10 Mistakes Often Made When Estate Planning
Financial planning is an important part of life. Estate planning is one key aspect of planning for the future. It can feel daunting to take on the task, but once it’s done and your future is organized, it usually feels a lot better. Unfortunately, there are a lot of common estate planning mistakes. You don’t have to make them. Here is more information on ten mistakes that you will want to avoid.
What is Estate Planning
Just to be clear, what are we talking about when we discuss estate planning? Put simply, it means putting a plan in place (on paper, often legally) regarding what should happen to all of your assets when you pass away. Estate planning includes, at a minimum, instructions about:
- Who you want to receive your items
- What you want them to receive from you upon your passing
- When they will receive it (often, for children, it’s after they age into adulthood, for example)
You can will away anything that you want to anyone you want including to charity.
10 Common Estate Planning Mistakes to Avoid
Estate planning doesn’t have to be difficult. However, it can be. Avoiding these ten most common estate planning mistakes will help you set a solid foundation for the process:
1. Thinking You Have no Estate
The most common of all estate planning mistakes is not to make the plan. The term “estate planning” can be misleading. You don’t have to have a huge mansion or a lot of valuable things to have an “estate.” An “estate” is just whatever you do have. It’s your car, your furniture, your personal items that may not have monetary value but are special in some way. It’s also your pets; what would you like to have happen to them if you pass before they do?
Don’t make the mistake of thinking that you don’t have an estate. Don’t make the mistake of thinking that there’s no need for you to plan ahead. You might imagine that your stuff isn’t worth anything or that your family will figure it out when you pass. However, that’s not a burden you should place on them. You should clearly outline exactly what you want to happen with all of your assets when you pass away.
2. Planning Only For After Death
Most of what you do in estate planning is related to what will happen if you die. However, you should also think about what will happen if you become incapacitated before your time of death. This is something that is crucial to include in your will. And it’s an important part of estate planning.
In relation to this, don’t forget to include insurance in this plan. Life insurance, disability insurance, and long-term care insurance are all things to incorporate into your financial plan for the future.
3. Differences Between Will and Other Documents
Every time that you update your estate plan, make sure that all of your different documents have the same information. For example, when you signed up for life insurance, you listed a beneficiary. Is that the same beneficiary that you have listed in your will? Everything should match up at all times. Otherwise you create confusion after your death and leave it for your heirs, and the courts, to figure out.
In particular, consider what you want to happen with your retirement accounts. Does the beneficiary you have listed mirror the one in your will? Does that person have creditor issues that would make it a bad idea for them to be the beneficiary? There might be a better way to divvy that up and reviewing that is smart as you do your estate planning.
4. Errors When Planning for Minor Children
There are a lot of things that you have to consider in estate planning when it comes to children under the age of 18. They come down to two categories:
- What happens to the children themselves
- What and how to pass along assets to children
You need to have a plan in place in case the terrible happens and you pass away before your children come of age. Most importantly, what do you want to happen with your children? Where will they go? Who should care for them? Will you be leaving money to those caregivers for their care?
Additionally, you want to think about passing along your money and belongings to your children. Don’t give the money directly to minor children. Instead, appoint a guardian and/or a trust with clear instructions about what you want the children to have and when you want them to receive it.
5. Confusion with Revocable Trusts
In addition to a will, you might want to include a revocable trust in your estate plan. The main reason to do this is that you list your beneficiary clearly which allows them to avoid lengthy probate issues upon your death. However, if you don’t do this part correctly, you can create problems for yourself. Work with a finance professional to make sure that you understand your assets and interest in the trust, how the trust impacts your taxes, and what the trust costs to set up and maintain.
6. Failure to Consider Taxes in Estate Planning
This is one of those estate planning mistakes that is common because people overlook the issue. You absolutely have to think about taxes in all aspects of estate planning. You want to minimize your costs as well as the costs to your heirs when you pass along your estate. That means thinking about the role that taxes will play for both of you.
Be sure to review this whenever there are changes in tax laws that impact estates. Make sure that you understand federal as well as state tax laws.
7. Lack of Liquidity
Kiplinger cites a failure to maintain adequate liquid assets as one of the top ten most common estate planning mistakes. When you die, your relatives may need cash immediately for many reasons including your funeral expenses or continuing to operate a business you owned.
8. Failure to Consult Heirs
You may think that it’s a wonderful thing to leave your home to your adult child. They, however, might not want the burden of that home. Ask them.
And definitely be sure to have honest conversations with anyone that you want to care for your pets or your children in any way.
Moreover, it’s a good idea to discuss your plans with your loved ones in advance so that they know what you expect I case of disability or death. The more open you are now, the easier it should be for them when that time comes.
9. Failure to Name More Than One Beneficiary
Let’s say that you have three adult children and have named only one of them as a beneficiary. That might make sense in your family if that person is the most responsible. However, what if that person passes away? Then what happens to your estate? Hopefully you update your estate plan regularly enough that it isn’t a huge issue. However, you can safeguard against this and a variety of other problems by naming a back-up or alternative heir.
10. Estate Planning Once and Never Again
This is the last, but not the least, of the most common estate planning mistakes. You did the work. The plan is in place. Now it feels like you are done. However, that’s not true. Your values, relationships, and assets all change over time. Therefore, your plan will have to change as well. As a result, you should work estate planning into your annual financial schedule. You do your taxes every April; you should do your estate planning once per year as well.
You should also update your plan after any major life events:
- Births in the family
- Separation or divorce
- Children aging into adulthood
- Relocating to a new state where the laws may differ
- Deaths in the family
The good news is that once you’ve set it up, updating it is usually much simpler. It’s just a matter of going through everything and making sure that it’s still the way that you want it. Then you’ll add in new information regarding any assets gained in the year since you last updated the plan. Moreover, you already know all of the most common estate planning mistakes to avoid, so you won’t have to worry so much about getting things right!
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