9 Common Mistakes To Avoid In Estate Planning
Estate planning is a process that most people forget amidst the busyness of life or simply avoid. It may be unpleasant to think of the ‘what ifs’ of not being around someday; however, estate planning is critical.
It’s not just for the rich people, either. After all, we all have something valuable that we can pass along to loved ones and friends–whether it’s the ancestral home, a family heirloom, money savings in the bank, or a vintage car.
Creating an estate plan can help reduce stress for your loved ones once you’re gone while maximizing the value of your estate and ensuring that everything goes according to what you want.
However, creating an estate plan is complicated and comes with many considerations. While anyone can plan for their end of life, maintaining a valid and error-free estate plan is critical to ensure the orderly and efficient distribution of assets after you pass away. Even the smallest mistake in your estate plan can create big problems during the settlement process.
And with that said, we created this article to enumerate the top estate planning mistakes you need to avoid.
1. Not Working With The ExpertAs mentioned before, estate planning is a complicated process, and it’s not an area you want to do it yourself (DIY). It's particularly true if you have more specific bequests, or complex assets or suspect that there may be disputes among your beneficiaries.
In this case, you want to visit a specialized estate planning law firm like Two Spruce Law P.C. and seek advice from dependable lawyers.
An experienced lawyer can help you come up with the best tax-planning strategies for your situation. They also bring you insights into state laws as well as proposed changes in federal tax laws. In addition, a reliable attorney helps you create a mistake-free estate plan, ensuring that these documents are strong enough to stand up against legal challenges.
2. Selecting The Wrong Individual To Carry Out Your Estate PlanIt’s difficult to know who the best people will be to handle your plan–whether it’s choosing the best trustee for your trust fund, the best executor for your estate plan, or the best guardian for your minor kids.
A surviving spouse is often the most obvious choice; however, that too, can be a mistake. The spouse may be too overwhelmed to manage complex processes and may not have the best understanding of investments, finances, or other legalities. Sometimes, they may also not be the right choice for executing your plan since they may disagree with your decisions or may act irresponsibly and thus, may not fulfill your outlined terms.
If you’re unsure who to name to carry out specific areas of your estate plan, you can talk with your lawyer so they can help you brainstorm your options.
3. Having A Set-And-Forget Estate PlanMost people write a will and forget it completely. With life constantly changing–more kids are born, someone starts a business, parents buy a car or home or get divorced–an outdated estate plan won’t work as intended and will be worthless in the future.
For instance, you created a will that gives your spouse the power to make end-of-life medical decisions for you. But after a year, you got divorced. Do you still want your ex-spouse to make healthcare decisions for you?
In addition, you don’t want to keep fixed beneficiaries until the end. You need to update your beneficiaries with time to ensure that only the right ones can get part of your wealth. For instance, major events such as childbirth or the death of a beneficiary require you to update your beneficiaries list. Otherwise, it can make your entire estate plan invalid.
Also, you need to update your inventory of estate assets, including houses, cars, and financial accounts. Without a current comprehensive list, things may get left behind.
In short, an estate plan is not something you do once. You want to periodically review and update your estate plan to reflect current situations and new life events.
4. Not Funding Your TrustAn essential staple for every estate plan is a trust. However, creating a Trust is only half the battle. It’s useless if you don’t properly fund it.
So, make sure to follow all the steps to fund your Trust. You also need to be sure of what you need to do, including how to get your taxpayer identification number (TIN), how to title your assets, how to handle assets and properties that don’t have a title, and so much more.
5. Adding Your Child’s Name To Your Home’s DeedSometimes parents put their child’s name on the deed to their house to protect it from creditors. Some may think that it’s the safest way to transfer property. However, doing so can backfire.
Adding your kid’s name on the deed means you’re giving them an ownership interest in your home. In short, you lose control of the asset. It means you can’t refinance your mortgage or sell your home without your child’s permission. In the worst-case scenario, your child could also sell their share of the property without your consent or kick you out of your home.
Even in the best-case scenario, adding their name on the deed and title of your home, you’ve given them a taxable gift, which is still not good and unnecessary. Other estate planning documents allow you to pass your family home and its value tax-free.
6. Lacking Asset LiquidityAsset liquidity is critical to have during your life but more important after death. If your assets need to be split among a surviving spouse, children, and other heirs, it requires a proper amount of liquidity. In this case, life insurance can help create estate liquidity, allowing you to split up wealth amongst beneficiaries and pay off debts.
For a business owner, liquidity also ensures that your heirs have the necessary cash to operate your business after your death. Another example of why liquidity is critical is if you have a buy-sell agreement with other plans to transfer your business within your estate plan–without enough asset liquidity, and the buy-sell agreement could be terminated.
If you want to know how much liquidity is suitable for your current situation, you may consult a trusted financial professional.
7. Not Preparing For DisabilityMost workers think for the disability risk before retirement is only 1-2 percent. However, statistics show that one in seven workers are expected to be disabled for five years or more, sometimes before reaching the retirement age.
As a result, most people are not prepared for unexpected disability and its significant impact. But this can be prevented with a comprehensive estate plan.
You can ask your estate plan attorney about a living trust, also known as revocable trust. With this, you can give a trusted individual a durable power of attorney to make decisions on your behalf if you’re unable to do so for yourself. Or you can also assign a temporary power of attorney during your incapacity.
8. Forgetting Your Digital AssetsDigital estate planning is a relatively new aspect. However, with the increasingly technologically-reliant world we’re in, it does make sense.
So, you want to include your digital assets in your estate plans, outlining how you’d like these to be handled after you pass away. Your digital assets can be anything, from social media and email accounts to online banking and digital investments such as cryptocurrency or the stock market.
Just like in other parts of your plan, you want to name a trustworthy digital executor who can ensure that all your digital assets are properly handled.
9. Not Considering Income Taxes On BeneficiariesSome assets left to beneficiaries can create unintentional income taxes. Although most people know that 401(k)s and individual retirement accounts (IRAs) have required minimum distributions (RMDs) after the age of 70.5, you probably don’t know that inherited accounts may also be subject to RMDs.
An IRA or 401(k) inherited by an adult beneficiary is subject to RMDs and could impact their tax situation. And the fund will be taken from the account each year, and in most cases, the entire distribution is taxable. If the beneficiary is a professional with higher earnings, this distribution can be taxed at the maximum marginal tax rate, reducing the total wealth passed down.
One solution is to switch to a Roth IRA, providing tax-free growth. If your beneficiaries have higher tax brackets than yours, it makes sense to convert before they can receive the accounts.
Take AwayYou plan for having a good day, a good life, and a good retirement. But you shouldn’t stop there–make sure to plan a good end of life, too.
That said, there’s no one-size-fits-all for a good estate plan. Your situation and what you want to accomplish are unique and constantly change too. Take the time to sit down with experts and plan for a good end to life while avoiding the above pitfalls. This way, your assets, and heirs survive and thrive even after you’re long gone.
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