Journal Help Client Avoid 10 Common Estate Planning Mistakes

Journal Help Client Avoid 10 Common Estate Planning Mistakes

 Estate Planning.

Estate planning is the process of anticipating and arranging, during a person’s life, for the management and disposal of that person’s estate during the person’s life, in the event the person becomes incapacitated and after death.

Common Estate Planning Mistakes to Avoid

1. Failing to develop an estate plan.

Many people believe that only the uber-rich need to have an estate plan. Others find it unhealthy to think about and plan for their death. Whatever the reason, it is important for nearly everyone to have an estate plan. If you don’t direct to whom and how your assets will be distributed at your death, your state statute will control. Often, this is not in line with how you want your assets divided and distributed. Formalizing your wishes may also save your children and family some heartache after you are gone and may help prevent inter-family arguments, which could end up costing more in legal fees.

2. Failing to create a complete list of assets and family information, and failing to keep adequate records.

A complete list of your assets and an approximation of their value will aid in crafting an appropriate estate plan that takes into account potential estate tax exposure and other issues that arise in estates of your size. Oftentimes, people undervalue their estates; a common misconception is that life insurance proceeds and retirement plan proceeds are not taxable. In fact, life insurance proceeds and retirement plan proceeds are both includable in your gross estate for estate tax purposes. This can result in an unrealistic estimate of your estate tax liability and a failure to properly address tax-reduction strategies that may be implemented during life and at death.

3. Failing to confirm or update beneficiary designations.

Life insurance proceeds and retirement plans can comprise a large portion of a person’s wealth. Life insurance, IRAs, pensions, and other employee benefits do not pass under your will or trust but are governed by beneficiary designation. Therefore, it is important to confirm that the beneficiary designations reflect your wishes and are consistent with your other estate planning documents.

 4. Failing to name appropriate fiduciaries.

In general terms, the executor will administer your estate after your death, the trustee will be the gatekeeper of your assets and may make decisions regarding the distribution of your assets to your beneficiaries, and the guardian will be the caregiver for your minor children. Each role has separate and distinct responsibilities, and you must carefully consider whom to name in each capacity. It is common for people to simply name someone because they feel obligated or they want to avoid offending anyone. However, you should appoint people or institutions who are highly competent, possess the relevant knowledge, and understand your values.

 5. Failing to correctly title assets.

Similar to missteps in designating beneficiaries, incorrect or haphazard titling of your assets can have unintentional and sometimes disastrous outcomes. For example, many people do not realize that jointly held property passes from one owner to the other automatically upon the first owner’s death. Therefore, inadvertently, an inequitable amount of property may pass to a joint tenant if he or she is also named as a beneficiary in your will. Similarly, it is often overlooked that a transfer of real property into your name with another as joint tenants during your lifetime is irrevocable.

 6. Failing to consider incapacity.

Should death comes in considering estate planning, and in covering the distribution of your assets, your estate plan should set forth who will make decisions for you if you are incapable of making them yourself. It is prudent to execute a durable power of attorney to name someone to make financial decisions for you in the event you are incapacitated.

 7. Failing to structure gifts and inheritances appropriately.

Estate plans are not one-size-fits-all. Your estate plan should not be cookie-cutter, but rather designed to take into account your beneficiaries’ needs and circumstances. The documents should be tailored to specify not only who receives your assets after your death, but how they receive them.

 8. Failing to consider, fund, and properly administer an irrevocable life insurance trust.

Life insurance proceeds will be includable in your estate if you own the policy at the time of your death. If the value of your estate (including the life insurance proceeds) exceeds the applicable estate tax exemption amounts, it may be prudent to create an irrevocable life insurance trust to hold the policy, thereby sheltering the proceeds from estate taxes at your death.

 9. Failing to consider gifting techniques during life.

It is not uncommon for an older person to ask for estate planning advice. Although some techniques can be employed at older ages, in most cases better results (for example, lower estate taxes) could have been achieved if a gifting program had been implemented earlier.

10. Failing to review and update your estate plan.

It is tempting to prepare an estate plan and put it on a shelf and forget about it. However, because of changes in the law, changes in your family circumstances, and changes in your viewpoints, estate plans should be reviewed periodically.

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