Just making a plan is not enough, but there are common mistakes to avoid when estate planning.
1. Not having an estate plan at all
This is the most common estate planning mistake any one can make. A lot of people cringe at the thought of their death and so may fail to make definite plans towards it. When a person dies without having a will, trust, or any other asset distribution document in place, then the state laws would determine where their assets go. Also, some people plan with their lips without documenting any real plan.
2. Not updating your estate plan
Estate planning should not be abandoned at a corner after creation. Estate planning documents such as wills and trusts, etc., are always subject to state laws and these laws are often amended from time to time. Also, these laws vary across states and you would have to amend your will or trust if you move to a state where the estate laws are different. When a baby is newly born into your family or a beneficiary dies before you, you consequently would have to update your estate plan to address the change.
3. Failing to plan for incapacity and long-term care
Not making plans to address sudden mental or physical disability may be detrimental to your finances. When estate planning, you should consider creating a living trust or power of attorney in order to name a person who would act on your behalf in the event you fall into illness or involve in a fatal accident. No estate plan is complete without planning for long-term care as a huge percentage of American senior citizens would need long-term care before they die.
4. Not planning for minor children
Ensuring that your children are properly cared for is one of the foremost importance of estate planning for most parents. Untimely death is an unfortunate possibility, thus you should create a will or trust designating a guardian or trustee to manage funds which you would leave for your minor children and clearly spell out how the funds are to be used for their benefits.
5. Not planning for estate tax savings
Another common mistake when estate planning is not planning to reduce your estate taxes. A great way to reduce estate taxes is by making gifts. According to the Internal Revenue Code, gifts below $14,000 a year per spouse made to businesses, groups or individuals, will be excluded from estate tax. This will invariably lead to your having more funds in your estate to pass on to your beneficiaries.
6. Not taking advantage of the federal tax exemption
Since 2018, the federal tax exemption has been set at $11.18 million per spouse. The tax exemption policy is the easiest way for couples to avoid estate taxes but unfortunately, some people do not take advantage of this. Surviving spouses are allowed to take on the deceased spouse’s unused exemption through a “portability election”, thereby doubling the surviving spouse’s exemption amount.
7. Choosing the wrong personal representative
Many people would think appointing their spouse or child as their fiduciary but this often is a mistake. Such persons would be too emotionally tied and due to grief, may not perform their fiduciary roles as supposed. A more financially experienced person would be better suited as a fiduciary.
8. Improper ownership of property
There may be oversights during estate planning which may be brought to light after death. Some assets may be in the name of a partner instead of being jointly owned by the couple. Having joint ownership would ease asset protection and transfer at the death or incapacitation of one partner. Improper ownership could also result when a person gives their own name to their business, transfer retirement accounts into a trust, or putting a child’s name on the deed.
9. Lacking asset liquidity
Some people die without having enough asset liquidity. This would be a major source of concern when the estate needs to be distributed among the heirs and there is no readily available cash to distribute or to manage your business affairs. Life insurance is a great way to provide liquidity, pay off debts and distribute amongst heirs.
10. Not consulting with an experienced professional
When you make this mistake, you likely would make several of the above mistakes as you may lack proper knowledge on how to create a perfect estate plan that addresses all possible issues which you or your survivors may have in the future. A tax professional would provide you with tax-planning strategies, and an experienced estate planning attorney would assist you in creating a personalized estate plan based on the peculiarity of your estate.