No one likes to think about death, but it is inevitable. This is precisely why the importance of estate planning cannot be over emphasized. Creating an effective estate plan requires an adept understanding of several factors but many people fail to pay close attention to them. While every estate plan is unique, there are common mistakes many people repeatedly make. This post aims to explore five of these mistakes so you create an effective estate plan that will help you prepare for the uncertainties of the future and eventual death.
Having No Plan
Over 55% of Americans do not have a will, let alone an exhaustive estate plan. Even more surprising is the fact that 64% of Americans aged 37 to 52 do not have one. One major reason for this is most people expect to live into their 80s so they keep pushing off this important task. Unfortunately, a considerable number of people do not live so long.
When a person dies in intestacy, or without a will, the distribution of their assets may be determined by a probate court. Since there’s no way for the court to know the intentions of the deceased, the property is distributed in a way that person may or may not have wanted. But it’s more than the money. If the deceased left a minor, the court also gets to decide a guardian. In the worse scenario, if no guidance is available, the minor is left to become a ward of the state.
At the very least, you should have a will. Even better is to have a comprehensive estate plan that will ensure that your wishes are fulfilled after death. Moreover, it will help ease the financial strain among your surviving loved ones.
As important as making an estate plan is ensuring you understand the plan. Ensure the estate planner spends time walking you through the planning process. Moreover, make sure you make notes so you can remember why you made some decisions years down the line.
Not Updating Beneficiary Designations
Many people make estate planning a one-time activity; they initiate it but fail to review and update periodically. Everything in life changes; laws change, situations change, status changes. An outdated beneficiary designation can cause an asset to go to an unintended person.
It’s truly shocking the number of people who have prior spouses or deceased relatives still named as a beneficiary on a retirement account or a life insurance policy purchased decades ago. In the court of law, beneficiary forms trump wills and testaments. This means that if you name your current wife and kids as a beneficiary of an asset in your will, but the beneficiary form contains your ex-wife’s name, that asset goes to your ex-wife.
That’s why it’s so important that after marriages, divorces, births, death of loved ones, change in estate laws, and other major life events, you review all your accounts to see if you need to update beneficiary statements.
Not Assigning Powers of Attorney
Powers of attorney are an important component of estate planning because of the possibility of getting incapacitated later in life. If a person cannot conduct business due to mental or physical incapacity, only a court appointee can sign for this person. This appointee controls and makes decisions on how your assets will be utilized.
That’s why it’s prudent to appoint people you trust to act as your powers of attorney while you’re still fit. You need at least two powers of attorney. It’s wise to assign a person versed in financial matters to serve as your financial power of attorney, while you can choose another person to act as your medical power of attorney. Furthermore, having backup powers of attorney will ensure that you have someone to act on your behalf even if your first choices are unavailable.
Not Funding Your Revocable Trusts
Many estate plans include a revocable trust. Although it is heavily taxed, assets owned by a trustee avoid probate and help with planning for other issues while you’re living. Unfortunately, many owners believe that simply listing assets in a trust is enough to ensure proper distribution. For some assets like household and personal effects, this is the case.
However, for the majority of other assets, the trust must be funded for it to be transferred without having to go through probate court. For instance, in real estate, the deed must be changed to reflect the trust as the owner. For financial accounts, the record has to be changed with the custodian and assets may have to be transferred from the old to the new account.
Failing to follow through the necessary steps means you’ve just wasted money to create the revocable trust because, at the end of the day, you may not be able to implement it.
Not Planning for Estate Tax Liability
For individuals with considerable assets, adequate planning can prevent your heir from incurring high inheritance taxes.
Following the Tax Cut and Jobs Act of 2017, the estate tax exemption amount was set at $11.4 million per person in 2019. Five years ago, it was just $5 million per person. This means that a couple can exempt up to $22.8 million in a taxable estate from federal tax laws.
For those who have completed their plans a long time ago, it’s crucial to review to see if it is still tax efficient. Modifying your plans to take advantage of the new estate tax laws will help you save family time, stress, and money in the future.
This point is a cautionary example of why it’s important to review your estate plan after major law changes.
Now is the right time to sit down and plan for the future so that you’re prepared should you become mentally or physically incapacitated later in life. And when you finally leave this world, proper planning will ensure that your assets are distributed according to your intentions.
Let us help you prepare. Contact us today for more information.