Estate planning can be a complex and sometimes daunting process. Perhaps that’s why so many people put it on the back burner or avoid it altogether.
Even if you have an estate plan, mistakes and cut corners can lead to outcomes that don’t align with your values and goals. Therefore, it’s crucial to work with a professional and review and update your plan regularly.
Avoid these six mistakes to ensure your estate plan accurately reflects your intentions:
Mistake #1: Not Having an Estate Plan
Surprisingly, one of the most common estate planning mistakes people make is not having a plan at all. In fact, only 34% of Americans have an estate plan, according to Caring.com’s 2023 Wills Survey.
Without basic estate planning documents, state intestacy laws will determine the distribution of your assets, which may not align with your personal wishes. Meanwhile, the probate process can be lengthy, expensive, and emotionally draining, and may lead to family disputes and legal battles.
If you’re a parent with minor children, the absence of an estate plan means the courts will decide their guardianship in a worst-case scenario. Regrettably, the court may appoint someone you wouldn’t have otherwise chosen to care for your loved ones.
Lastly, your estate may face significant tax liabilities if you fail to plan strategically. Ultimately, this lack of planning can reduce the amount you leave to your beneficiaries.
Mistake #2: Not Planning for Incapacity
If you become incapacitated and can no longer manage your own affairs, appointing someone you trust to step in and make decisions on your behalf can provide peace of mind. Unfortunately, many people overlook incapacity planning when creating their estate plan.
Without clear directives, disagreements can arise within your family over your care, your financial matters, and even decisions like where you should live, potentially leading to contentious legal battles. Moreover, a court-appointed guardian may make decisions about your healthcare and finances that don’t honor your values or preferences.
In many cases, these complications arise due to the absence of one or more of the following documents:
- Durable Power of Attorney (POA). This document authorizes a person you trust to handle financial matters on your behalf in the event of incapacity. This may include paying bills, managing investments, selling property, or handling other financial affairs.
- Healthcare Power of Attorney (POA). A healthcare POA designates an individual to make healthcare decisions on your behalf should you become unable to do so. This may involve decisions about medical treatments, choice of healthcare providers, or end-of-life care.
- Living Will or Advanced Healthcare Directive. This document outlines your personal preferences for end-of-life medical care, such as life support measures, pain management, organ donation, and other critical issues.
- HIPAA Authorization. A HIPAA authorization allows the representatives you designate to access your medical records, which can be vital for making informed decisions about your healthcare.
Mistake #3: Overlooking Potential Tax Consequences
Without proper planning, taxes can erode the value of your estate, reducing the amount you intend to leave to your heirs.
While the federal estate tax exemption is currently high ($12.92 million per person in 2023), you may also be subject to estate and/or inheritance taxes at the state level. Different states have different laws, so it’s important to be aware of the taxes that may affect you and plan accordingly.
If you plan to transfer part of your wealth during your lifetime, you may trigger the gift tax if your gifts exceed a certain threshold. In 2023, the annual exclusion amount is $17,000 per recipient.
In addition, you may be subject to the generation-skipping transfer (GST) tax if you leave assets directly to grandchildren or to a trust that benefits them. The IRS levies the GST tax on top of the estate tax, which can reduce your estate even further.
Income and capital gains taxes can also affect your estate and the amount you ultimately leave your beneficiaries. Thus, an effective estate plan includes plans to strategically transfer your wealth during and after your lifetime while minimizing the potential tax implications.
Mistake #4: Forgetting to Update Your Estate Plan
Life is full of changes. Indeed, marriages, births, divorces, deaths, and shifts in financial status can all dramatically affect your estate plan.
Failing to update it regularly—especially after a major life event—can lead to unintended outcomes, conflicts, and even legal complications. For example, if you go through a divorce but forget to update your estate plan accordingly, your ex-spouse may ultimately inherit your assets.
At the same time, the details of your estate plan may not match your current reality. If your executor or trustee is no longer able to perform their role or you’ve acquired significant assets since your last update, for instance, you may have problematic gaps in your estate planning documents.
Lastly, tax laws often change, including those that impact your estate and beneficiaries. By forgetting to update your estate plan periodically, both may be subject to excess yet avoidable taxes.
Mistake #5: Forgetting to Name or Update Beneficiaries
Beneficiary designations apply to assets like retirement accounts and life insurance policies. Since these designations generally override the terms of a will, forgetting to name or update your beneficiaries can lead to a variety of unintended consequences.
The most significant risk is that your assets might not go to the individuals you’d like to inherit them, especially if you forget to update your beneficiaries after a major life event. If you’ve neglected to name a beneficiary altogether, the terms of your will—or in the absence of a will, state intestacy laws—will determine the distribution of these assets.
Meanwhile, assets like life insurance policies and retirement accounts can generally pass directly to beneficiaries, thereby avoiding the probate process. Failing to name a beneficiary may delay the transfer of these assets and result in a time-consuming and potentially expensive process for your loved ones.
Mistake #6: Not Seeking Expert Estate Planning Guidance
Given the plethora of online tools and resources available, it may be tempting to save money by crafting your own estate plan. However, DIY estate planning can lead to mistakes, oversights, and legal issues that can undermine your intentions and potentially cost your heirs more in the long run.
Thus, it’s essential to work with a reputable estate planning attorney to draft a comprehensive and legally sound estate plan. Your attorney can also help you navigate changing family dynamics and tax laws that impact your estate planning goals.
In addition, a fee-only financial planner like Chladek Wealth Management can help you craft a tax-efficient estate plan that reflects your personal values and achieves your financial goals. We can help you preserve your wealth for generations to come, so your legacy endures long after you’ve left this world.
To begin your financial planning journey and achieve your estate planning goals, please schedule your Free Financial Assessment. We look forward to hearing from you.