Creating a plan for your estate is one of the most important things you can do for your loved ones. Your plan can help your family avoid costly legal and financial pitfalls after you’re gone. But if your plan has errors, it can lead to unintended consequences, family conflict, and serious financial loss. Don’t fall into these common estate planning traps.
We are going to review some of the most common estate planning mistakes. We will discuss why it is important to have a plan, what happens if you let your documents become out of date, and what is involved in considering tax consequences. We will also discuss the importance of communicating your plan to your loved ones and how to avoid misunderstandings.
Mistake 1: Failing to Create a Plan at All
It might surprise you to know that the number one mistake people make when it comes to their estate plan is not having one at all. Many people put it off or believe they are too young or do not own enough assets to need a plan. This is a dangerous and false assumption that can create monumental legal and financial problems for your family. Without a plan in place, your estate is distributed under your state’s intestacy laws.
This means that a court will decide who gets your property and how they divide it, and this may not reflect your true wishes. Probate can be a long, expensive, and public process. It can also cause a great deal of strife for loved ones as they fight over the assets you leave behind. A simple will can be the first step in the right direction, and can give you the peace of mind in knowing that you have taken the time to control the fate of your legacy.
What Happens Without a Will?
- State Control: You may have people in your life like close friends, charities, or loved ones who aren’t related to you that the state would not allow to inherit under the intestacy rules.
- Guardianship Issues: If you have minor children, the court will appoint someone to care for them without your input. This is a very personal decision, and you should have the right to make it for yourself.
- Lengthy Probate: Your estate will go through the probate process, which can take months or even years to resolve, delaying the transfer of assets to your heirs.
Mistake 2: Failing to Update Your Documents
Life changes and evolves, and you may go through a number of important life events that have significant implications for your estate plan. Marriage, divorce, the birth of a child, or a substantial increase or decrease in your financial situation are all common examples. A mistake many people make is creating an estate plan and then never looking at it again. An outdated estate plan can be just as bad as not having one at all.
For instance, a will that you wrote before the birth of a child could leave them completely out of your plan by accident. A former spouse could be left as a beneficiary on a life insurance policy or retirement account if you failed to update your beneficiary designations after a divorce. The best way to prevent this is to review your plan every three to five years or immediately after a major life change.
Events that Should Trigger a Plan Review
- Marriage, divorce, or separation.
- The birth or adoption of a child, grandchild, or great-grandchild.
- The purchase or sale of a major asset, such as a home or business.
- The death of a beneficiary, executor, or guardian you named in your documents.
- Major changes in tax laws.
Mistake 3: Forgetting to Account for Taxes
One of the most important elements of a sound estate plan is minimizing taxes. Federal and state estate taxes, inheritance taxes, and even capital gains taxes can all take a major bite out of the final value of your estate. A common mistake is not taking these taxes into consideration, and leaving your heirs with a much smaller financial legacy than you intended.
An effective estate plan will use a number of different tools and strategies to limit your exposure to these taxes and fees. Trusts are one of the most effective ways to protect your assets against estate taxes, and gifting is a great way to pass on wealth during your lifetime to reduce the overall value of your taxable estate. A qualified estate planning attorney can help you understand the tax landscape and create a plan to minimize your tax burden.
Mistake 4: Poor Choice of Executor or Trustee
Your estate and trust administration documents should have a person in place to be in charge of the administrative details of your plan. These individuals are referred to as executors and trustees, respectively. An executor is in charge of ensuring that your final wishes are met, from paying off debts to transferring ownership of your assets to your beneficiaries. A trustee will manage the assets in your trust according to the instructions in the trust document. It is vital to name the right person for this responsibility.
Appointing the wrong person as an executor or trustee can lead to all sorts of problems. Your plan could end up being mismanaged and delayed, your assets could be squandered, and your family may end up fighting with each other over the details. Sometimes people name their oldest child or a close friend without much consideration of whether they are the right choice.
The ideal candidate for executor or trustee is someone who is responsible, organized, trustworthy, and financially savvy. They should be able to deal with complex administrative details as well as interpersonal conflicts in an impartial and professional way. It is also important to name a successor if your first choice is unavailable or unwilling to serve.
Mistake 5: Not Communicating With Your Beneficiaries
When it comes to your estate plan, there is a right and a wrong way to be private. Beneficiaries who are in the dark about your estate plan until you are gone can be taken by surprise by the details of your plan. They may feel like you have treated them unfairly or unreasonably, which can lead to contests of your will and trust. This can tear families apart and cost your loved ones hundreds of thousands of dollars in legal fees. It is important to be forthcoming with your plan while still protecting your privacy.
Your loved ones do not need to know the intimate details of your financial situation in order to understand your estate plan. Having a family meeting and a frank discussion of your wishes and expectations is a good way to set everyone on the right path. Explain why your plan is structured the way it is and introduce the person you have chosen as your executor or trustee. This can help manage their expectations and pave the way for a seamless transition when the time comes.
Secure Your Legacy Today
Estate planning is an important part of any person’s financial life. Creating an estate plan is the best way to ensure that your family is provided for and your hard-earned assets are protected. By being aware of these common estate planning mistakes and taking proactive steps to avoid them, you can help ensure your loved ones are protected.
Don’t wait until it is too late to get your estate in order. Take action today to protect your legacy. Consult with a qualified estate planning attorney and a financial advisor so that you can plan for the future with confidence. Your family will thank you for it.
Larsen, Larsen, Nash & Larsen offers some of the best estate planning services in Salt Lake City. Give us a call at (801) 964-1200 or visit us online. We can’t wait to meet you!
We’re located at 2974 West 3500 South, Salt Lake City Utah 84119
