Where There’s a Will, There’s a Way to Avoid 4 Common Estate Planning Mistakes
When it comes to estate planning, what you don’t know can hurt you, along with your beneficiaries or heirs. That’s because estate planning missteps can have far reaching consequences from tax headaches, to family discord, lengthy court battles, and more. Below we look at some common estate planning mistakes and steps you can take to avoid them.
1. Waiting for the right time
A recent study found that less than half of adults age 55 and older have a will. Among those without one, 42% blame procrastination, and more than 1 out of 3 say they don’t have enough wealth to leave behind.1 Surprisingly, many well-known and often wealthy individuals have died without doing any estate planning, including Abe Lincoln, Pablo Picasso, Howard Hughes, Michael Jackson, Amy Winehouse, and Chadwick Boseman, forcing their estates to go through lengthy, costly and very public court processes – something you never want your family or heirs to endure. In Boseman’s case, more than a third of the late actor’s estimated $4MM estate was lost to taxes and legal fees.2 Yet, estate planning is not only about what you have accumulated during your lifetime, it’s also about:
Since none of us knows what the future holds, putting strategies in place now can help protect the people and property you value should unexpected events occur.
2. Assuming you only need one type of will
While they sound similar, a living will and a last will serve different purposes. A last will and testament is a legal document that governs what happens to your property and dependents after your death. It allows you to appoint a guardian to care for your minor children and name an executor who will distribute your property. These can be the same or different entities. It can also help facilitate the probate process. If you die intestate (without a will), state law will determine who will inherit your assets and appoint a guardian for any minor children.
A living will, also referred to as an advanced directive, is a legal document that governs what happens if you become incapacitated during your lifetime. It details the type of healthcare treatments you may or may not want, including extraordinary measures to keep you alive, and your preferences when it comes to pain management or organ donation. A living will becomes effective when the person who has written it is no longer capable of communicating medical decisions.3
A durable power of attorney (POA) is another important estate planning tool. It allows you to appoint someone to act on your behalf in the event you are unable to make certain legal, financial or healthcare decisions on your own during your lifetime. Your POA can be your executor or another individual of your choosing.
3. Forgetting to update beneficiary designations
Certain types of accounts and assets sit outside of a will and are distributed based on individual beneficiary designations. These include life insurance policies and qualified retirement accounts, such as 401(k)s and IRAs that require their own beneficiary designations. Similarly, assets or accounts titled as pay-on-death (POD), or transfer-on-death (TOD), will be transferred directly to the named beneficiaries upon the death of the owner and are not subject to probate. That’s why it’s so important to review your account beneficiary designations annually or whenever changes in your life occur.
For example, if you divorce and remarry, and forget to update the beneficiary designation on your IRA account to your new spouse, your ex-spouse will be entitled to those assets upon your death. That’s the case even if your will or another document, like a trust, was previously updated to reflect your new spouse as the beneficiary of your estate, since the IRA account is not governed by these documents.
4.Failing to fund a trust
A trust is a separate document that can play an important role in the organization and management of your assets during your lifetime (including any periods of disability) and after your death. While there are different types of trusts, revocable trusts are among the most commonly used. A revocable trust means the trust can be changed at any time during the owner’s lifetime. It becomes irrevocable upon the owner’s death and cannot be changed at that point forward.
Unlike a will, assets held in a trust avoid the court-supervised probate process following the owner’s death. Other advantages associated with a trust include a high degree of flexibility, continuity of asset management, privacy, and potential tax savings. To reap the benefits of the trust, it’s important to work with your estate planning attorney and financial professionals to ensure that the appropriate assets are placed in the trust. This involves retitling certain financial accounts and real property.
If you would like to discuss your estate planning strategies, call the office to schedule time to talk.
1 Lustbader, Rachel, “Caring.com’s 2023 Wills Survey Finds That 1 in 4 Americans See a Greater Need for an Estate Plan Due to Inflation.” Caring.com, https://www.caring.com/caregivers/estate-planning/willssurvey/#:~:text=But%2C%20many%20others%20are%20still,enough%20wealth%20to%20leave%20behind. Accessed 3 AUG 2023.
This information was written by KRW Creative Concepts, a non-affiliate of the Broker/Dealer.
This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Financial Watch | August 2023
August 24, 2023