Putting an estate plan together can seem about as fun as doing your taxes or going to the dentist, but the bottom line is that it can give you peace of mind about the future and what you leave behind for your loved ones.
Estate planning isn’t just a way for the rich to allocate their money after they die. It can be worthwhile for anyone with assets – whether they have a home or a car, or simply money in the bank – because planning is necessary to ensure your wishes are followed with respect to how your assets will be distributed. That said, estate planning is more than the distribution of your assets, too. It can encompass the care of dependents and how you would be cared for should you become incapacitated.
If you aren’t careful, common estate planning errors can make settling your affairs less of a gift and more of a burden for your family, friends and beneficiaries.
Here are ten estate planning mistakes you want to avoid:
1. Not Having One
The traditional place to start with estate planning is writing a will. At the very least, your will should detail how your assets will be distributed and who will have guardianship of your minor children. Whatever the size of your estate, a will can make your wishes clear to family members and avoid disagreements. It should also designate an executor to inventory assets, resolve issues with creditors and pay administrative fees. Lastly, your will must follow your state’s guidelines to be determined “valid”.
2. Choosing the Wrong Executor of Your Estate
Choosing a child or spouse to handle your estate after your death can sometimes be a poor decision. They may not be comfortable with the responsibilities or be objective enough to deal with the requirements of handling the affairs of someone they loved.
It may be better to ask a member of your extended family, a close friend or hire an attorney to handle the duties. Plus, if you have a complex estate with a private business or commercial real estate, you may need someone with experience in those areas in order to make sure everything is handled properly.
3. Not Titling Assets Properly or Naming Beneficiaries
Every state recognizes joint ownership with rights of survivorship. What that means is that property or investment accounts titled in this manner will pass directly to the other owner(s) upon the death of one party. Also, if beneficiaries are properly indicated in ownership documentation, then the assets pass directly to the beneficiaries and are not subject to estate settling proceedings or probate. You should also add secondary beneficiary designations on all of your contracts in case your primary beneficiary dies either soon after you do or before you.
Examples of assets that might have joint ownership titles or beneficiary designations are bank and investment accounts, retirement plans, annuities and insurance contracts.
4. Not Changing the Beneficiaries on Accounts
It is not uncommon for someone to draft a will, create a trust or take many other steps to formalize an estate plan, and then live for another 30 to 50 years. During this time, the person might get divorced, lose a child, start and lose a business, or deal with any number of additional scenarios. Many of these events could influence the person to change the beneficiaries on their accounts. A good example is a person designating a spouse as a beneficiary on a retirement account – but then they divorce. After the divorce, they may each agree to remove the other as beneficiary on particular assets or accounts. If these steps are not taken and a person dies, even if their will states that an asset should go to a particular family member, the beneficiary designation will trump the will, and the asset will go to the beneficiary.
5. Not Writing a Living Will or Advance Directives
The purpose of a living will is to clearly state the extent to which you would want to receive medical care or be kept alive should you become incapacitated and unable to make decisions for yourself. Included in the documents is often a medical or health care power of attorney that names a person to make decisions for you when you are unable to do so. Your living will or advance directives would also cover decisions such as whether to use a breathing machine, receive feeding through a tube, whether you should be resuscitated and other details such as organ and tissue donation.
6. Not Considering a Living Trust in Order to Avoid Probate
Any assets titled in your name alone or directed by your will must go through your state’s probate process before being distributed to heirs. The court system controls the process, and there will typically be legal fees and court costs. It can take months or years to be completed, and your files are open to the public.
One way to possibly avoid probate is to create a living trust. A living trust is created by a person or couple (known as grantor or grantors respectively) to transfer assets to a trustee. The grantor generally retains the power to change or revoke the trust during his/her/their lifetime. Upon death, the trust becomes irrevocable, and the trustee must follow the instructions set forth in the trust. The trust is a legal entity and if set up properly, will avoid the grantor’s assets being subjected to probate.
7. Not Communicating with Individuals Named in Your Will or Trust
In order to avoid disagreements among family members or friends when it comes to following your wishes after death, take the time to communicate with anyone that is named in your will or trust. You want to give each person an opportunity to ask questions or voice their concerns around whatever responsibilities you will be expecting them to carry out should you die or be unable to communicate while still alive. You don’t want to designate individuals that are uncomfortable with these responsibilities. An example may be a single parent having a second home and multiple children. Whether the home is sold or kept in the family may be a point of disagreement among the children if it is not discussed before the parent passes away.
8. Not Considering Personal Property
Imagine the little figurine that’s been on your mantel for as long as your kids can remember, or the painting in the front hall that makes particular family members smile every time they enter your home. Whether you realize it or not, the knickknacks in your house may mean a lot to certain family members. Adding an attachment to your will that lists who gets what can cause fewer problems than leaving individual items to be divided “as my children agree.” Otherwise, the courts could get involved – which costs money – or feelings could be hurt if one person who really wants that signed baseball doesn’t get it.
9. Not Updating Your Estate Planning Documents
If you have a will, that’s great! However, problems can still arise if you don’t keep it up to date. All sorts of changes can warrant adjustments: births, deaths, marriage, divorce, new assets, etc. With respect to your advance directives, your opinion may change on the extent to which you would want to be kept alive if you were unable to make decisions for yourself. Make a habit of checking your documents periodically. For example, when you gather your tax documents on an annual basis, consider asking yourself whether any of your estate planning documents need an update.
10. Not Getting Professional Help
Writing a will, creating a trust, having property in different states, and many other dynamics can make it confusing and complicated to put an estate plan together that is considered “valid” according to your state of residence and the IRS. The good news is that estate planning professionals are available for hire, as well as legal, financial and tax experts.
At the very least, an attorney or tax professional can review your will and advance directives to make sure you are aware of the tax implications to your family when your estate goes through probate. For some with extensive assets, professional help can be worth the cost.
If you still have questions, talk to a Money Coach. Together, you can develop long-term financial goals and discuss the financial implications of different estate planning strategies. Your Money Coach can also help you get a referral to an estate attorney or tax specialist, should the need arise. Call 888-724-2326 to get started!
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