Avoid These 8 Estate Planning Mistakes to Save Your Loved Ones from Unnecessary Pain & Expense With a Comprehensive Plan
Estate planning should be your biggest concern if you are 50 or older, says Dan Serra, a certified financial planner (CFP) at SageVest Wealth Management in McLean, Virginia, who has spent many hours trying to “put the pieces together after a client died.” He recommends seeking professional advice from a financial planner, lawyer and/or tax expert who will consider the details of your life and create an appropriate plan. “Professional advice in this area is well worth the cost to avoid headaches and fighting among children.”
Start by creating a new plan or reviewing your current one to reveal potential problems. Following are mistakes that people often make.
1. Plans that are incomplete or in error
Obvious as it may seem, some people don’t have an executed will, or they fail to update a previously executed one when they divorce or go through another life change, says Kevin Brady, a CFP at Wealthspire Advisors LLC, in New York City. “This delays the administration of an estate or leads to heated litigation and acrimony.”
Also, some people assume a plan is complete because an attorney prepared it, says Neal Van Zutphen, a CFP at Intrinsic Wealth Counsel in Tempe, Arizona. One plan he reviewed lacked provisions for the minor children. “Read your estate planning documents before you sign off.”
2. Misunderstood or underutilized plans
Some people don’t understand their estate plan, so it doesn’t reflect their wishes, says Jason Deshayes, a CFP at Cook Wealth in Raleigh, North Carolina. In that case, ask a financial planner to explain the documents. “Finish the process and execute it, so the plan can work.”
Sometimes others don’t make use of a person’s plan after that person has signed the documents, says Karen Van Voorhis, a CFP at Daniel J. Galli & Associates in Norwell, Massachusetts. This is particularly true for trusts, which allow a third party to hold assets, such as a house, on behalf of beneficiaries. She said to ask yourself: Why did you set it up — to own your house or some other assets? If you don’t know how to use your trust, ask your attorney.
3. Wills that specify investments
If your plan names investments you wish to leave to one or more of your beneficiaries, make sure that you still own them, experts warn. If not, your estate may be required to buy them at higher current prices, which would hurt your beneficiaries. In the worst case, that purchase might drain most or all of the assets from your estate.
4. Plans that don’t comply with current laws
Failing to update a plan can make it worthless due to changes in the law and the people named in it, Serra says. He once reviewed a will created in 1976. “There was a long, tedious process of settling the estate, resulting in unnecessary expenses and family strife. Pay an attorney now or pay the price later.”
Deshayes suggests revisiting your plan every three years or more often, as needed. He recalls one plan that listed elderly parents, who had died, as guardians of kids who were already in their 30s. If the trust document is outdated, the trustee will be required to execute things in a certain way that may not make sense now.
5. Beneficiary conflicts and mistakes
Beneficiaries also need careful attention, says A. Raymond Benton, a CFP at Benton & Company in Denver, Colorado. “Review retirement plans, IRAs and annuity contracts and make sure that beneficiary designations do not conflict with your documents.”
Be sure to update beneficiaries on insurance policies and 401(k) plans in the event of a divorce, says Herschel Clanton, a CFP at Chancellor Wealth Management in Atlanta. “I’ve seen the ex-wife as beneficiary, which disappointed the current wife when the husband died. The insurance company and the 401(k) provider paid the beneficiary of the policy as written.”
Don’t forget to name contingent (or backup) beneficiaries, so the assets don’t end up in probate should a beneficiary die, says Lindsay Graves, an elder law attorney and a founding partner of the Graves Law Firm in North Canton, Ohio.
Be sure to include bank accounts. Many banks offer “payable on death” designations that allow an account to pass to a beneficiary upon the death of the original owner, says Joey Loss, a CFP at Delegated Planning, Inc., in Jacksonville, Florida. “Establishing joint titling on bank accounts for couples and beneficiary designations, whenever possible, can dramatically streamline the estate resolution process.”
6. Gifts that cause problems
You want to leave assets to your minor or adult children. Who will handle money for the minors? Are the adults equipped to make the best choices? “Parents should draft a trust that leaves the inheritance in a trust that is managed by responsible trustees,” says Keith Singer, a CFP at Singer Wealth in Boca Raton, Florida.
Also, will your gifts have troublesome implications? Let’s say you want your two kids to always have a home. You leave them yours, with conditions for its sale. But one of them needs to move to take a job. That child may have to endure a lengthy, expensive legal process to sell it. And if the home is older, needs repairs and has declined in value, you’ve left them a money pit.
7. Tax consequences from unequal ownership
If you’re married, consult your tax adviser when it comes to who owns which assets. Having more assets in one spouse’s name may inflate a future tax bill. The spouse who worked longer may have a larger IRA. Other investment accounts or a second home may be in their name only.
Experts advise seeking professional advice about how to make your estate more equal, which would eliminate the possibility of owing more taxes should one of you pass away.
8. Leaving loved ones uninformed
Finally, have a discussion with your spouse and kids about your assets, so they know where everything is should you become incapacitated, says Singer,
It’s also important, says Kevin Brady, a CFP at Wealthspire Advisors LLC in New York City, to leave a “digital accounts access guide,” particularly if one spouse handles all or most of the financial decisions. “Otherwise, the survivor may find him or herself unable to efficiently access bank accounts, credit cards and other important items.”