It's 2024, and you may finally be making time to create or revisit your estate plan. If so, I commend you — because planning your estate is a compassionate goal that falls victim to procrastination for most people.
Making sure you carve out time is a selfless act of care for your loved ones, including your furry friends. It’s also an opportunity to make sure the difference you make in the world for the causes closest to you continues far into the future after you yourself have departed the world. When planned properly, the decisions recorded in your estate plan can uphold your priorities and your values while setting your loved ones up for success that helps carry forward your legacy.
At the same time, when not planned properly or sufficiently, your estate plan can lead to complications for you and your loved ones. These consequences include making it more challenging for your affairs to be handled smoothly if you become unable to manage them. Lack of proper documentation can also create barriers for your intended beneficiaries to inherit assets meant to be distributed to them upon your passing.
Put simply, I’m familiar with far too many examples of when inadequately thought-out planning has led to familial discord and strife that nobody intends or wants.
Planning your estate can feel like a daunting task, being aware of the most common pitfalls could make a difference for the important people in your life. Here are what I’d describe as the five most common estate planning mistakes and how you can avoid them:
Mistake #1: Neglecting non-probate assets.
Do you have a 401(k) or an IRA? Chances are, you do have a retirement plan, and it’s hardly unlikely that it might be one of your most valuable assets. Unfortunately, these are examples of the assets that aren’t distributed by your will. They’re called non-probate assets. Instead of passing through your will, they pass according to the beneficiary designation on file with the relevant custodian, such as Fidelity or Vanguard.
Even if you clearly designate your beneficiaries within your will, failing to properly set your beneficiaries with your retirement plan custodian would mean you’ve overlooked an integral component of your estate plan that can make the unwinding of your estate more complex. This happens quite often, and in cases involving public figures, it’s surprising how often we see problems occur despite the presence of a will. This is a common cause.
If you do not properly name a beneficiary for these assets, they could become subject to the probate process, which goes through probate courts and can prolong the time it takes for your asset to get where you intended for it to go. This delay can be stressful for your loved ones, who may need to access these funds for their needs and to fulfill your last wishes in accordance with what you’d want.
Another important non-probate asset is life insurance. Many do not realize that life insurance proceeds may be included as part of your taxable estate for estate tax purposes. In addition to naming a beneficiary, consider establishing an irrevocable life insurance trust. This arrangement can help ensure the benefits from your policy can avoid estate taxes.
Finally, by not designating beneficiaries correctly, there’s also a missed opportunity to create lasting impact. For example, many people intend to name charities as the beneficiaries of their non-probate assets to fund causes they care about. This can happen only when the organization is properly named on the correct beneficiary form.
Mistake #2: Not addressing lifetime disability planning with powers of attorney.
Anecdotally, through my work and beyond, I believe that most Americans assume that their estate plan comprises only a last will and testament, to control the flow of assets after passing away. Big mistake, especially with an aging population that continues to live longer.
While a will covers many important factors, including the passing of your assets upon your eventual death, your estate plan is equally important during your lifetime. For example, if you were to become disabled, your plan can name who you would prefer to manage your financial affairs and make decisions that impact your health and well-being. To designate a loved one for these roles, you can create powers of attorney. As described below, these documents allow you to identify one or more agents to make choices for you about these important matters should you become unable to decide for yourself.
Your financial power of attorney covers decisions that include how to fill out your taxes, whether to pursue a real estate transaction and who should receive gifts of your property. Your medical power of attorney covers decisions such as using life-sustaining measures in your care and may include instructions to provide treatment and care that align with your recorded values, religious/spiritual beliefs and wishes.
Your close family members or friends may not necessarily know what you would prefer in these scenarios, so recording your wishes can offer them and yourself peace of mind. Additionally, not identifying someone for this responsibility may lead the courts to decide for you, potentially giving this critical task to someone you believe is not the right fit. Anyone who is familiar with the Terri Schiavo case spanning from 1998 to 2005 can recall how ugly this can get.
Mistake #3: Naming too many co-agents.
When determining which individuals in your life would make suitable co-executors, co-trustees or co-agents, many names could come to mind — maybe Aunt Linda, Uncle Jim and Cousin Sally are all responsible relatives who you would trust with critical matters such as your health care and property. While all of them may be fit for the role, it’s important to note that humans naturally have varying opinions. All of these loved ones may not be aligned in their decision-making regarding health care and financial affairs. A disagreement among your agents can come at a high cost, especially if a court needs to get involved.
For example, let’s say you become disabled, and a piece of your real estate needs to be sold to cover medical expenses. Maybe Aunt Linda believes the price should be $550,000, but is willing to adjust the number within a range of $100,000; however, Uncle Jim and Cousin Sally want to sell the house at $700,000 and will not agree to sell at a lower price. This clash can hold up the transaction during this pressing moment, extending the timeline at which you can access the funds.
If you have multiple people whose opinions you value, consider naming one primary agent and request that they consult the remaining people before making a final decision. This arrangement can account for all the thoughtful opinions of your loved ones while streamlining the ultimate decision-making process.
Mistake #4: Establishing trusts that end too soon.
Have you considered leaving assets in trust for your beneficiaries? This can be a smart and effective estate planning technique because asset protection and tax benefits can often be achieved. Additionally, your financially immature beneficiary can learn a lot about prudent financial management from a trustworthy and dependable trustee. It’s common to establish a trust that terminates when the beneficiary turns a certain age.
However, implementing a trust that ends before a beneficiary reaches the age of financial maturity can lead to your beneficiary making irresponsible decisions.
For example, maybe you established a trust for your child that concludes when they reach the age of 24. While initially creating your plan, you may have believed that they would be ready to take on the responsibility of inheriting all of these funds and assets at that stage. Yet, as they approach their 24th birthday, you recognize that they have yet to improve habits around paying their credit card bills on time or saving a certain amount from their paycheck every month. These factors should lead you to reevaluate your original decision.
It may be worth establishing a lifetime trust arrangement that would provide guidance and oversight during the entire duration of their life, or indicate a later age when the distributions are made.
Mistake #5: Forgetting the furry family members.
Fido, Rover and Scout are not just pets, they’re a part of the family. These are special relationships, and it’s necessary to think about what would happen to your companion animals if you were to pass away. Under the tax code, your pet is considered property, meaning you need to account for them in your estate plan. If you do not designate a legal guardian for them, they could end up in a shelter rather than with someone you know and trust. In fact, over 500,000 pets tend to get placed into shelters annually due to pet parents not accounting for them in an estate plan.
One approach is to bequeath your pet to a trusted individual and give specific instructions for their care. Every companion animal is unique, and some may have certain medical conditions that require a specific number of visits to the vet or have dietary needs that may not be so obvious. You can describe all of these requirements for the guardian you name in your estate plan.
Another approach is to create a pet trust, a more formal arrangement where a trustee is named and charged with distributing funds for the benefit of your pet.
Takeaways
Writing your estate plan is a great thing to do at the beginning of a new year. By avoiding common estate planning mistakes, you can implement a plan that reflects your wishes and supports your beneficiaries.
