan for your health care and medical treatment at the end of your life, when you are no longer able to communicate your wishes. You need to decide and communicate what treatment you want (and don’t want) to receive when you reach the end of your life, prior to those plans being needed.
19. Putting Child’s name on Deed
A common estate planning method, and a potentially costly mistake, is adding your children to the deed on your home as co-owners with rights of survivorship. While this step will avoid probate, it also has adverse tax consequences. Since your children received part of the home’s value as a gift, they will owe more capital gains taxes on its sale than if they had received it as an inheritance. Your home also becomes exposed to the debts and liabilities of the new co-owner, your son or daughter, including those caused by a divorce. In some states, creditors can force the sale of the home to get the child’s share.
20. Using a Traditional Estate Plan for a Blended Family
Your estate plan needs to be suitable for your family. Yet, as reflected in state intestacy laws, “default” estate planning has a clear bias towards traditional families. For example, estate plans for married couples, especially online “do-it-yourself-kits” often follow the “all to spouse” model at the death of first spouse. However, as more and more families are becoming more complicated, including children from prior relationships, separate assets and other differences, often make that kind of an estate plan a poor fit. By working with an experienced estate planning attorney, your plan can be drafted to fit the actual composition of your family.
21. Treating Beneficiaries Equally, instead of Fairly
Many parents feel obligated to divide their estate equally among their children. And most children feel they should be treated equally. However, this type of equal distribution at death can be unfair for a number of reasons. The children may have substantially different financial means. The parents may have provided more for one child than the others. One child may have provided more care or service than another. If parents do decide to provide for an unequal distribution, it’s important that they discuss that decision with their children to avoid any hurt feelings, and expensive litigation, after their passing.
22. Not Coordinating Financial Accounts with Legal Documents
When talking about estate planning, many people only consider legal documents like wills, trusts and powers of attorney. However, estate plans consist of two separate, but related, components: legal documents and financial accounts. The distribution provisions in these components must be coordinated, meaning that both reflect the same goal for the management and distribution of assets. In many estates, the value of the financial accounts will be a substantial fraction of the estate’s value. Many of these accounts, like retirement accounts, annuities and life insurance, have beneficiary designations so they do not pass under either a will or trust. As a result, these beneficiary designations need to be coordinated with the asset distribution provisions of the will or trust, so that the overall asset distribution matches your intended goals.
23. Failing to Conduct Adequate Financial Planning
A well-drafted estate plan can fail if no assets remain to be managed or distributed. An often-forgotten part of estate planning is financial planning to make sure sufficient income and assets are available to meet your lifetime needs. Your plan needs to include guaranteed sources of lifetime income to meet your living expenses. In addition to living expenses, your financial plan needs to address things like home repairs, medical care and health insurance. You need to plan to leverage your existing assets to cover the expense of long-term care. For married couples, it needs to address the replacement of any income lost at death of first spouse.
24. Not Reading Actual Estate Plan Legal Documents
The only way to be certain that your trust, will, powers of attorney and advanced directive do what you want is to read the actual documents. If you don’t understand something, you can seek an explanation from your attorney. If you need to make a change, you can amend the document. Additionally, how can you explain your estate plan to your successor trustee, personal representative and family if you have never read it?
25. Lack of Record Keeping
Estate planning is partly about making things easier for your family to close out your estate following your death. However, many successor trustees / personal representatives end up spending a lot of time searching for information which was not properly organized. They need to inventory your estate or trust assets, so they need to know what you owned, so they can be certain the inventory is complete. They need to locate, liquidate, close and distribute every account, but first they have to identify them. If you are not organized, they may miss an asset, disrupting your distribution plan and complicating the process. A lack of organization will also increase the time, money and effort needed to close your estate.
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