Estate planning can provide peace of mind, ensuring that your assets, interests, and loved ones will be protected after you die. Still, it is fertile ground for potentially costly and emotionally painful mistakes.
Whether due to oversight or improper planning, estate planning missteps can undermine your intent and drastically diminish the financial legacy you leave behind. They can also create added stress for your heirs in a time of grief.
Unfortunately, mistakes happen more frequently than most people might imagine. It happens most often because the individual and/or their advisors did not consider the complete financial picture.
Below are brief descriptions of the most common estate planning mistakes, most of which are easily avoided.
- Procrastination
Estate planning may be a financial priority, but it is not fun.
Few among us like to consider our own mortality, including some who superstitiously fear end-of-life preparations. Younger individuals often mistakenly assume that wills and power of attorney documents are the sole domain of the elderly.
As a result, far too many Americans delay drafting the legal documents necessary to protect themselves and their loved ones.
According to a 2020 survey by Caring.com, more than half of Americans do not have a will. Just 42 percent of U.S. adults have estate planning documents, such as a will or living trust. And only 36 percent of parents with children under the age of 18 have an end-of-life plan in place.
The consequences of dying intestate, a legal term that means dying without a will, can be dire. Absent instruction from wills and beneficiary forms, the courts will decide how best to divvy up your assets, which may not reflect your intent.
At a minimum, everyone should have a will, a financial power of attorney identifying the individual you would like to make financial decisions on your behalf should you become too ill or incapacitated, and a healthcare power of attorney identifying the person you want to make health care decisions for you in the event you are unable to do so for yourself.
Your estate plan should include a living will, also known as a healthcare directive, which outlines your preferences for end-of-life medical care. This will ensure your wishes are carried out and relieve your loved ones of trying to guess what you would have wanted, a common source of family infighting.
As part of the process, you must outline who will talk to the doctor if you cannot do so and who will pay your mortgage bills and file your tax returns if you become mentally unable to handle financial matters.
- Naming an executor who doesn’t play fair
When you’re dealing with families, things can get complicated – quickly. We see so many cases come through with unresolved feuds between siblings. It’s one of the most common causes of litigation over an estate.
To avoid contentious situations that invariably arise, I counsel clients to consider the complicated dynamics between the family members named in a will. If an estate is possibly causing fights or damaging relationships, I encourage them to consider an independent personal representative who can settle things fairly.
- Outdated wills and forms
If you made a will 20 years ago but haven’t touched it since chances are it is out of date. Estate planning documents are not a “set it and forget it” solution.
Instead, you should review estate planning documents and beneficiary forms every couple of years and always after a change in family status, including birth, death, divorce, or marriage – even a relocation if you move out of state. A best practice is to update your will every five to seven years, as well as your health care power of attorney and financial power of attorney every three years.
You may need to update your estate plan periodically for various reasons. It could be that the assets you own are worth dramatically more now than they once were or that you need to change your beneficiaries. Perhaps one of your kids has special needs, so you want to leave your assets in a special needs trust.
- Uncoordinated beneficiaries
Some people make the mistake of changing their will but fail to update the beneficiaries for their retirement accounts (IRAs and 401(k)s), life insurance policies, and annuities, often the largest assets in their estate. That can be an expensive oversight.
It’s especially important because the beneficiary forms for such accounts are legally binding documents that supersede anything stated in your will.
If you change your will after a divorce but forget to update your IRA beneficiary form, for example, that asset would still go to your ex-spouse (or his or her heirs) decades from now when you die.
Failure to coordinate beneficiaries is one of the most common errors. For example, a couple may set up a trust for their young children but have a life insurance policy issued before they have kids. The beneficiary of that policy may still be their mom or dad, who is now in a nursing home. They don’t understand that beneficiary designations take priority over their wills.
- Failure to title a trust
Trust accounts serve many roles. They can help protect assets from creditors, ensure your estate gets distributed to your heirs in the timeframe and manner you desire, and keep details of your financial affairs private – including your assets, debts, and designated heirs.
However, trusts cannot accomplish any of those missions if you fail to move assets into the account, including real estate, stocks, cash, or mutual funds, which happens often.
Probate is the costly and time-consuming legal process of distributing your will after you die.
Indeed, once a will is filed with the probate court, it becomes public record so anyone interested (think disinherited heirs and nosey neighbors) can request a copy.
- Triggering the estate tax with life insurance
Wealthy individuals who die while maintaining ownership of their life insurance policy could inadvertently create a taxable event for their heirs.
Indeed, while life insurance death benefits are not subject to federal or state income taxes, proceeds may still be subject to estate tax if the insured had any “incidents of ownership” when he or she died.
Only the portion of one’s estate that exceeds the federal estate exemption limit, which is $11.7 million per person in 2021 ($23.5 million for married couples), would be subject to the 40 percent federal estate tax. (Note: the exemption is only available to U.S. citizens and permanent residents at the time of death, and your state may have a separate state estate tax and a different exemption amount).
If you have a $20 million life insurance policy and want to remove it from your taxable estate, you must gift it to an irrevocable life insurance trust. Otherwise, if you own it individually and die tomorrow, the death proceeds may be includable in your taxable estate.
One potential pitfall could be, for example, when a wife is named the outright beneficiary of her husband’s life insurance policy. The proceeds would generally not be taxable to his wife upon receipt (life insurance proceeds are usually tax-free to the beneficiary), but any remaining assets from the policy when she dies would be included in her taxable estate, which could increase the size of her taxable estate, potentially subjecting her estate-to-estate taxes at her death.
To help shelter the life insurance proceeds from estate taxes at the beneficiary’s death, the insured could instead make a gift of his existing policy to an irrevocable life insurance trust (ILIT), or have an attorney draft a new trust to purchase a new policy where the trust would be owner and beneficiary.
Either way, the trust could be structured so that the surviving spouse receives all of the income generated by the trust for her lifetime and is allowed distributions of principal by the trustee for her ongoing health, education, maintenance, or support.
Because the trust owns the policy, any proceeds that remain upon her death would not be included in her taxable estate and would pass to her heirs tax-free.
However, estate planning using trusts is complicated and must be structured carefully to provide proper protection.
- Making children joint owners of your assets
Another estate planning no-no is to name your children as joint owners of your assets, which gives their creditors access to your money.
A better option is to name your child your power of attorney and payable-on-death beneficiary to your bank or brokerage accounts. This will allow him or her to access those accounts if needed during your lifetime but keep those assets out of your child’s estate and away from the hands of his or her creditors.
When crafting a bulletproof estate plan, good intentions are never enough.
Failure to establish the proper documentation could result in a serious tax hit on your heirs or deny your loved ones their rightful inheritance.
- Making heirs fight it out over coveted items
Parents are frequently the glue that holds families together, and once they pass away, [issues can arise] among relatives. I’ve seen this happen many times when there’s confusion about who should inherit certain heirlooms.
My best advice for clients planning their estates is to clearly write out exactly what you want to bestow to each heir and the physical location of each item.
If you’re the potential heir, I encourage you to talk to your parents or grandparents about which possessions mean the most to you before they pass away. As an extra measure of certainty, have them put it in writing. Challenging a verbal agreement in court is easy, but it is much harder to disprove a written document.
- Forgetting about valuable personal effects
When clients plan their estates and write their wills with an attorney, there’s usually a catch-all category called’ personal property’ at the end of the property and financial assessment.
In many cases, attorneys just set a ballpark monetary value for this category based on the rest of the estate’s assets. This works out fine sometimes, but not always.
I’ve seen several clients who are beneficiaries of estates where valuable personal items were left out of the will but discovered later.
If the value exceeds the amount designated in the personal property section of the will, the beneficiary may face a significant tax burden.
Sometimes, the only way to pay those taxes is to sell off items in the collection at an auction or fire sale. When this happens, beneficiaries can lose up to 50%–70% of the value of the items. That’s not just a costly mistake; it’s a heartbreaking one.
But you can help prevent this by keeping detailed records of your most valuable possessions, even if you’re unsure whether they’ll increase in value over time. While most people think about their possessions as emotional investments, it’s also important to consider them as potential financial assets.
- Gifting money to minors with no rules
If you are setting up your estate and have minor children or grandchildren to whom you wish to leave money, it’s so important to tread carefully.
If you name them a beneficiary with no restrictions, that young person will have unfettered access to his inheritance at age 18, which often leads to trouble.
The best tool to prevent this situation is a living revocable trust that provides for your young heir’s health, education, and well-being. It’s an agreement you create that allows you to manage your estate and designate a trusted agent to execute your wishes after your death.
That trustee – a family member, friend, or someone unrelated to you—can use the money responsibly to cover the child’s school tuition, buy him a car, and help instill proper money management lessons.
Then, once the child hits 25, he can inherit the rest of the estate. Ideally, this will help ensure that the minor is set up for a financially secure life for the long term.
