7 Common Estate Planning Mistakes — and How to Avoid Them
Apr 5, 2023
4 min read
An estate plan is one of the greatest gifts you can leave for your loved ones. Documenting your wishes helps your family avoid disputes, legal fees and complications and gives them confidence that they are honoring you when they take action with what you’ve left for them.
There are many different estate planning strategies you can employ depending on your unique circumstances; working with an advisor and an attorney can help you create a personalized plan. Whatever your plan looks like, here are some common estate planning mistakes to avoid.
Solutions for Common Mistakes in Estate Planning
Not Having an Estate Plan
The first and most basic estate planning issue is not having an estate plan at all. Some people think that estate plans are just for wealthy people, but that’s not true. In fact, people with a smaller estate may find that having a plan is more important because final expenses will make a larger impact on what they’re able to leave to loved ones.
There are a variety of risks you take if you don’t have an estate plan. At the highest level, you won’t have a say in what happens after death. A probate court will handle the distribution of your assets, which could result in losing family assets. Additionally, failing to create an estate plan can result in family conflict when there are disagreements about your wishes or asset distribution.
There are certain circumstances that require even more detailed planning, such as if you have minor children or children with special needs, if you have beneficiaries from multiple relationships, if you have a partner but are not legally married, if you own a business, if you have property in more than one state, if you have special property like artwork or if you have a large estate.
Estate Planning Advice:
No matter what your estate looks like, make it a goal to create a will that is verified by an attorney in the next three months. It’s the foundation of an estate plan and a good place to start.
Causing Confusion with Beneficiaries
A beneficiary is anyone you name to receive assets you own after your death. Because relationships and people are always changing, beneficiary conflicts can sometimes arise if you don’t keep up-to-date with your beneficiary designations. For example, family conflict and confusion can happen if after a divorce an ex-spouse is not removed or after a birth the additional family member is not added as a beneficiary.
Issues can also arise if the beneficiary named in a will or trust is different from those named on retirement accounts or life insurance policies, or if the line of distribution isn’t clear. For example, if your child passes away before you, do their children split the share their parent would have received or do all surviving descendants get an equal share?
In many cases, such as life insurance policies and IRAs, minor children cannot directly inherit. Each circumstance is handled differently, but in most cases the courts will be involved and a surviving parent or the guardian named in the parents’ will, if applicable, will be the custodian of the funds.
Estate Planning Advice:
Be sure that your named beneficiaries align across different documentation and are kept up-to-date. Name a contingent beneficiary in case your primary beneficiary passes away before you or concurrently with you.
If you’d like to leave assets to a minor child and avoid court intervention, you can instead name a trusted adult to act on behalf of the minor or you can create a trust if the child will not need to access the money until they reach adulthood.
Choosing the Wrong Executor
The executor of an estate is the person chosen to administer your will. They will be tasked with things like notifying Social Security, insurance companies and financial institutions about your death; paying outstanding bills; managing taxes and distributing your assets. Choosing someone who is unable or unwilling to do the legal and financial paperwork can have a significant impact on what you’re able to leave to beneficiaries.
Estate Planning Advice:
Your executor is also responsible for distributing your assets, so in addition to someone responsible, you’ll want to choose an executor who you can be confident will respect your wishes.
Failing to Plan for Disability
Your estate plan lays the groundwork for your assets and care if you are no longer able to manage these yourself due to illness or injury. It also allows you to plan for care of an heir who needs additional support, such as those with medical conditions.
For example, you can set up trusts and name trusted people to act as financial power of attorney and medical power of attorney. These individuals will handle your affairs and decisions on your behalf if you are unable to do so. Without planning documents that name these trusted people, you risk allowing someone who doesn’t know your wishes, or even the court, to make decisions when you’re vulnerable.
Estate Planning Advice:
Consider if a revocable trust is right for you and meet with an estate planning attorney to discuss how it can help meet your needs.
Improperly Transferring Property
DIY solutions floating around on the internet about how to transfer property may do more harm than good. There are lots of ideas about passing down real estate, such as putting an heir’s name on the deed to a house, that could have significant consequences. In that example, the owner loses at least partial control of the home – meaning that the heir has a say in sales decisions, a spouse can have access to it in a divorce and it is at risk if the heir experiences bankruptcy.
Estate Planning Advice:
Talk with an estate planning professional about the best way to set up joint ownership or to pass real estate to an heir.
Not Thinking About Taxes
One of the largest potential expenses your estate may have to pay is taxes. It’s important to understand the tax system (and work with a tax planning professional); doing so will help you reduce your tax liability overall, give a higher percentage of your estate to your beneficiaries vs. to the government and plan for the payment of taxes, which typically must be done within nine months of your death.
Estate Planning Advice:
There are a few things you can do to help reduce your tax burden. First, take advantage of the elevated gift value limits that sunset in 2026 to give assets to your heirs now. Consider making charitable gifts to organizations you care about. If you have a larger estate, you should talk with a lawyer about if an irrevocable life insurance trust is right for you.
Forgetting to Update Your Estate Plan
When you experience a significant life event, your estate plan should reflect that. It’s a legal document of your wishes, so if a new family member enters the picture and you don’t add them to your estate plan, whatever your intentions were don’t matter. The written record of your wishes is what matters. Additionally, estate laws can differ based on your state and can change as time passes. Failing to keep your plan up-to-date can undo all the hard work you put into creating the document and can cost your loved ones time and money to sort it out.
Estate Planning Advice:
Review and update your estate planning documents regularly, especially when you experience a life change.
Get Professional Help
Creating an estate plan can be a daunting task, but we’re here to help! Connect with a Farm Bureau agent or financial advisor to get started.