10 Common Estate Planning Mistakes People Make
Here are ten common estate planning mistakes —some you may already know about, while others you’ve at least heard of—that people have made when they’re arranging their estates. We’ve seen many unhappy, unfortunate, or plain strange things happen with wills and trusts over the years. Inadequate estate paperwork could result in people accidentally omitting loved ones from inheritance funds, paying significant taxes without intention, and spawning costly legal fights for families of the deceased.
#1 – Estate Planning Mistakes w/ Beneficiaries
One of the main estate planning mistakes that folks make is simply to fail to name a contingent beneficiary on their retirement accounts and insurance policies or not doing it regularly enough. If no contingent is selected, you will be the default option; this might be subject to probate, debt collection, delays, etc.
Changes to an IRA’s beneficiary are not automatic. If you forget to alter your ex-spouse on an IRA, it can have terrible consequences for your new spouse or family! (Please note that in a retirement plan, your new spouse becomes the beneficiary the day you get married, but this isn’t the case with an IRA!) If you don’t want your present spouse to benefit from your retirement plan, they must agree to name someone else. And no, a prenuptial agreement isn’t going to help here because only a spouse has those rights, and a fiancée isn’t one yet!
#2 – “Selling” Your Assets or Property for $1.
This was once popular in areas where land value rose dramatically. One law firm had a client whose grandfather relocated and he had paid $50 for a lot of land (this was quite a long time ago). The same lot would be valued at nearly $2 million today. The idea used to be that you could sell for a low price and avoid paying taxes on the profit without having to worry about the tax burden. You are free to sell the property at whatever price you choose; however, the IRS may consider these assets a “gift” if they are less than market value, and this can lead to some tricky tax considerations – so be careful to avoid these kinds of estate planning mistakes and ask your estate planning attorney about the best practices for your situation.
#3 – Naming Specific Investments in Your Will.
For example, let’s say a person bequeathed shares of a stock worth $10,000 to a grandchild 30 years ago. One issue with this situation is that the Will was signed 30 years prior, and the shares would have been worth roughly $600,000 at his death, but he didn’t own them anymore. His heirs would then have to buy those shares to be able to give them to their grandchild. A situation like this could drain virtually all of the estate’s value, leaving beneficiaries with very little actual property. Ensure you straighten out any notable bequests first and foremost and determine the ownership / eligibility of your assets. An individual who dies may not even still own the investment, or it may need to be sold at a higher price after the person’s death, and the estate could be compelled to purchase the assets at a higher price later as a result. Avoid these kinds of estate planning mistakes where applicable.
#4 – Giving someone a gift without considering possible changes or other implications.
One client at another law firm had three daughters, and she wanted to make sure that they would always have a home to go to within the town she grew up in. Her Will stated that her kids were not permitted to sell her house until everyone in the shore community-owned one. Two of the children lived in the same town as their mother at the time of her death. On the other hand, the third moved to San Diego (2,500 miles away!) several years before her mother’s death and did not want to own a property there.
Because of how the Will was written, these particular heirs had to go through a lengthy legal procedure to sell their mother’s house. Worse, during this time, the property’s value plummeted dramatically, and the heirs ended up losing more than $500,000 in addition to costly legal expenses once the property was eventually sold.
#5 – Transferring assets directly to a minor without dealing with guardianship issues
What happens if the bank account runs out of funds? Is it the parent’s responsibility to replenish it? Who will manage the minor’s finances until they are old enough to handle them? Questions like these can open up a Pandora’s box of potential meanings, so it’s important to think through the situation carefully and be specific so you can plan for unplanned events and the possibility for any unfortunate circumstances that could occur.
#6 – Failing to anticipate the death of a beneficiary.
What happens to your assets if one of the two beneficiaries listed in your will passes away? Is it the other beneficiary or the family of the deceased who will receive them? You could end up disinheriting grandchildren by bequeathing everything to the second beneficiary and their family!
This is often referred to as per capita (which is Latin for “by heads,” that means per person) vs. the term per stirpes (which is Latin for “by branch,” means each branch of a family would be entitled to receive a share). You could create your Will so that it can be read as follows: You leave your property to “all legal children equally — Per Stirpes.”
#7 – Mistakes and imbalances in asset ownership.
If too many assets are in one spouse’s name, it may speed up or increase taxes (see your estate or tax planning attorney).
Frequently, one spouse has worked longer and has a much larger IRA. They might also have a vacation house or investment accounts in their name only. The estate becomes more equalized by investing funds or transferring the home to the other spouse, reducing the chance of owing taxes after the first death.
#8 – A residuary clause is not included.
A residuary clause can address any items you didn’t specifically identify in your Will, anything you forgot to include in your will/trust/etc., things you don’t yet own but will own before your death, or something you may not even know you have.
This happens more often than you might expect. One family went to sell a house and discovered that part of the property was a 4-foot by 25-foot strip of land that wasn’t theirs. When we went to ask the owner to sell it, he had no idea it was his.
#9 – Failing to plan for unexpected events.
Some of the other common estate planning mistakes people make is to not plan for an illness, or a loss of assets that suddenly affect you or your spouse. What about the separation of your child? How about your kid’s creditors? Is it possible for your beneficiaries to handle the amount of money they’ve been given? There are often many issues you might not have considered.
This is usually handled by setting up a trust, which allows you to choose who receives money, how much each person gets, and when it’s paid out. Unlike a will’s outright inheritance, your assets can go to a trust where you can control how the money will be spent. As an example, your funds could be transferred to a trust at age 25/35/45 unless the trustee thinks they’re somehow endangering themselves.
#10 – Ignoring your mortality!
Yes, you will eventually perish, whether you want to accept it or not. Don’t leave your family to deal with this later simply because you don’t want to face a challenging situation!
There are many ways things can go wrong after someone dies, and you don’t want make matters even worse by failing to plan. If you’re concerned about the expense of an expert estate planning lawyer, we’d like to assure you that it’s likely going to be much cheaper than the cost of litigation down the road!
Contact Moulton Law Offices today to get started with your estate planning if you haven’t already. We have years of experience navigating difficult tax and legal circumstances and would be happy to schedule a consultation for you. Call us at 509-328-2150 for more information or visit our contact page to get started.
Want to learn about other common estate planning mistakes? View this useful blog post from Trust&Will to learn more.
