The world we live in is no longer as simple as writing a will and expecting it to go as you wish. Many think only a will controls how their assets will pass upon their death. However, many people hold much of their wealth in retirement plan accounts or life insurance, and these assets pass outside wills.
After your death, avoiding common mistakes when planning an estate will ensure you minimize expenses related to estate administration while still abiding by your specific end-of-life wishes.
Failing to Understand Common Estate Planning Tools
The simplest way to avoid common estate planning mistakes is to grasp a firm understanding of common estate planning tools. A will explains your last wishes, names an executor for your estate, and provides instructions for what will happen to your property and assets. Certain estate tools, like retirement accounts and life insurance, are separate from wills. They can be especially helpful as they provide instant cash to a beneficiary, reducing the estate’s cost burden. A trust is probably the most beneficial tool, but not commonly understood or used.
Failing to Avoid Probate
Probate is a court-supervised process that confirms or invalidates a person’s will, settles their estate, and distributes their property and assets to the proper beneficiaries. For some estates, the probate process is straightforward and uneventful. For others, it can be costly, time-consuming, and worth avoiding.
If after planning an estate, mistakes occur, your estate may be forced into the probate process and be liable for thousands of dollars in unnecessary taxes and probate fees. Meeting with an experienced estate planner could help you avoid the time and cost of probate.
Failing to Use Trusts
You can avoid most estate planning mistakes, and probate, by setting up a trust. A trust is a three-party fiduciary agreement that allows someone (the trustor) to give a third party (the trustee) rights to hold assets and property on behalf of and for the benefit of a beneficiary. A trust is funded with assets like real estate, bank accounts, and other investments (apart from retirement accounts and life insurance).
Using a trust may offer significant tax benefits, so failing to use one can cost you big time. A trust also helps you avoid probate, limits challenges by heirs, and provides flexibility as life circumstances change.
However, it is important to transfer assets into the trust as you accumulate them. Failing to transfer assets as life goes on could leave sizable assets outside the trust, resulting in costly probate and unwanted tax implications.
Other Common Estate Planning Mistakes to Avoid
In addition to the general common estate planning mistakes mentioned above, there are other, more complicated mistakes that are equally important to avoid.
Failing to Update Beneficiaries
Reviewing your beneficiary designations for retirement accounts and life insurance policies when major life changes happen can help you avoid litigation. Many difficult cases in estate litigation result from a person who divorced, remarried, or had another child but failed to update their beneficiary designations.
Losing Control by Adding Someone to Your Bank Accounts
Adding a child to a bank account could be a mistake if your child is not financially savvy. By adding them to the account, you are subjecting that account to potential creditors. Be mindful that giving that person an ownership interest could subject your property to a tax lien if they don’t treat the account responsibly.
Gifting Assets in Advance of Death
Giving away large amounts of an estate before your death could be a huge mistake as it may result in unwanted tax issues, reduce your federal estate tax exemption, and incur a capital gains tax. Further, the estate may be liable for a gift tax—a tax that’s applied on gifts exceeding a certain dollar amount paid by the giver.
Failing to Consider Tax Consequences
Retirement accounts and life insurance policies may provide fast cash to a beneficiary, but each is subject to different tax liabilities. Insurance policies are tax-free, while retirement accounts are subject to income tax. Failing to understand the difference could result in less value in your estate than anticipated.
The estate itself also has its own tax implications. An estate tax is imposed on estates worth more than a set value. Failing to implement a properly structured estate plan could leave you liable for an estate tax you could otherwise avoid.
Further, be sure to clarify in your trust or will who will pay the estate tax. Failing to do so could leave a hefty inheritance tax bill for your children or partner.
Hiring an Estate Planner Is Worth It
Investing in an experienced estate planner now will save your loved one’s heartache down the road. Having worked as a licensed clinical social worker and mental health therapist prior to practicing law, attorney Katherine Harris Elliott at Harris Law Firm provides empathetic counsel to her clients during the estate planning and probate process. For a free case review, call 662-237-3869.