Here are five of the most common, yet tragic, mistakes people make with their estate planning. From failing to plan to failing to pay attention to the details, here are five tragic mistakes to avoid:
1. Failing to Plan
The first tragic mistake people make in their estate planning is simply failing to plan. Everyone needs an estate plan so that, at a minimum, YOU decide: A) who will make financial decisions for you if you become incapacitated and cannot make them for yourself (and your spouse is unable to do so); B) who will make medical decisions for you if you reach the point where you cannot make them for yourself; C) who will take care of your children if you die or become incapacitated; and, D) who will receive your property at your death, and how that inheritance will be structured. Failing to plan simply means that you would prefer to have your state decide for you what should happen with your property when you die and who should have a say in making decisions for you if you lose capacity.
2. Failing to Regularly Review the Plan
The second mistake people make is thinking their estate plan is a one-time decision. It’s not. Life changes, circumstances change, laws change. Your plan will need occasional maintenance to make sure that it continues to match your wishes as your life circumstances change. Every couple of years, consider: 1) Are the persons I have selected to be my fiduciaries still appropriate? 2) How have my assets changed since my estate plan was prepared? 3) Have the tax laws changed and have the changes affected my situation? 4) Have there been any marriages or divorces that affect me? 5) Have there been any births or deaths that affect me? 6) Have any of my intended beneficiaries experienced difficulties (such as addiction, divorce, disability, or creditor problems)? Considering each of these questions on a regular basis will help you recognize when your estate plan needs to be updated.
3. Failing to Protect Children’s Inheritance From Creditors
A third mistake people make is failing to recognize the benefit of protecting their children’s inheritance from claims of the beneficiaries’ creditors. If the children receive their inheritance outright, or at a certain age after the parent’s death, then the property is not protected from claims of the children’s creditors at that time and not necessarily protected from the claims of a divorcing spouse of the child. Creditor protection and divorce protection can be obtained by structuring the inheritance so that it is held in a trust for their benefit under terms that make the property inaccessible to the creditors.
4. Failing to Coordinate Retirement Plans and Life Insurance With the Living Trust or Will
A trust or will is what people most often use to express their instructions on how and to whom their property is to be distributed at death. It is likely to have specific carefully crafted provisions for how the property is to be distributed to the beneficiaries, whether in trust with restrictions on how the assets may be used for their benefit and spendthrift provisions to protect the property from creditors. None of this careful planning applies to assets like life insurance and retirement plans that are governed by the beneficiary designations on those accounts. Thus, the beneficiary designations need to be coordinated with the will or trust. Also, people sometimes fail to revise the beneficiary designations that were made before their will or trust was prepared, such as parents, siblings, or former spouses. As a result, those unintended beneficiaries may receive the life insurance and retirement account instead of the beneficiaries under the will or trust.
5. Failing to Fund the Revocable Living Trust and to Keep it Funded
The final tragic mistake people make is failing to fund their revocable living trust and keep it funded. A trust is funded by transferring assets to it; simply preparing the trust is not enough, yet some people make the mistake of failing to transfer their property to their trust. A similar mistake is failing to take title to later-acquired assets in the name of the trust, or by removing assets from the trust to refinance a mortgage and failing to transfer it back to the trust when escrow closes. The carefully prepared trust will only govern the property that is in the trust, so it is critical to make sure that the assets are actually transferred to the trust, and retained in the trust, and that newly-acquired assets are titled in the trust. Failing to do so may result in probate court proceedings, which can be long and expensive in many jurisdictions, all of which could have been completely avoided.
Additional Resources
Fortunately, these mistakes are easily avoided and if caught timely, are easily corrected. For more information, you should consult with an experienced trusts and estates attorney.
