Thinking about the inevitable—death—is not very pleasant.
Perhaps that's why so many people fail to plan for the time when their time
will be up. Even clients who make the effort to plan their estates often
neglect to follow through or update their plans as changes occur in their
lives. Over the years, we've seen estate plans fail to do what they were
intended to do. For your estate plan to remain a valuable asset for you and
your heirs, you would be wise to avoid these eight common mistakes.
1. Thinking your
state will handle everything. You might think that having a trust,
such as a revocable trust, is just for the rich or that if you have a will,
you've covered your bases. Well, consider this: A will may indicate who gets
what upon your death, but your estate may have to go through a very public
probate process, and probate can be very expensive. If you have a revocable
trust, it eliminates the probate process for the assets titled in the name of
the trust, and it ensures that your privacy and the privacy of your heirs are
protected.
2. Thinking your work
is done after creating a trust. Establishing a trust and signing the
document is just the first step, but many people forget to fund their revocable
trust. Remember, the trust does not exist unless it holds assets. When you
establish a revocable trust, you need to retitle your accounts in the name of
the trust. Your financial planner or brokerage firm will help you do this. As
an additional measure, we recommend clients have a "pour over" will.
Upon the grantor's death, it will collect and transfer all additional
assets—such as jewelery and cars—into the revocable trust so that they will be
dispersed according to your instructions and avoid probate.
3. Setting it and forgetting
it. This faulty thinking applies to many situations in financial
planning. In this case, it means that clients all too often set up their
estate-planning documents and then rarely look at them again. Keep in mind that
these documents might specify who will be guardian to your children should
something happen to you. Those sober, married guardians you originally named
years ago may now be divorced, active alcoholics. The point is that life
changes. Your needs, as well as the number of children you have now, may be
different.
Now that the estate tax exclusion is more stable—gradually
increasing each year—it may fall off your radar. So plan to review your trust
documents every few years or whenever your life, or the estate tax law,
changes.
4. Thinking all your
assets will follow your will or trust. Retirement accounts and
insurance policies are governed by the beneficiary form you filled out when you
opened the account or bought the policy. These assets do not flow through your
trust or your will. Whomever you designated on that form you signed so long ago
is who will get that money should you die. It's a good idea to look at those
beneficiary forms and revise them, especially if you have gone through a
divorce or had more children. It's the easiest thing you can do, and it costs
you nothing.
5. Relying on the
"DIY" trust. Paying a few thousand dollars for a good
drafting of your estate plans will ultimately save you much more money in the
end. It's like paying for a good accountant. They will most likely save you
enough money to be more than worthwhile in the end. Not convinced? Refer to
mistake number 1 above for the potential costs of probate.
6. Giving too much
too soon. Many parents who establish trusts when their children are 5
or 6 years old assume that by the time those kids are young adults, they will
will be responsible enough to handle their inheritances. But as said children
get closer to 21 or 25, parents often realize that they could be giving their
kids too much too soon. But with many trusts, that's already too late to make
any changes. Parents should consider delaying larger portions of their
children's inheritance, giving them more when they are older and allowing the
trustee to have more discretion in distributing their money should they need it
sooner.
7. Not considering
the needs of your children. We all know how different each of our
children can be, and there may be times when it's appropriate to treat each of
them differently when it comes to disbursing their inheritance. One example:
If you have a special needs child, he or she may require more help for a longer
period of time. In this case, it's especially important to consult an
estate-planning attorney because the rules are tricky. Assets owned by a
disabled child could count against his or her supplemental Social Security
Income (SSI) and Medicaid benefits.
8. Choosing the wrong
trustee. Choosing your brother or sister as the trustee of your trust
may sound like a good idea, and he or she might technically be the best person
for the job. But you may be putting them in the uncomfortable position of
playing bad cop, rather than loving aunt or uncle, to a difficult niece or
nephew. In this case, you may want to consider hiring a corporate trustee. It's
easier for an impartial third party to be the heavy when your heirs come asking
for money. This comes at a cost, but it may be worth it in the interest of
preserving the family peace.
Good estate planning is an essential component to any good
financial plan. By working with a reputable estate-planning attorney and making
time to review and discuss your estate plan on a regular basis, your estate
will pass to your heirs—hopefully with less drama but certainly as you
intended.
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