The 5 Most Common Estate Planning Mistakes No One Warns You About
Key Takeaways:
Discuss your estate plan with your heirs, including the location of documents.
Having a Revocable Trust is not enough; retitle appropriate assets in the name of the trust for it to be effective.
Having a Will or a Trust does not relieve you from keeping your beneficiaries up to date.
Be careful whom you add as Joint owners of your accounts or assets; there are a wide array of implications ranging from tax costs to elder abuse.
Laws change, and people die, keep your Estate Plan current and review it every 3-5 years.
Estate Planning can be complex and overwhelming, as there are many nuances to keep track of and potential pitfalls for the unaware. For that reason, it is best to consult with an attorney specializing in Estate Planning matters and seek their professional assistance in drafting documents. Even then, there are several estate planning matters that often get overlooked that no one warns you about. With that in mind, let’s look at the top 5 mistakes – detailed here:
1) Failing to discuss your estate plan with your heirs and ensure they have access to it when the time comes:
You may have the best, most elaborate estate plan in town, but if your heirs do not know about it and it cannot be found after your passing – it might be the most useless estate plan ever drafted. Communicate where the documents are located with your heirs and share access if needed. Sharing access may mean giving them a second set of keys to the document safe, a password to your computer, copies of the documents if they are digital, or the name of the attorney who drafted them.
2) Funding your Living Trust:
Thinking about your last days on planet Earth is difficult enough; thinking through it in detail and putting things in writing is that much more unpleasant. After all the documents are signed, you may be tempted to put the whole binder in the back of the closet and never look at it again.
Unfortunately, that is not the right thing to do. Just because you have a trust does not mean that the trust will work as intended – because it is not funded. You may look at your Trust document and think, “Hey, my Trust IS funded; right here, it says that there is $10 in my trust!”. Funding of the Trust means that assets should be placed in the name of the Trust. If you have a brokerage account, the account must be re-registered in the name of the Trust. So, when you get your next statement, the address area where you are used to seeing your name and address would say something along the lines of “Joe Smith Revocable Trust.”
Sometimes, your Trust will have to be listed as a primary beneficiary of your IRAs or your 401K plan, and after that your loved ones will be individually listed as contingent beneficiaries. You may also have to reach out to your Life Insurance or Annuity companies to update beneficiaries. If your house does not have a mortgage, your estate planning attorney may also suggest putting the house in the name of the trust.
Once all of your asset ownership is reviewed and placed in your Trust as needed, that is when you can put your Estate Planning binder in the back of the closet. But do not load too much stuff on it; reviewing your estate plan every 3-5 years is recommended. You will have to pull it out and dust it off if you move to a different state, if someone listed in your documents passes away, if a new family member is born, or if there have been law changes that affect your documents.
3) Improper beneficiary elections:
A common misconception is that once you have a Will or a Trust - all assets will be directed by your Will or by your Trust, and there is no need to update beneficiaries. The truth of the matter is that assets/accounts with beneficiaries listed – pass outside of the scope of your Will or your Trust. This means that if you neglect to update your beneficiaries, your assets may pass to unintended recipients.
It is also important to keep track of all the accounts you have. Believe it or not, people forget about their accounts - most often, it’s a small 401K or old insurance policy ages ago that got lost in the shuffle when you changed jobs or endured a divorce. It is not uncommon for these old forgotten accounts to have ex-spouses or ex-significant others listed as beneficiaries, which can lead to disappointment from current family members when your estate is settled.
Remember to plan for contingencies as well, list primary and contingent beneficiaries, and then indicate whether your elections are per stirpes or per capita. A per stirpes selection will ensure that the percentage of inheritance intended for a now-deceased recipient will be passed on to their children or even grandchildren. A per capita selection will re-distribute the intended share of inheritance amongst remaining living beneficiaries, and heirs of the deceased beneficiary will not receive anything. If you do not elect per stirpes, it will be assumed as a per capita distribution and may inadvertently disinherit heirs of the beneficiary who pre-deceased you.
4) Loss of control by adding someone to your bank accounts:
It may seem like an easy solution to add someone you trust to your bank account as a joint owner, with the expectation that the person you selected will help in case you are incapacitated and are unable to access your bank account to pay your bills. While most often this works as intended, unfortunately, sometimes the people you trust the most do not have your best interest in mind but are instead in the best position to take advantage of those close ties. Elder Financial Abuse is a more and more common statistic in the US as the Boomer demographic segment is aging and retiring. Most often, perpetrators are those closest to the victims.
5) Failing to update your estate planning documents:
Laws change, and legal documents need to be updated. If your estate planning documents were drafted 20 years ago – there most certainly will be parts that no longer work with current laws and may complicate or completely torpedo what used to be a well-written Estate Plan. Generally, estate planning documents should be reviewed every 3-5 years or when big life changes occur. Often, your Attorney can draft amended language to a supporting document, and other times, you may need to redo the entire estate.
Legal documents such as Wills, Trusts, and Powers of Attorney are driven by the law of the state you reside in, so if you retired from New York City to Hawaii, you would have to update your legal documents to make sure they work with local laws. Also, review your documents after big life changes: if someone in your family passed away or there has been an addition to the family, someone got married, divorced, or sick and will be receiving government benefits.
The Bottom Line:
An Estate Plan is a crucial part of every Financial Plan; it is the roadmap of how your assets, savings, and belongings will be handled after your passing. In addition, the effectiveness of your Estate Plan will determine how easy or difficult it will be for the people you care about to carry out your wishes. It can be the difference between a smooth pre-arranged transfer of accounts or a drawn-out legal process with the courts dividing your assets as their rules dictate. The longer that probate and other legal proceedings go on for, the more your attorney’s fees eat away from your heirs’ legacy. It’s why hiring a good attorney BEFORE it’s too late is a wise investment. Consult with your Financial Advisor and other trusted professionals to get the process started. Once your Estate Planning documents are drafted – revisit and update documents as needed.
Sources:
https://trustandwill.com/learn/estate-planning-mistakes
https://www.aarp.org/money/investing/info-2023/estate-plan-mistakes.html
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Paragon Wealth Strategies, LLC [“Paragon”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Paragon. Please remember that if you are a Paragon client, it remains your responsibility to advise Paragon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Paragon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Paragon’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.wealthguards.com. Please Note: Paragon does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Paragon’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Also Note: IF you are a Paragon client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.