Seven Biggest Estate Planning Mistakes People Make
Estate planning provides you with much needed peace of mind as you go through the sometimes daunting after-life planning process. It ensures your assets are distributed as per your wishes and keeps your loved ones safe after you leave. Mistakes, however, can lead to expensive consequences.
Understanding the different aspects of estate planning helps ensure that your loved ones do not experience further issues after you’re gone. As you go through the process, be on the lookout for the following common mistakes people make when creating an estate plan.
1. Not Having a Robust Estate Plan
The most common and most expensive mistake people make? Not having an estate plan at all. Without a comprehensive estate plan, it will be up to the courts to decide the distribution of your estate and who the executor will be. This can make the process longer and more confusing for your loved ones.
You might assume, if you’re married, that your spouse would automatically receive all your property under intestacy laws. What you might not know is that in many states, this is not actually true. Therefore, doing estate planning ahead of time is crucial to a smoother process.
2. Failing to Update Your Estate Plan Based on Major Life Events
Estate planning is not something that you can accomplish all at once. As your finances and life situation change, your estate plan needs to evolve.
Here are some of the life changes that call for updating the estate plan:
Moving to a New State
Estate planning norms vary according to state laws. The state laws where you currently live determine whether your will, trust, power of attorney, and other documents meet validity requirements. Failing to update your estate plan according to state laws might cause delays and additional expenses.
Separation or Divorce
Any provision that directly or indirectly benefits your spouse is revoked upon divorce. However, the rules are not the same for separated couples. For example, gifts made to your spouse under an IRA or life insurance beneficiary designation are not automatically invalidated by divorce.
Revisit your estate plan after separation or divorce to determine who will inherit what when you die. If you don't update your beneficiary designations, your ex-spouse could end up as the legal owner of your assets after you pass.
If you remarry but have children from previous marriages, make sure you take care of your spouse and children from your past marriage. Plan for dual goals, and include corresponding provisions.
3. Unorganized or Unqualified Beneficiaries
The purpose of an estate plan is to protect your loved ones even when you are gone. It also safeguards your assets from certain taxes and losses. However, if you don’t organize your beneficiaries well, it could cause more chaos.
It's critical to update the inheritance of the following assets (if applicable):
- Life insurance
Updating your estate planning document is not the same as updating the beneficiaries. Beneficiary forms are legally bound and held higher on the priority list in comparison to an estate plan.
4. Not Setting Up Your Trust Properly
Trust accounts are crucial to the estate planning process. They serve multiple roles, including:
- Protecting assets from creditors
- Ensuring the privacy of financial details
- Taking care of proper estate distribution
Failure to set up or move assets into appropriate trust accounts could lead to costly consequences. With proper trust allocation, you can avoid the long, painful probate process and ensure your loved ones receive the care you want.
5. Choosing the Wrong Executor
Most people choose a spouse, child, or sibling as the executor of their estate, but you can consider other options. Sometimes, a person not related to you such as a close friend can make the best executor. An unbiased third party who is not a beneficiary has no stakes and can make decisions based strictly on the deceased’s wishes.
While you may be resistant to the idea of anyone other than a family member being the executor of your estate plan, a friendly neighbor, friend, or even a coworker can be a reliable choice.
6. Allowing Joint Ownership of the Assets
Many individuals add an adult child to the asset titles to avoid probate. However, this can lead to bigger problems. Jointly-owned assets are exposed to co-owner credits, divorce proceedings, and possible misuse. Additionally, if you have more than one child but only name one to be the co-owner with you, there are chances of unbalanced and unintended inheritance issues.
If you wish to involve children directly in your estate, you can create a power of attorney or consider payable-upon-death beneficiary options. This guarantees your child receives any money in the bank or brokerage funds upon your death.
7. Ignoring Liquidity
An asset is liquid if it is easy to sell or convert into cash without any loss in value, allowing an individual or company access to cash at any time. Examples include bank notes and checking accounts.
Asset liquidity is important both in life and after death, especially when your estate has to be divided between your spouse and other heirs, including children. Life insurance is one of the most common ways for people to create estate liquidity. This also ensures proper estate distribution and payment to the creditors.
Business owners must maintain liquidity to ensure their heirs have the funds required to operate the business seamlessly. If you have a buy-sell agreement or another plan to transfer your business within your estate plan, a lack of liquidity can disrupt the implementation of your decisions. Consult a financial advisor to determine how much liquidity is relevant to you and how you can bring it into effect.
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