Common Mistakes in the Estate Planning Process
The estate planning process can seem overwhelming. However, if you own any type of assets, you should consider establishing an estate plan that allows you to be in control of how those assets are distributed to your beneficiaries following your death. As the saying goes, if you fail to plan, you plan to fail. If you fail to establish an estate plan, the decision regarding who will receive your assets will rest with the state. Your family and beneficiaries will have to legally abide by the determination of the court. While the largest mistake regarding an estate plan is not having one, there are several other common mistakes that you should attempt to avoid as you being the estate planning process.
Most people wait too long to create an estate plan. Whether you think you need one or not, avoid the stress imposed on your family and loved ones by visiting with experienced professionals to ensure that your wishes are carried out and your assets are protected.
Visit With Family and Beneficiaries
If you are beginning the estate planning process, or even if you have already drafted and executed your estate documents, you should always visit with your family and beneficiaries. Your death will be difficult for those you love, and visiting with them before that devastating time can help them better understand your wishes. You can let them know what your decisions are regarding the distribution of your assets as well as specify where your estate planning paperwork is located. This communication will help your family and beneficiaries make the process after your death much easier.
Make Estate Planning Documents in Writing
Many people simply tell their family, friends, and loved one what their wishes are regarding their estate after they pass away. These oral communications will simply not hold up legally in a court of law. If you already have an estate plan in place, then any changes you make must also be in writing. Any new addition to the family such as a birth or marriage, or any change to family statuses such as a death or divorce may affect your intentions regarding your estate and should be addressed. Any revisions to a living trust or last will and testament should be made in writing according to established estate laws. Without written documentation of an estate plan or written documentation of revisions, a court of law will not use your documents as a basis upon which to distribute your assets.
Wisely Choose a Trustee
Choosing your trustee is one of the most important estate planning decisions you will make. This person will be handling all of your finances following your death and should be chosen with care. Some people even choose a trustee who is a neutral third party, and not related to them or any family member or beneficiary. Make sure that the person you choose to be your trustee is responsible enough to be a good steward and caretaker of your finances throughout the process.
Many people only think of a last will and testament as their estate planning document. However, there are many benefits to including a living trust in your estate plan. A living trust can shelter home property from any creditors or a spouse if you get married in the future and ensures that children are provided for after death. You may choose to have both a living will and testament and a living trust at the same time. Visiting with an experienced professional can help you make the best decision for your circumstances.
Considering You May Get a Disability
During the course of your lifetime, you may become permanently disabled. As most people develop their estate planning documents only consider their death, they do not think about what would happen if they become permanently disabled and are unable to work and bring home an income. There are often unexpected life events that happen that require a person to access their assets prior to their death. Consider whether a living trust would be appropriate for you, as this type of estate planning document will allow a trustee to distribute and manage your assets during your lifetime, including providing for any medical expenses you may have.
If you, or your family, own a business or have a professional practice such as a dental or doctor office, you will need to make careful decisions regarding estate planning. The business could be considered part of the estate for legal purposes if the correct steps are not taken. Partnerships pose even more complex legal challenges. In some cases, even purchasing life insurance policies for the owners is a way to pay for any potential stock buybacks. There are both estate planning and tax considerations if you own your own business. Consider visiting with a qualified professional to get the best advice for your specific situation.
Many people who create an estate plan on their own or without adequate legal counsel do not include a residuary clause in their estate planning documents. The residuary clause is a “catch-all” type of clause that will govern all assets that may be been unintentionally and inadvertently overlooked and not disposed of properly within estate planning documents.
Selling Property for $1
Many years ago this tactic was used in areas that witnessed a rapid appreciation of property and land. The legal theory originally was that if you sold the property for a low price, you would not have to pay any tax on the gain the property had when you removed it from your estate. However, the way the current tax law works if you purchase a property worth $1 million dollars for $1, you will have to pay tax on the $999,999 gain. It is best to avoid this perceived loophole.
Oftentimes a person creating estate planning documents will directly name specific investments. In many cases, the person who died may not have those investments anymore, and the estate would be required to actually go out and purchase those investments (possibly at a higher price) which could devastate and destroy their assets.
All estates will likely be subject to both federal and state taxes. Taking this into consideration from the very beginning of your estate planning process is imperative to ensure that you create an estate plan in such a way that your assets are taxed as little as possible, leaving more for your beneficiaries.
If you are divorced, you will likely have substantial alterations that need to be made to your estate planning documents. You may want to just revoke your old documents and create completely new ones. Your new life will likely have different beneficiaries and different objectives than you previously had. Additionally, certain assets such as government pension plans or other types of retirement plans were probably legally divided in your divorce and are no longer part of your estate. Bank accounts, life insurance policies, vehicles, and real estate has likely all changed substantially since your divorce and should be reflected accurately in your new estate planning documents.
Guardian for Children
If you have minor children, you should make it a priority to have an estate plan. For example, a Last Will and Testament may establish a legal guardian upon your death. While in most cases the other parent will receive custody of the children, there are circumstances under which you may need to appoint a different legal guardian for your children. In these cases, it is not only important to have estate planning documents but also ensure that they represent your wishes regarding your children.
Leaving Assets to a Minor
While you may want to leave assets to your children, you should make sure that you ensure that you have a guardian established to handle the money for their benefit. Additionally, you should define “for their benefit” in such a way that there is no room for interpretation.
Not Planning for a Beneficiary’s Death
If you name a beneficiary in your estate planning documents, and then they die, where does the money go? There are different ways to bequeath assets to your children and grandchildren such as per capita (per person) or per stirpes (by branch – meaning that every branch of your family would receive an equal share versus every person receiving an equal share).
Failing to Coordinate Trusts and Retirement Plans
If you decide that you would want to include a living trust, or another type of trust, in your estate plan, you should ensure that you coordinate it with any retirement plan that you may have. You may name a trust as the beneficiary of an Individual Retirement Account (IRA) or a 401(k), however, there are challenges that may come with this. Because of specific Internal Revenue Service (IRS) regulations, if you name the wrong type of trust as a beneficiary to a retirement plan it can accelerate the taxes owed.
If you are married, and too many of your assets are in only one spouse’s name, this could accelerate or increase the amount of taxes that are needed to be paid. Make sure to visit with someone regarding your unique situation, but in many cases shifting large assets, such as a house or large investment to another spouse can equalize an estate and therefore reduce any change of owing gargantuan taxes after the first spouse passes away.
Life Insurance Policies
When a person dies, a life insurance policy is often subject to substantial estate taxes, which result in a great deal of the estate reverting to the IRS instead of the intended family and beneficiaries. If you establish a life insurance trust prior to your death, it will be considered the owner of the policy. Therefore the large estate taxes placed on the estate can be avoided, and your spouse or beneficiary will avoid any undue financial hardship waiting for several months as the insurance pay-out comes.
There is a specific exemption for married couples established by the federal government, specifically set at $11.8 million per spouse in 2018. However, after 2011, surviving spouses may make what is known as a “portability election.” This election routes the deceased assets under the deceased spouse’s unused federal exemption to the surviving spouse. This has the potential to double the exemption amount for the surviving spouse. These are complicated financial matters, and if you believe you may benefit from this exemption, you should contact an experienced professional.
Revoking Prior Estate Plan
If you have created any new estate planning documents, you will want to officially and legally revoke your previous estate documents. Especially if you have had a divorce, you do not want any confusion regarding beneficiaries or who is the executor of your estate.
Powers of Attorney
As you work through your estate planning documents, you may want to consider appointing a person to have the power of an attorney regarding your finances and health care. Both the financial power of attorney and a health care power of attorney documents appoint a specific person to make serious decisions on your behalf. Executing a power of attorney helps ensure that your wishes are followed during your lifetime if you happen to have a disability that renders you unable to do so. While not exactly an estate planning document, it is an important part of guaranteeing that someone you trust will handle your finances and act as your advocate for any significant health-related decisions if you are unable to do so.
Never Consulting with an Experienced Professional
The biggest mistake that people make is not visiting with experienced professionals to help them understand their legal rights regarding their estate and assets after their death. Meeting with an experienced professional can help you if you have any doubt that you may be unable to accurately draft an estate plan that will ensure that your wishes are taken care of regarding your estate after your death.