It’s sad but true: estate planning mistakes are incredibly easy to make. Planning your estate is a complicated process, with lots of potential pitfalls that you need to avoid. Worse, while there are certainly similarities and big rules that every estate plan must follow, each one comes with unique challenges.
That being said, there are a number of common mistakes that we at Haimo Law have seen over and over. In this post, we’re going to highlight those big errors – so that you don’t end up making them.
Avoid These Estate Planning Mistakes
Want to know the biggest, most common mistakes people tend to make in estate planning? Check out my video below.
[Read Transcript]
Hi, this is Barry Haimo. Thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you a meaningful amount of information in a short amount of time. Today I’m going to go over what I would call the top mistakes that we see in estate planning. Let’s jump right in.
Number one, not understanding that you have an estate leaves the door open for how it’s going to unfold. And it’s going to be a surprise to everybody. We promise you that. One of the things that can happen is the estate goes to probate. Another thing that can happen is this day goes to guardianship.
We’ve talked about these in other videos, so we’re not going to get into them today. But the bottom line is that probate guardianship and the surprise that can happen if you don’t have a plan are the consequences of not having a plan. Having the right people versus the wrong people can make a significant difference when it comes to day to day rights and day to day needs. Financial, medical, decision making, who you’re seeing, where you’re going. Those are things that you can decide for yourself or the court’s going to decide for you.
When there’s families that get along and it’s a beautiful harmonious picture, it’s less of an issue. But unfortunately that’s not always the case. So when you don’t have these documents in place, you’re basically rolling the dice that the court’s going to appoint somebody that you would have hoped would be the right person, the most appropriate person, the most caring person, the most responsible person. When it comes to inheritance, people don’t understand that blended families will have usually a different result depending on which spouse dies first.
A lot of times with blended families, all the kids are our kids. We love them all equally. Even though they’re not mine, they’re mine. But under the law that’s not the case. Under the law, they’re not yours and they’re not going to get anything from you. So if you go first, your kids that you want to be your kids will not be included.
I would say another issue would be assets being disorganized. Having assets all over the place is just disorganized and it’s a pain in the ass to keep on top of for one thing. But when something happens to you and somebody else has to come into the picture, they have to figure it out. So if you have a great spreadsheet with all this organized, that’s helpful, but by no means eliminates the problem. If you don’t know where those assets are, you’re setting this person up for a lot of trouble. And it’s going to be very expensive to figure it out, that I can assure you. You’re setting your family up for a problem.
A big mistake that we see a lot is not being mindful of retirement accounts. IRAs, 401ks, life insurance. These assets are exempt from creditors. These assets don’t go to probate. If they’re done right, they go over probate. They go outside the toll booth of probate. If you screw that up and they’re not entered correctly, or if your advisor screws it up – that happens too – the bottom line is, if it’s not accurate, it might go to the wrong person. It might be confusing as to what happens to it and it has to go to court for interpretation.
If it goes to the estate for some reason, which is possible – we’re dealing with numerous cases right now where that’s inadvertently happened – the estate picks it up, and now it’s part of the probate, which it shouldn’t have been. It’s subject to creditors in the probate, which it shouldn’t have been, and it’s now subjected to adverse taxes, which it shouldn’t have been. It’s just a waste. So be careful with your retirement accounts.
Another thing is going back to the advanced care directors that I mentioned about taking care of you during life, it’s very common where family members there’s one caregiver that’s like taking care of you and helping you with your doctor’s appointments, your pills, your medications, your pharmacy pickups, your doctor runs, food shopping, paying bills, and the other kids are not helping. And that pisses you off, and you want to do something about it. The only way to do something about it is to do your planning.
If you don’t do your planning, they’re all the same. They’re all treated equally. And you may end up with a situation where the children that are less caring and involved are in a position of power that you really would prefer to have a caring and healthy child in. And that’s just a decision you’re going to have to make. It’s not going to be made for you.
Homestead is often a nice little trip wire. They bury it under the dirt. It’s like a hole with one of those little bear traps. There’s three parts of homestead. The part that trips up people the most is the inheritance portion. It goes to spouse and minor kids, whether you like it or not. A prenup or postnup can mitigate that, but breaking the rules results in a different set of rules, which is often very surprising and challenging.
Surviving spouse. Surviving spouse will get a portion of your estate if you disinherit him or her, move to Georgia. If that’s unacceptable, the amount that he or she can claim is the elected estate. Elected estate includes the probate estate plus other things that are outside the probate estate. It brings it back in and it’s divvied up in the court.
I would say the most interesting and most problematic issue with not planning ahead is litigation. Even if you do plan ahead, it can go to litigation, so it’s important to strengthen your files and do it right at the right time. Doing your planning and then passing away in a week where you’re cutting somebody out is a recipe for litigation.
Not necessarily because you didn’t have the capacity or you were forced to do it, but because a picture can be painted that way, and that picture painting that way is expensive to overcome. So the timing of your planning is actually quite important. Messing that up can be consequential.
Those, of course, aren’t the only estate planning mistakes people make. Other common ones include:
Not Updating Your Estate Plan
Estate plans are developed to fit the circumstances of your family at the time of the writing. But over time, most people have a significant life event or two that could potentially alter the way you want your assets to be distributed or your affairs to be handled.
You will also need new documents for changes such as new life insurance policies or changes in the status of assets such as retirement accounts. If you currently have an estate plan, take some time to review it carefully, and consider whether you’ve had any life events that would affect your plan.
Not Planning for the Possible Death of a Beneficiary
A thorough estate plan will make provisions for the potential death of each beneficiary. If a beneficiary dies and the estate plan does not include a contingency for this event, that beneficiary’s portion of the estate will have to go through probate.
Especially having just gotten through the COVID-19 pandemic, when everyone’s future was more uncertain than it would otherwise have been, hopefully people are waking up to how important it is to plan for this contingency.
Selecting the Wrong People to Handle Your Affairs
Ideally, every estate plan should include someone to handle your medical care (should you become incapacitated) and your financial matters.
You will want to select a personal representative who you trust to act in your best interests in these capacities. This person can be a family member, a close friend, or even a hired professional.
Sometimes, your relationship with your personal representative might change, though. If you start to feel that another executor might better reflect your wishes and be more equipped to execute your affairs the way you want, switching is possible — but only if you officially do so.
Naming a Particular Beneficiary Can Be a Mistake, Too
Speaking of wrong people, one of the worst estate planning mistakes you can make is to choose the wrong individual or entity as a beneficiary. Make the wrong call and you could end up facing significant taxes, chaos, court, costs, conflict (litigation), and a host of other unpleasant and destructive surprises.
There are several mistakes commonly made when someone names a beneficiary. They include:
Designating Your Estate as Beneficiary
Some people assume that if they name their estate as their beneficiary, then the executor of the estate or any trustees in a trust that’s been set up will have the control to distribute the assets as you want to your beneficiaries. This is not the case.
When you name your estate as your beneficiary, then those whom you want to inherit your assets will need to initiate probate in order to establish who or what should receive your assets in accordance with the trust or will you’ve left behind. Probate is a costly process and delays the distribution of your assets, so it’s something that should be avoided if possible.
Designating a Minor as Beneficiary
You can certainly name a minor as a beneficiary to your estate, but doing so will complicate things upon your death. Financial institutions cannot directly pay benefits to a minor, so a conservator or custodian will have to be appointed to manage the inheritance until they come of age. In Florida, this means age 21.
Talk to an estate planning attorney about the less complicated avenues you can take to name a minor child as a beneficiary — such as creating a trust or naming them a co-beneficiary.
Designating Beneficiaries That Cannot Manage It
You may have someone in your life who you would designate as a beneficiary… but know you shouldn’t because they won’t be able to manage the inheritance on their own. For example, someone financially irresponsible or someone who is disabled.
An attorney can work with you to create a trust that appoints someone else to manage the assets of your estate for the beneficiary. They’ll be able to enforce limits on how those assets are to be used. The trust can then be named as a beneficiary.
Mistakes in High Net Worth Estate Planning
One last area with its own set of issues to deal with? High net worth estate planning.
If you are a wealthy individual, and you haven’t taken the proper precautions to safeguard your assets, you can be saddled with probate, high taxes, and other financial burdens. The greater your worth, the more complicated (and crucial) your planning can be, and the easier it is to make estate planning mistakes!
This is why it’s so valuable to have a trusted attorney guide you through the process. Together, you can navigate the following common mistakes to ensure you and your heirs avoid legal and financial issues down the road.
Mistake 1: Underestimating Estate Taxes
High net worth estates can be subject to high tax rates and liability — which can burden your heirs and diminish your assets. But planning ahead can protect your wealth and your beneficiaries from substantial tax liability.
There are a number of strategies to help reduce your estate taxes, including:
- Financial gifts to individuals (up to $15,000 a year, tax-free)
- Financial gifts to charities, tax-free
- Creating a trust, which can lower tax liability and helps avoid probate
- Opening an LLC (limited liability company) to pass down assets to family, with lowered taxes
Mistake 2: Unclear Division of Assets
If you own multiple businesses or properties, having a clear plan for the division of your assets can avoid conflict, confusion, and turmoil. If you want to divide your assets among multiple people, you must use precise terms and language in your estate plan. Also make sure to put everything in writing and communicate clearly with your beneficiaries and the trustee or personal representative of your estate.
Trusts are estate planning tools that can help you design the best way to divide and distribute your assets clearly and prevent conflict among your heirs. They can also help avoid probate, which saves time, money, and stress.
Mistake 3: Neglecting An Advanced Care Directive
There are events in life that are impossible to foresee. Most people consider the terms of their estate after they have passed away… but neglect the possibility of a life event that makes it impossible to tend to their affairs while they’re still around.
If you become incapacitated, your estate can fall into disarray if you do not have advanced care directives in place. These documents help secure your estate and outline your wishes or appoint trusted individuals to act on your behalf if you are unable to make life decisions.
They can include:
- Power of Attorney
- Healthcare Surrogate or “Proxy”
- Living Will
As you can see, estate planning mistakes are a hassle, but they are avoidable. Working with an experienced estate attorney can make all the difference. Contact Haimo Law today for the support and guidance you need to plan and protect your estate now and in the future.
