Common Estate Planning Mistakes to Avoid

Common Estate Planning Mistakes to Avoid

Learn what not to do so you can maximize the assets you pass on to beneficiaries.

Common Estate Planning Mistakes to Avoid
Wednesday, 21 April 2021

As uncomfortable as it may be to think about the end of your life, we all want our assets and estate to go to the right people when we die. Taking steps now to provide for those you love can be a source of joy and comfort, and having a thoughtful estate plan in place can give you a sense of control over the inevitable.

Below, we’ll discuss nine common estate planning mistakes and what you can do to make sure your estate will be handled according to your wishes.

Mistake #1: Not Having an Estate Plan

This is, perhaps, the biggest mistake you can make because failing to have a plan means losing control of what happens to your assets when you pass away. Maybe you have a plan of sorts, but it’s a boiler-plate document that won’t address the specific needs of your estate. Without specific instructions and the proper documentation on place, everything may fall into probate and be distributed by the government. This can slow the process, and the results may not be ideal.

Mistake #2: Never Updating Your Estate Plan

Failing to update an existing estate plan can be almost as bad as not having one at all. Your plan needs to be updated in response to events both from within and without. Personal life changes like marriages, acquiring property, having children can all impact your plan. Even moving requires an update to documents at times because wills, trusts, and powers of attorney vary from state to state.

You'll also want to change your estate plan in response to governmental shifts at the state and federal levels. Be aware, tax and estate laws also vary by state. What may have been the best strategy in one place may not work in another. Stay abreast of major changes and adjust your estate accordingly.

SEE ALSO: Understanding How Different Types of Retirement Savings are Taxed

Mistake #3: Forgetting about Long-Term Care Insurance

If you should end up needing long-term care as you age, it can quickly become the single most expensive cost of end-of-life and retirement. Like estates in general, no one wants to think about the implications of what long-term care means. However, not planning for it can leave you with little to no estate to pass on.

Buying into the right long-term care insurance plan has many benefits. Some offer the care you need, and many will give a life insurance payout to your beneficiary if you die. The sooner you begin paying into the insurance, the cheaper your rates will be.

Mistake #4: Misallocating Your Asset Ownership

A major pitfall to estates and businesses is a mishandling of assets, in this case, ownership. Make sure all of your property is under the correct ownership and beneficiaries. Mistakes like these don’t affect things operationally, but once consulted, the paperwork can expose major issues.

One common mistake is having an asset for your business tied into your personal assets. This can cause the assets of your company to be brought into probate by the state. Another common mistake is not including a spouse as a beneficiary on property. If you intend for the property to go to them, make sure it’s in the contract. Be careful bequeathing property to your relatives for a small fee like $1. The IRS sees this as a completed gift, and the beneficiary will be responsible for the gift tax liabilities.

Mistake #5: Lacking Liquidity

Have a good balance of liquid assets in your estate plan, especially if you are splitting the estate among several people. It can’t always be as easy as King Lear dividing his land into thirds!

One solution to the liquidity problem is to have a life insurance policy. The payout will help keep things moving and help cover the funeral costs, so your loved ones are not responsible for a financial burden while the estate is settled.

Liquidity is also important for business owners. If you plan for the business to continue, having the business assets stuck in probate could bring them to a grinding halt. Set up a buy-sell agreement ahead of time so the other partners can move forward in your absence. 

Mistake #6: Income Tax Liability for Beneficiaries

Be mindful of the impact your gifts will have on your beneficiaries’ taxes. It may not be readily available information, but it will be helpful to let them know your plans. If your beneficiary is in a higher income bracket, the extra assets may push their worth into an even higher bracket, making them incur a greater tax burden.

If you have started Required Minimum Distributions from your retirement accounts, your beneficiary will have to continue the distributions. This amount will also add to their current income, increasing the tax burden. You can work to mitigate this by converting the accounts to Roth accounts. It would be taxed, but it would continue to grow tax-free afterward.

SEE ALSO: The Stretch IRA is Gone – What Now?

Mistake #7: Being Unsure of Beneficiary Impact

The above point illustrates the need for transparency with your beneficiaries. It is nice to leave a surprise gift to them, but if you’d like to maximize what they are getting, you’ll want to know the best course of action. For many accounts, including retirement accounts, they will need to be on the paperwork. Wills and trusts vary from state to state and have no legal power over financial accounts.

Decide if you will leave money directly to a person — the most common person being a spouse. A trust is a good option for extra protection if there are creditors involved or the beneficiary is a minor.

Mistake #8: Not Preparing for Young Beneficiaries

It is never too early to set up protections for your children. Include who will become the guardian for your kids and make sure the guardian is on the same page. Also, consider creating a trust. You can avoid many issues by clearly stating how the money will be managed and not just handing it over to the guardian. Having a young beneficiary is another good reason to begin a life insurance policy.

Mistake #9: Neglecting Charitable Gifts

Don’t forget to add charitable gifts to your will or trust. Many people find it very fulfilling to know the charities they love will continue to receive gifts after they’re gone. You can consider creating a donor-advised fund or utilizing a charitable remainder trust to fulfill your charitable intentions.

Final Thoughts on Estate Planning Mistakes

Estate planning is a crucial step towards taking care of your loved ones and ensuring your wishes are met once you’re gone. However, more than just having an existing estate plan, you need the right one for you.

There are many options available to you while planning your estate. Remember that each estate is different and requires a personalized touch in order to meet your needs. A financial advisor can be instrumental in making sure you can pursue your short- and long-term goals while building the right protections for your estate. If you’d like professional guidance, please contact us today. At Charles Carroll, we use our experience and knowledge to design a specific plan to meet your unique financial needs.


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