Even when one has gone to the effort to create an estate plan, caution should be taken to ensure that you and your family do not fall victim to any of the top five estate planning blunders, which could compromise your original plan for the preservation and disposition your wealth.
The most common estate planning blunders are as follows:
1. Failure to Fund Your Trust
People create trusts for many great reasons, one of which includes avoiding Probate. Probate is a Court administration procedure whereby the court oversees the distribution of assets. The latter procedure is known for it’s costly, lengthy, and public nature, and more often than not, best avoided. When you retitle assets into the trust, you are said to have “funded the trust”. The importance of funding the trust cannot to be stressed enough, as failure to do so may render the very existence of your trust redundant. Unfortunately, a common mistake is sometimes when people put a trust in place, they do not retitle assets into the trust. The failure to do so ensures that that their estate will go through Probate. As a direct result, when one passes on and leaves an unfunded trust, the contents of their estate will become public knowledge. The value of the estate will be significantly reduced by lawyers fees and administrative costs and their chosen loved ones will not receive the distributions in a timely manner.
Always fund your trust.
2. Failure to Change Beneficiary Designation
Relationships begin and relationships end. Another common estate planning mistake occurs as a result of these changing circumstances: failing to review the beneficiary designations on your retirement accounts and life insurance at the end of a relationship. Failure to update beneficiary designations when there has been a change in circumstances could result in your assets going to an unintended person.
Always look at your beneficiary designation for retirement accounts and for your life insurance account whenever you have a serious change in circumstances.
3. Leaving Your IRA to your Estate
Subject to a few limited exceptions, it is not a good idea to leave your IRA account to your estate. In short, the reason is that it will be subject to heavy taxing upon your death and also available to your creditors as payment for debts owed upon your death. When you leave your IRA account to a named natural person, the proceeds of your IRA account will pass directly to that chosen person, free from the grips of creditors.
Another reason not to leave your IRA to your estate is that it denies your heirs the ability to let those assets grow. Non-spouse heirs can normally either liquidate an inherited IRA and pay taxes within five years of the owner's death, or "stretch" their required minimum distributions—and tax bite—out over their lifetime.
Never leave your IRA to your Estate.
4. Failing to Sign an Advance Healthcare Directive
An advance healthcare directive is a powerful document that enables an individual to choose and document how he would like to be treated in the occurrence of various medical events. This document lets your family, physicians and friends know what your end-of-life preferences are, as far as procedures such as surgery, organ donation and cardiopulmonary resuscitation are concerned. The document also enables you to designate an agent to speak for you and make decisions on your behalf from a medical standpoint in the event that you are unable to speak for yourself. Failure to sign an Advance Healthcare Directive, can and has in the past, put huge emotional angst on the family of a loved one who is in a medical situation which requires a decision as to whether to continue with treatment or let nature take its course. In these highly stressful, emotional times, families often enter into bitter arguments as members often disagree on the course of treatment for a loved one who is critically ill. These unnecessary arguments can be avoided by having a signed tailored Advance Healthcare Directive in place, spelling out your wishes in as much detail as you like. A copy of this document should be given to family members, your physician and your attorney.
Always sign an Advance Healthcare Directive.
5. Picking Poorly
People assume that estate planning is only about planning for your death. Oftentimes people forget that estate planning is really a two-part process, planning for death, and planning for your care when you are alive. A durable power of attorney is a document that enables you to designate someone to act for you in various situations when you are incapacitated. An Advance Healthcare Directive, as explained above, enables your to choose an agent to speak for you from a medical standpoint along with enabling you to document your wishes.
It is very important to think carefully about whom you will nominate to act as your attorney in fact pursuant to your durable power of attorney. It is also very important to think carefully about who you have nominated to speak on your behalf from a healthcare standpoint. With the best intentions to make provision for yourself and your family, if you choose someone who is incompetent or unqualified to act for you in the situations that you have chosen, the results can be less than pleasing and generally contrary to your original intentions.
Always choose individuals you know and have confidence and trust to act on your behalf.
These estate-planning pitfalls occur quite often. When putting in place an estate plan, or when reviewing a current estate plan (which should be done every 2-4 years or change in circumstance) think about these common estate planning blunders and ensure that your estate is not adversely affected by these common pitfalls.