Avoid These Common Estate Planning Mistakes

Since October is Estate Planning Month, the month can't pass us by without some more articles about estate planning. An important part of any sound comprehensive financial plan, estate planning can do a number of things for you and your loved ones. This includes, but is not limited to, ensuring your assets pass to who want them to, keeping estate taxes as low as possible, helping the financial security of your survivors, and making sure your health care wishes are followed, among others.

It should go without saying then, that everyone should have some type of an estate plan. An estate plan can be as simple as a will or as complex as including one or more trusts. The more thought and care you put into your estate plan, the better it will be for your beneficiaries and heirs. Remember, though, that overlooking an important step could undo all the time and hard work you put into your estate plan. Therefore, here are some common mistakes to be careful to avoid making.

Many financial accounts can have a beneficiary assigned. First, it's important to designate a beneficiary to your financial accounts. Doing so makes the transfer of those assets to the beneficiary much simpler.

It's easy to forget that a specific person was designated as a beneficiary of an account. For example, an account holder divorces his/her spouse, but neglects to change the beneficiary to a retirement account, so when that account holder passes away the account assets pass to the ex-spouse. It's a good idea to revisit your assets and beneficiary designations on a periodic basis and whenever major life changes occur.

Assigning beneficiaries may appear to be straight-forward, but it can be more complex when it comes to distributing assets among different people. For example, an individual or couple may want to leave their assets to their children in equal shares. If one child has been designated as a beneficiary of a bank account, that designation takes priority over the will. That account passes to the one child, while the rest of the assets could pass to all the children in equal shares, leaving that one child with a larger share than the other children. Therefore, it's important to include very clear and precise instructions in your will that distributes your assets exactly how you want, taking into account specific account beneficiary designations.

If you made arrangements for your funeral or burial plot it's important to include that information in your estate documents and ensure your family knows of your wishes and those arrangements. If you haven't made those arrangements, include your wishes in your will or trust. Doing so will make the process much simpler for your family, who will be mourning your death and dealing with many other things at the same time.

Also, be sure to delegate a specific person or persons to handle the final arrangements so that you can be sure they understand your wishes. Failure to make arrangements or designations could force any issues to be resolve in probate court, which could take time and have a considerable cost involved.

When you think of an estate plan, your probably think of it as being for when you die. However, an important part of any estate plan is planning for the possibility of becoming incapacitated, whether it's from a sudden accident or a long-term medical condition. A properly developed estate plan should address those types of events and identify people who are authorized to make important decisions on your behalf regarding your finances, health care, and other important matters. This is usually done through powers of attorney and advance medical directives. The key is that these are established before incapacity because otherwise the decisions that need to be made, or determining who can make those decisions, falls on the courts.

It's important to designate contingent or secondary decision-makers for your estate plan. In your will this would be a contingent executor. For your trust it would be a successor trustee. You can even designate multiple decision-makers, in order of preference, in case one or more of them are no longer available. This is especially important when spouses name each other as their executors or trustees of their trust. If both spouses happen to die at the same time, then there is no one left to make the decisions, resulting in matters being decided by the courts.

In the world of estate taxes, it is sometimes far better to gift assets after death rather than before it. For example, if you gift property to a next of kin during your lifetime, the amount of the capital gains is based on the original purchase date, which means your next of kin will eventually pay taxes using the original purchase price. However, if you gift the property at death, then the basis for the capital gains is based on the value of the property at the time of death, which may be much higher than the original purchase price, resulting in lower taxes for your next of kin in the long run. These are important details that must be taken into consideration when developing an estate plan.

A very common mistake with estate plans is the failure to transfer title of a property to a trust. For example, an individual establishes a trust to transfer their home to their children at death. However, the deed is never changed from the individual to the trust. When the individual dies, the ownership of the house must go through probate. That creates many issues when bills must still be paid for the property or the next of kin may want to move into, sell, or renovate the home.

Estate plans can be complex, but they are not just for high net worth or wealthy people. Everyone can benefit from having a will, powers of attorney, and advance medical directives as a minimum. And a trust can help ensure assets pass to who you want, quickly and smoothly, with less cost than probate. Be sure to check out other Escient Financial Insights articles on Estate Planning for more info. For more guidance, feel free to...