The goal of estate planning is to ensure your assets transition to your loved ones after your death in an efficient manner while maximizing tax savings. There is no one plan for everyone – it depends on you, your family, your assets and your wishes. Unfortunately, not everyone pays as much attention to their estate plan as they should or heeds the advice of their lawyer.
During the estate administration process, it is easy to see where the decedent veered off course. Often the fix was inexpensive and could have saved their heirs lots of money in legal fees. As they say, hindsight is 20/20.
Here are the top 10 costly mistakes I have seen in administering estates:
• Improper funding of the trust. You spent time, money and effort in creating a trust, but you never took the last and often most critical step to ensure your assets are either in the trust now or will flow into the trust upon your death. Not doing so could mean that the assets never reach your trust and your intended beneficiaries.
• Unintentional beneficiary designations. If your will leaves assets to your nieces and nephews, but your large retirement account names your cousin as the beneficiary there may be little if anything that your nieces and nephews receive under the will. Review your beneficiary designations to make sure your assets flow the way you intend.
• Insufficient cash to pay gifts. It is important that your estate has enough cash to pay any specific gifts listed in your will. Remember retirement accounts and life insurance pass outside of the will and go directly to named beneficiaries. If the only asset passing under your will is your home which you want to leave to your children, but your will includes cash gifts to charities, the house will need to be sold to pay the charities.
• Lack of understanding about how estate taxes are paid. Estate taxes are paid on all your assets, not just on assets passing under your will. When you leave your retirement accounts and life insurance to named beneficiaries, it is often difficult to get them to pay their fair share of the estate taxes. Your loved ones who inherit under the will are often stuck paying all the taxes. Be sure to structure your plan so that the tax liability is consistent with your intentions.
• Forgetting to update your estate plan after a divorce. Unfortunately, this happens a lot. You never removed your ex-spouse as the beneficiary of your retirement account or your life insurance. Or worse you were required to maintain a life insurance policy for your ex-spouse after your divorce, but instead you changed the beneficiary to your new spouse. I have seen these scenarios play out time and time again, often leading to costly lawsuits.
• Having an “old” will. Laws change, people die and your intentions may have shifted. Make sure you review your will with your attorney every few years (or sooner if you have experienced a major life event) to ensure that it does not need updating. Often a simple update can save your heirs from expensive headaches down the road.
• Poor communication about who gets what. Mom leaves her cherished family beach house to her son but doesn’t tell her daughter that she will not be receiving it. This can result in years of litigation whereby daughter asserts evidence that mom intended the house to be shared by her children. Set expectations. Otherwise, your family members may be battling it out in court.
• Skipping the formal execution process. Your lawyer drafted a will for you, but you decide to get it signed on your own with some friends as witnesses. However, if the will is improperly executed, it could be held to be invalid or it may open the door for some of your heirs to file a will contest.
• Drafting your own will. Creating a will is based on state laws and decades of case law. If elements of the will are missing or if the language is unclear, it could lead to a will contest or the executor having to petition the court for guidance. Either way, it prolongs the estate administration and increases the costs.
• Not doing an estate plan. Having no will or trust can lead to your family members battling it out in court over your intentions or having the court oversee every aspect of the administration. This is particularly true if you have minor children as they cannot inherit money. The court will appoint a guardian to hold the minor child’s inheritance and then oversees the monies spent.
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