Most people completely ignore estate planning, which is probably the most important part of the entire financial planning process. Even people who recognize the importance of estate planning often overlook the important details that make up a proper estate plan.
But with proper planning, everyone can ensure that their personal wishes are respected, their family members are properly taken care of, and that the assets of the estate are distributed as intended.
Before we discuss the most common mistakes in estate planning, let’s take a step back to define what exactly estate planning is.
What is estate planning?
In simple terms, estate planning is a person’s attempt to answer the following question:
What happens to myself, my possessions, and my loved ones, if I’m not able to make those decisions any more?
With that said, estate planning can be a relatively simple process, or it can be complex, depending on your specific situation. But deciding to have a comprehensive estate plan that gives you peace of mind is one of the most important decisions you can ever make.
Starting doesn’t always guarantee success. Here are 9 common estate planning mistakes to avoid when it comes to your estate plan.
Estate Planning Mistake #1: Not having any estate plan in place.
Many people simply never take that first, most important step. And this is the biggest mistake anyone can make in estate planning, for several reasons.
When you die without estate planning documents in place, like a will, you’ll likely die intestate. When you die intestate, you literally leave all the decisions up to the state. This might include decisions like:
- Where important assets go
- Which family members gets what assets
- Who takes care of your minor children
In other words, you give up control over the decisions you probably would want to be in control of. Most likely, things that should be private affairs will be aired out in probate court, which doesn’t serve anyone’s best interests.
Additional stress for your loved ones
When you die without leaving instructions, you put additional strain on the people you love. For example, your surviving spouse, who is already facing one of the most stressful times of his or her life, now has to deal with a lot of decisions about what you might have wanted, without knowing for sure.
The best way to help your loved ones avoid this stress is to document your life wishes and have an estate plan in place.
Estate Planning Mistake #2: Not taking the time to learn about estate planning.
Many people think that estate planning consists of getting a bunch of legal documents together, like a will, powers of attorney, and maybe an advanced directive for medical decisions. While proper estate planning likely requires these important documents, it’s important to understand what this stuff means.
And that’s what an experienced estate attorney can help you with. An estate attorney specializes in giving legal advice about estate planning needs to people, and educating them on estate planning aspects of their personal situation.
The primary thing that you have to do is be attentive enough to learn from the attorney’s experience, and inquisitive enough to ask questions for a better understanding. And that’s something you’re probably not going to do by yourself.
Estate Planning Mistake #3: Doing your estate plan by yourself
Make no mistake. There are people who love doing things themselves.
- Why hire a financial planner? I’ll manage my own investments?
- Why hire a lawn care company? I can take care of the yard myself.
But more often than not, most of these people end up not putting in the work to do it properly, or taking the time to learn. As a result, their yard ends up a giant mess. Or their investment portfolio performs poorly.
And estate planning isn’t an area where you don’t want to see the results of not putting in the work. But the good news is that estate attorneys aren’t expensive for most people. And you don’t have to do it all the time.
But you do have to keep an eye on your estate plan once in a while just to make sure you’re keeping up to date with major changes in your life.
Estate Planning Mistake #4: Not keeping your estate planning documents up to date
Once you create an estate plan, it’s critical that you check it on a regular basis to make sure it remains relevant. Why? Several reasons:
Your life changes
Let’s imagine you’re 60 years old. You’re reviewing the estate planning documents you drafted when you were 30 years old. What are the odds that you didn’t have one major life change or a significant life event over the past 30 years?
Did you get married? Divorced? Remarried?
If you had a revocable trust in place to care for your minor children, guess what? They’re adult children now. Probably with children of their own.
The point is that your estate plan needs to be updated to reflect significant changes in your life. And they need to be relevant to the changes in the law.
The law changes
Estate planning law changes over time. And the law is different from state to state.
So your estate plan needs to be reviewed from time to time to ensure that it remains up to date with state laws.
When I was a financial planner, we would tell clients that they should have their estate documents reviewed at least:
- With each major life change-this could be change in marital status, having children, moving to another state
- Every 5 years
Just as importantly, you need to be talking with the correct people about your estate plan.
Estate Planning Mistake #5: Not communicating with the right people about your estate plan
So, who are the right people? The right people include:
- Those who are on your estate planning team
- Those who are a part of your estate plan
- Those who are impacted by your estate plan
Let’s take them a step at a time.
Estate planning team
Estate attorney: At the very least, the law office where your estate planner is. I say the law office because the estate attorney who drafted your documents might not be the same one who ends up executing them. For example, your estate attorney might get sick, pass away, or retire.
Financial advisor: If you have a financial advisor, investment advisor or financial planner, those people count too. Your financial planner will keep an eye on the financial aspects of your estate plan, to include:
- Life insurance policies
- Retirement plans or individual retirement accounts (IRAs)
- Investment accounts
- Bank accounts
Your financial planner has a very important role to play in your estate planning, as we’ll get to in a moment.
Tax professional: If you expect to file estate tax returns, believe your estate will pay federal estate taxes, or face big tax bills from your state, then your accountant or tax professional should be included from a tax planning perspective. People who own business interests or rental real estate definitely need to keep their tax professional up to date on their estate plan and their intentions.
Part of your estate plan
Who is a part of your estate plan. Basically, anyone whom you name as someone expected to carry out your intentions. This could include:
- Personal representative or executor (executrix) of your estate
- Successor trustee, if there are trust administration requirements beyond distribution of assets
- Durable power of attorney
- Guardians of minor children
You need to talk with each of these people when you create your estate plan, so they understand your expectations. More importantly, you need to know if they aren’t able to, or don’t want to, accept those responsibilities. That way, you can update your estate plan as needed.
Finally, you need to update these people as your plan changes. This might include:
- Changes to your estate planning documents
- Location of ALL important documents
Finally, we get to those impacted by your estate plan.
Impacted by your estate plan
This is a highly personal decision. Some people are wary of having a conversation with their beneficiaries about what they’ll inherit. Most folks think that having this conversation means that their kids will end up spending their inheritance before they get it.
It’s an uncomfortable conversation, but it’s worth having. Because despite most parents’ fears, heirs are more likely to make a more informed financial decision when these conversations take place.
- They ask more questions about income taxes (especially when inheriting IRAs, where they might face big tax bills)
- They ask for tax advice to help with those tax questions
- They seek financial advice to avoid investment mistakes, when they know they’re charged with protecting an inheritance
And it’s not just children. Married couples can benefit from this too. Spouses who normally ‘delegate’ financial decisions, should feel empowered by having these important conversations.
Estate Planning Mistake #6: Not paying attention to beneficiary designations
Do you know which accounts have beneficiary designations? Do you know the designations on your life insurance policy? What happens if your primary beneficiary dies before you?
This is where a good financial planner comes in. A good financial planner will:
- Help you understand which accounts need beneficiary designations
- Help you understand and complete beneficiary designation forms
- Keep an eye on your beneficiary designations to make sure they reflect the intent you’ve outlined in your estate planning documents
One important consideration is how to designate contingent beneficiaries.
Contingent beneficiaries: Per stirpes or per capita?
If one or more of your primary beneficiaries predeceases you, then your contingent beneficiaries might receive some of the assets in question. Or they might not. It depends on how you designate your contingent beneficiaries.
We’ve written at length about the difference between per stirpes and per capita designations in a separate article.
Estate Planning Mistake #7: Not accounting for what happens if you DON’T die
Sometimes, we’re so worried about what happens when we die, that we forget the other unfortunate situations we might encounter.
What if we:
- Become incapacitated for a period of time?
- Go into a coma?
- Need long term care?
Your estate planning attorney can discuss important health care documents, like:
- Advance medical directives
- Power of attorney for medical care
- Living wills
- Special needs situations
At the very least, you should ensure that your health care provider has HIPAA (Health Insurance Portability and Accountability Act) release forms so that the right people have access to talk with doctors in the case you’re in an accident.
Estate planning doesn’t have to be a complicated process. And once you have an estate plan in place, it doesn’t take a lot of effort to maintain it. But like anything else, a good estate plan does need to be periodically reviewed and maintained to remain relevant.
If you liked this article, and are interested in learning more about other estate planning topics, please check out our estate planning archives!