June 29, 2012   Estate Planning

Common Estate Planning Mistakes to Avoid


1. Not having a plan. If you do not have an estate plan, the state in which you live has one for you—but it probably will not be what you would have wanted. State laws vary, but generally they leave a percentage of your assets to your family members. (Non-family members, like an unmarried partner, will not receive any of your assets.) If you are married and have children, each will probably receive a share, which could leave your spouse with not enough money to live on. If your children are minors, the court will control their inheritances until they reach legal age (usually 18), at which time they will receive the full amount. (Most parents prefer their children inherit later, when they are more mature.)
 
Probably not all of your assets will go through this court process called probate. Assets with a valid beneficiary designation will be paid to the person(s) you have named as beneficiaries and jointly owned property will automatically transfer to your joint owner. But if your beneficiary or co-owner is a minor or is incapacitated when you die, the court will get involved to protect their interests. If your beneficiary or co-owner has died before you or the designation/title is otherwise invalid, these assets will go through the same court process as your other assets and will be distributed according to state law.
 
2. Not naming a guardian for minor children. You can only name a guardian for your minor children through a will. If you have not done this, and both parents die before your children reach legal age, the court will have to name someone to raise your children without knowing whom you would have chosen.
 
3. Joint ownership. Many older people add an adult child to the title of their assets (especially their home), often to avoid probate. But this can create all kinds of problems. When you add a co-owner, you lose control. Your jointly-owned assets are now exposed to your co-owner’s possible misuse of them; you could lose part of these assets to your co-owner’s creditors; the assets could become part of divorce proceedings; you can no longer act without your co-owner’s consent. There could be gift and/or income tax issues. It’s easy to add a co-owner, but taking someone’s name off the title can be difficult; if they do not agree, you could end up in court. And if you have more than one child but only name one to be co-owner with you, fluctuating values could cause your children to receive unbalanced/unintended inheritances.
 
4. Not avoiding probate. If you have a will, the assets it controls will have to go through the probate process before they can be fully distributed to your heirs. And if you don’t have a will, your assets will probably have to go through probate. (Assets with beneficiary designations and jointly-owned property may avoid probate; see #1 above.) Probate proceedings vary from state to state, but many view the time, cost, and loss of privacy and control that come with probate as unnecessary evils that should be avoided. Probate can often be avoided by using co-ownership and beneficiary designations, or by using a revocable living trust. Because most people want to keep control over their assets and not have the risks associated with joint ownership, a living trust is preferred by consumers and professionals alike.
 
5. Not planning for incapacity. If you can’t conduct business due to mental or physical incapacity (dementia, stroke, heart attack, etc.), only a court appointee can sign for you—even if you have a will. (A will only goes into effect after you die.) The court usually stays involved until you recover or die and the court, not your family, will control how your assets are used to care for you. The process is public and can become expensive, embarrassing, time consuming and difficult to end. It does not replace probate at death, so your family could have to go through the probate court twice.
 
You can give someone power of attorney, but that person can do anything they want with your assets with no real restrictions. A living trust is preferred in the event of incapacity, as well. The person(s) you choose to act for you can do so without court intervention, yet they are held to a higher standard as a trustee; if they misuse their power, they can be held accountable.
 
Health care documents are also critical. You need to give someone the power to make health care decisions for you (including life and death decisions) if you are unable to make them for yourself. Without a designated health care agent, you could be kept alive by artificial means for an indefinite period of time. (Remember Terri Schiavo?)
 
Finally, the exhorbitant costs of long term care, most of which are not covered by health insurance or Medicare, can wipe out a lifetime of savings. Consider long term care insurance to protect your assets.
 
6. Not having a coordinated estate plan. It can be difficult to coordinate multiple beneficiary designations and titles so that all of your beneficiaries inherit the way you want. Real estate and stock values fluctuate almost daily. Also, if one of your beneficiaries dies, you may want that person’s share going “back into the pot” so it can be distributed to your other beneficiaries—instead of going to someone they choose. Keeping beneficiary designations and titles current while you are living is a challenge; impossible if you become ill or incapacitated.
 
One way to coordinate all your assets into one plan is to make your living trust the owner and beneficiary of your assets, then put the distribution instructions in your trust. That way, you can be sure each beneficiary receives the proportionate amount you want him/her to have, regardless of the value of an individual asset. If a beneficiary dies, you can control what happens to his/her share. It’s much easier to change, too; you would just need to change the one trust document, not all those individual titles and beneficiary designations.
 
7. Not using a qualified attorney. Estate planning is not something you should do yourself with a kit or online program. Simple mistakes or omissions can have far reaching effects that only come to light after you are gone. An experienced estate planning attorney understands the technical terms and legal requirements in your state. Most have counseled many families and have seen the results of proper and improper planning. An experienced attorney can guide you to make smart decisions for delicate situations, including who should be the guardian of your minor children; how to provide for a child or elderly parent with special needs; how to provide for your children fairly (which may not be equally); and how you can protect an inheritance from creditors and irresponsible spending.
 
8. Not funding your living trust. A living trust can only control the assets you put into it. You may have a great trust, but until you fund it (by changing titles and beneficiary designations), it doesn’t control anything.
 
9. Not keeping your estate plan up to date. Your estate plan is based on your current personal, family and financial situations, and the tax laws in effect at that time. All of these will change over time, and your plan needs to change with them. It’s a good idea to review your plan every couple of years or so and make sure it still does what you want it to do. Your attorney will let you know when a tax law change might affect your plan, but you need to let your attorney know about other changes. (And that’s another reason to avoid do-it-yourself estate planning.)
Rating
  1. Rate Article:
Form Controls

Register or Login to Rate.



0 Comments


To Comment, reply, or recommend, please Register or Login




Free Estate Planning Checklist

Free Estate Planning Webinar



Stay Updated

Stay updated by receiving updates to estateplanning.com's free resources, latest topics, premium content, upcoming events and more!

Subscribe to Our E-Newsletter