Estate planning is one of the most unloved steps in creating a financial plan. No one really likes to think of their own death, and developing a comprehensive estate plan can be both unsettling and complicated. However, it’s an essential step if you want to ensure that your estate is distributed in the manner you would like.
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Avoiding Estate Planning
The most common estate planning mistake is to avoid it altogether. Unfortunately, this mistake is far too common. There are innumerable reasons why people avoid estate planning, including fear of its complexity, reluctance to accept the inevitability of death and assuming it’s unnecessary. The truth is that nearly everyone can benefit from at least some level of estate planning, so don’t let excuses get in the way.
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Thinking You Don’t Have Enough Money
Estate planning is often thought of as only for the rich and famous. After all, some statistics show that only about 0.07% of decedents pay any estate tax. And while it’s true that advanced estate planning techniques might only apply to those with a certain level of wealth, all individuals can benefit from a well-defined estate plan. At the very least, having a will in place can direct the probate court how you want your assets distributed, and having a trust might allow you to avoid probate altogether, keeping your affairs out of the public record.
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Doing It All Yourself
Estate planning can be a landmine full of tax and legal consequences. Since estate law is complex and ever-changing, this is one of those times you should call in an expert to help you plan. Even if all you need is a simple will or trust, working with an estate attorney can help ensure that you don’t overlook important requirements when completing your paperwork. Since the purpose of estate planning is to protect your assets and make sure they are transferred to the right people, it’s critical that all of your documents are in order.
Overlooking Special Circumstances
In addition to specifying where you want your assets to go after you die, your estate plan should cover additional special circumstances. For example, many estate plans contain a provision for a “living will,” which directs medical personnel to avoid using extraordinary measures to prolong your life if you become totally incapacitated. Without this directive, your heirs might need to petition the court to make those types of judgments. Another example of a special circumstance might be if you want children from a different spouse or other individuals who wouldn’t normally be in line for an inheritance to share a portion of your estate.
Not Considering All Contingencies
A good estate plan must be flexible and able to handle any contingencies that arise in the future. One of the most common areas where estate plans need flexibility is in the area of executors. Your best friend might agree to be your executor when you draft your trust, for example, but 30 years down the road, he or she might have a change of heart, be unreachable, or may even predecease you. If you don’t have contingent executors lined up, your whole estate plan might end up in the hands of your state court. This is only one example of contingencies that your estate plan should address, and it’s another good reason why you should work with an estate attorney.
Having Outdated Beneficiaries
In a perfect world, you’ll hand pick friends, family, charities or others important to you to receive your assets after you die, and your estate executor will make those distributions according to your wishes. The reality is that life can sometimes get messy, filled with ex-spouses, estranged children, friends who have fallen out of favor and so on. In other words, the people you select as your beneficiaries when you are 30 might not be the same ones you want to pass your assets to 50 or 60 years in the future. Planning to review and/or update your beneficiaries for all of your financial accounts at least annually is a good practice.
Having a ‘Set It and Forget It’ Mentality
An estate plan is a living, breathing set of documents. Although it can be tempting to simply “set and forget” your estate plan at the time you draft it, you should embrace the idea that you’ll have to review and/or update your documents frequently. Think about how often major changes occur in your life, from buying a house to raising a family to getting married or divorced. Whenever you undergo a major life change, which would include major changes in your income or net worth, take that opportunity to update your estate plan.
Naming a Minor Beneficiary
You might be tempted to name one of your minor children as the beneficiary of your estate, especially if you don’t anticipate passing until they reach the age of majority. However, this can be a mistake, as minors can’t directly take possession of an inheritance. As unlikely as it may seem to you, if you do pass away while your children are still minors, your estate might pass into a guardianship, something that could be avoided if you instead named a custodian or trustee of your choosing to manage your children’s inheritance.
Adding a Minor as Co-Owner
Just as you shouldn’t name a minor as a direct beneficiary, you should also avoid having a minor sign on as a co-owner to your estate. For starters, if you add a co-owner to your estate, you’re legally gifting half of your assets to the joint owner. If that co-owner is your child, you might be subject to gift tax. Also, if the minor is pursued by creditors, the money in the joint account may be vulnerable. If you instead passed the inheritance to your heir through a trust, that money would typically be protected from creditors.
Not Considering Income Tax Ramifications
The income tax ramifications for assets vary depending on when they are given and sold. For example, if you gift a stock worth $200 that you bought for $100, the recipient of that gift will be liable for that $100 gain if they sell the stock. If instead that gift is transferred upon your death, your cost basis will be “stepped-up” to the current $200 value, meaning your heir won’t be liable for any taxable gains at all. There are other income tax ramifications to estate planning that you should discuss with your attorney, including the intention of the Biden administration to remove this step-up in basis for gains exceeding $1 million for single taxpayers.