Top 10 Estate Planning Mistakes

Gregory Palacorolla, CFP ®

Most people don’t plan on leaving their family with huge tax bills or setting them up for costly and emotionally draining legal battles/family arguments. Unfortunately, it happens, often as a result of improper estate planning or total lack thereof. We can have the best of intentions for our loved ones, but if not outlined, documented, and carried out properly, those intentions can quickly transform into ticking time bombs capable of hurting, or even worse, ripping entire families apart.

We’ve compiled a list of 10 mistakes people make when planning their estates:

  1. Burying your head in the sand and avoiding the topic of Estate Planning altogether

Let’s face it, none of us enjoy engaging in conversation regarding our mortality, let alone seeing it in permanent ink on a piece of paper. However, the reality is this uncomfortable moment where you are forced to dine with one of your greatest fears, will potentially save your family money, heartache, and unnecessary stress at a time when they will be forced to deal with a lot already.

  1. Not updating the plan itself

At the very least, it is encouraged that plans be reviewed with your estate planning attorney annually. Major life changes such as a birth, death, divorce, and marriage are all triggers. Changes in your job status, residence, net worth, and even your goals, also warrant a review. Changes to the law also occur from time to time generating a need to revisit your plan. You may not be following these types of changes as closely as your attorney, which is why annual meetings are advantageous.

  1. Not updating Powers of Attorney

You typically have at least two, one for financial matters and one for medical care. What if you are incapacitated or not of sound mind? Having a Power of Attorney (someone you trust) in place will help ensure your designated Power of Attorney can facilitate your medical and financial matters.

  1. Beneficiary mistakes

Not naming a contingent beneficiary on retirement accounts and insurance policies is a huge mistake. Typically, the contingent beneficiary will default to the estate if none is stipulated, which can lead to creditors, probate, and delays. Furthermore, no contingent beneficiary on an IRA means your loved one is not eligible for a valuable tax break called a “stretch IRA,” which allows someone who inherits an IRA to draw out distributions over his/her life expectancy if the original beneficiary has died.

Failing to review beneficiaries annually or when an event arises warranting a change, such as a divorce or marriage, can cause problems. Perhaps an asset goes to a parent or sibling instead of your spouse because you forgot to change it. Perhaps a child was born after you prepared the documents and you forgot to add them as a beneficiary later.

  1. Not updating asset ownership

Some assets are jointly owned with a spouse, adult child or another individual. Some involve trusts or limited partnerships. These should be reviewed just like beneficiary designations are reviewed. Laws change, as do personal circumstances, sometimes leaving plans obsolete or more complex, and costly than originally intended.

  1. Not understanding the plan in its entirety

It isn’t uncommon for people to rely on their estate planning attorney so much so that they don’t truly understand the plan put in place. It is the attorney’s job to explain the basics of the plan, the “why” behind each section, what needs to be done to implement/maintain it, and how it works for you as well as your beneficiaries. Take notes during each stage of the planning process and ask questions! You will always have these to refer back to later.

  1. Naming specific investments in will

Specific bequests take priority. The person who died may not own that investment anymore, which means their estate would have to purchase it again, but this time possibly at a much higher price, which could have a negative impact on all his/her other beneficiaries.

  1. Death of beneficiary

When one of the beneficiaries dies, how does the money get distributed? Do you want the money to go to the beneficiary’s offspring? If so, one way to set this up is to use the verbiage that you are leaving your assets to “all lawful children equally – per stirpes.” If you don’t use the correct verbiage you could potentially be cutting people out of the will unknowingly.

  1. Failure to fund Revocable Trusts (aka Living Trust)

Assets owned by the trust avoid probate and help with disability planning, as well as other issues. The trust is created after the attorney prepares the trust agreement and all interested parties sign it, but after that, the trust must be funded. Legal title to assets has to be transferred to the trust. For some assets, such as personal effects, it is simple. However, when dealing with real estate, the deed must be changed to show the trust now has ownership. For financial accounts, you must change the name of record with the custodian. These steps must be taken otherwise the assets won’t avoid probate and other benefits associated with the trust won’t be realized.

  1. Not having a residuary clause

A residuary clause encompasses things you didn’t specifically name in your will, forgot to include, things you don’t own yet but will before you die, and even things you aren’t aware you own.

Don’t let your good intentions turn into ticking time bombs. Contact your estate planning attorney to create a plan that reflects your wishes, or if you already have a plan, reach out to your attorney annually for a review. If you experience a life event or change in goals, contact them right away. Your family will thank you. 

Sources: Kiplinger and Forbes

© Geier Asset Management, Inc. Nov. 2018. Gregory Palacorolla, CFP ® is Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of November 2018 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.