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7 Costly Estate Planning Mistakes

Couple avoids costly estate planning mistakes

And How to Avoid Them

Estate planning can be a daunting task to undertake. It’s often difficult and emotional to consider your own demise. Add to that a bunch of confusing legal jargon and complex planning strategies, and you may be tempted to throw in the towel before you even begin your estate plan.

And if you have successfully navigated the estate planning process once, you may be hesitant to revisit your plan to make sure it continues to meet your changing needs. I understand.

However, if you’re not taking steps to manage your estate plan, you may be making costly mistakes. Below are seven common estate planning mistakes and strategies to help you avoid them.

Mistake #1 – Not having an estate plan

It may seem silly to call this out, but according to a recent survey, although 56% of Americans believe estate planning is important, only 33% of adults in the United States have documented their end-of-life wishes. Of the estate plans created in 2021, 75.12% included wills and 18.78% included trusts. Shockingly, only 6.1% of people designated guardians for their young children!1

If you don’t have an estate plan in place, you could be putting your assets at risk. More importantly, you’re missing an important opportunity to provide for your children following your death.

You probably won’t meet anyone who tells you they enjoyed the estate planning process. That being said, it can feel very comforting to have a well-thought-out, carefully executed estate plan. It’s also a valuable gift for your loved ones that can save them significant time, stress and money. Countless clients have come to me to get their own estate plan prepared after experiencing how easy it was to administer the estate of a loved one who had a comprehensive plan in place. It’s a true act of caring for the people you leave behind.

Mistake #2 – Thinking a will is enough

A will is an important document and a great first step in developing your estate plan. However, many people are surprised to learn a will isn’t always enough to protect their loved ones.

A will is a legal document that specifies how you’d like your assets to be distributed following your death. It allows you to name an executor for your estate and a guardian for your minor children. A will can (and should) be updated and changed as your life and situation change, but it only goes into effect after your death.

If you die without a will in place, your assets and property will be distributed according to the default laws of your state, which may not be consistent with your wishes. Perhaps more importantly, a judge will be responsible for determining who will care for your minor children, which may not be the person you would have chosen.

The downside of a will is that it can’t help you avoid probate. In fact, probate is typically the process the executor designated in your will must follow in order to take charge of your estate after your death. The probate process can be extremely time-consuming, stressful and expensive for your heirs.

In addition, probate proceedings are a matter of public record, which means anyone, including creditors, fraudsters and estranged family members, can find out who’s inheriting your assets and how much they stand to receive.

If your goal is to avoid probate, you may need to implement additional estate planning strategies, such as a revocable living trust. Your wealth manager can help you determine whether a trust makes sense based on your financial situation and goals for the future.

Mistake #3 – Only planning for after you die

Many people incorrectly believe that an estate plan’s sole purpose is to designate how assets are passed along following your death. However, a solid estate plan can also help protect you while you’re alive, should you become unable to make decisions on your own.

It’s important to implement the following documents to protect yourself:

  • Financial power of attorney –A financial power of attorney (also known as a durable power of attorney for finances) is a legal document that designates an individual to act on your behalf should you become incapacitated and unable to make financial decisions on your own.
  • Healthcare power of attorney –Similar to a durable power of attorney, a healthcare power of attorney designates an individual to make medical decisions on your behalf should you become incapacitated and unable to do so on your own.

If you become incapacitated without these documents in place, your loved ones will need to go before a probate judge to request authorization to make financial and healthcare-related decisions. As mentioned earlier, probate is matter of public record, which means the court must hold a public hearing to determine what’s most certainly a very private matter. Like any court proceeding, the process can take a long time and lead to significant legal expenses.

In addition, the person appointed to manage your affairs may not be the someone you’d want to have decision-making authority.

You can save both yourself and your loved ones a lot of time, stress and money by having powers of attorney in place before an unexpected event occurs.

Mistake #4 – Thinking you’re not old enough or wealthy enough to need an estate plan

If the word “estate” has you picturing a country manor with manicured gardens and a full-time staff, you may believe your net worth precludes you from needing an estate plan. However, estate planning is an important step to take, regardless of how old you are or how much money you have.

In fact, the estate planning process should begin at age 18, when you’re legally recognized as an adult. Without the necessary documents in place, your family members may be unable to obtain medical information or even visit you in the hospital should you have an accident or serious injury.

At Creative Planning, we recommend all adults, regardless of age or assets, have the following documents in place:

  • Signed Health Insurance Portability and Accountability Act of 1996 (HIPAA) waiver to help ensure your loved ones have access to your medical information and can visit you in the hospital should you experience a serious accident or injury
  • Advanced medical directive/healthcare power of attorney
  • Financial power of attorney
  • Basic will (a trust may also be advisable under certain circumstances)

Mistake #5 – Taking a “set-it-and-forget-it” approach

Implementing an estate plan is a great first step, but thinking of estate planning as a “one-and-done” task can be a costly mistake.

For example, let’s say you established an estate plan during the early years of your marriage, leaving everything to your lovely spouse. Then 20 years later, you and your first spouse are divorced and you’re remarried, but your estate plan remains unchanged. Who do you think will inherit your assets when you die? (Hint: It’s not your current spouse or the children you had together.)

Estate planning should be an ongoing process. It’s not enough to establish your plan and leave it unattended for decades. Instead, it’s important to regularly review your plan and make changes to help ensure it remains up to date as your life and financial situation evolve over time. There are also changes to the law that can significantly impact whether your estate plan can be followed according to your wishes. The SECURE Act, for example, made significant changes to the laws around inherited retirement accounts. A plan that doesn’t account for these types of changes can create major roadblocks for the people trying to administer your estate.

Be sure to review your estate plan at least every other year and whenever major life events occur, such as:

  • A marriage or divorce
  • The birth of a child or grandchild
  • The death of a loved one
  • The start of a new business
  • A home purchase
  • A move to a different state

Mistake #6 – Failing to properly title trust assets

Trusts offer several benefits that wills don’t. Similar to wills, trusts allow you to specify how your assets are to be distributed following your death. However, unlike assets passed along via a will, trust assets aren’t subject to probate and can be transferred more quickly to your heirs following your death.

However, in order for a trust to be effective, your assets must actually be controlled by the trust at your death. After establishing a trust, it’s essential that you complete the extra step of “funding” your trust. This process involves taking steps such as retitling all your real estate and accounts into the trust and updating beneficiary designations to direct assets to your trust at your death. This can be a time-consuming task, but it’s absolutely vital to ensuring the effectiveness of your planning efforts.

Mistake #7 – Not integrating your estate plan with your overall financial plan

A final common mistake is treating your estate plan as a stand-alone set of documents. Instead, your estate plan should be a coordinated part of your overall financial plan.

Viewing your estate plan as an extension of your overall financial plan can help you:

  • Align your personal values with your long-term goals
  • Protect and provide for your loved ones
  • Support your favorite charitable organizations long into the future
  • More efficiently transition your wealth
  • Minimize your tax liabilities

Could you use some help getting started with estate planning? Creative Planning is here for you. Our in-house estate planning attorneys work alongside your wealth manager to help ensure you have a solid estate plan that’s in line with your overall financial plan and goals for the future. For more information about how we can help you avoid costly estate planning mistakes, please schedule a call with a member of our team.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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