Money & Retire

6 Common Mistakes To Avoid in Estate Planning

1. Trying Too Hard To Reduce Estate Taxes

Many people still believe, mistakenly, that they need to give away their assets to reduce the size of their taxable estate. The reality is that for most people giving assets away can actually work against you and your family in terms of income tax liability that will be imposed on your heirs. The federal estate tax exemption is currently $5,430,000 and will increase each year for an inflation adjustment, which means that fewer people will be affected by estate taxes. (High net worth individuals with assets that exceed the federal exemption amount will still want to give assets away to reduce the size of the taxable estate. For such persons, estate planning will include techniques designed to leverage the federal gift tax exemption.)

2. Not Clearly Stating Your Wishes

With concerns about estate taxes out of the way for the majority of people, the focus of estate planning should be on making sure your important paperwork is in order and your wishes are clearly stated. The priority to-do list includes creating a will and/or revocable trust agreement, signing a power of attorney which names a financial agent who can act for you if you become incapacitated and a health care proxy or other advance medical directive, such as a living will, which describes your wishes in the event of a terminal illness. Also, you should make sure that the beneficiary designations for any life insurance policies, retirement accounts, and payable on death (POD) and transfer on death (TOD) accounts are up to date.

3. Not Including Enough Detail in Your Will

A will should include detailed information about how you want your property divided. Do you want everything to be split evenly among your heirs or does it make more sense, for example, for one child to get your house and another the stock portfolio or art collection? If there is a relative you have been helping to support with their medical or housing costs you may need to establish a trust for them to make sure they continue to be cared for. If there are personal or sentimental items such as jewelry or family heirlooms that you would like to leave to a particular family member or friend, or a charity that you wish to support, that needs to be specified as well.

4. Specifying the Wrong Executor

Choosing an executor of your estate is an important and sometimes difficult task. The first choice would generally be your spouse, but if you are divorced, widowed or your spouse is in poor health, you may want to choose an adult child. Often a parent will name all of their children to act together as co-executors, so that the responsibility is shared and no one feels they have been left out or that they are being controlled by their sibling. There are, however, a number of factors to consider: Do the children all get along well with each other? Are they financially responsible? Also, even if adult children get along well in general, that does not mean they will always agree on everything. You may want to appoint a family friend or a professional advisor (e.g. a lawyer, accountant or financial planner) who is less emotionally involved to serve as a co-executor and help with the decision making. You should also be aware that, by law, executors are entitled to compensation. While family members normally do not ask for payment, making them the more economical choice, cost should not be the main factor in choosing an executor. It is important to pick the right person for your family situation.

5. Not Appointing a Guardian or Creating a Trust for a Child

If one or more of your children is a minor, you will need to appoint a guardian who will raise the child, in the event your spouse is not able to do so. In many cases, it will be desirable to create a trust to hold the assets that are bequeathed to a child to make sure that there is a trustee who will manage the assets until the child reaches an appropriate age and to protect those assets in the event the child gets divorced. As your children get older you can update and revise your plan.

6. Not Discussing Your Estate Plan with Your Family

It is also advisable to discuss your estate plan with your family. Although many people are hesitant to tell their children how much money they may inherit, the broad outline of your estate plan need not – and should not – come as a surprise to your family members after your death. Explain your wishes and your reasons behind them so that any questions or concerns can be addressed while you are still around to answer them. Also make sure they know where to find all of the important documents and how to contact your lawyer, financial planner and other professionals.


More information: The Surprising Rules of Inheritance

Mistakes to Avoid When Getting a Divorce

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