Top 6 Estate Planning Mistakes

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Lauren Pitman

Author, Attorney

The best planned estate can be easily undermined with common mistakes. Review the Top 6 Estate Planning Mistakes made so you can help ensure your own estate plan

The Beneficiary Designations Are Not Coordinated with the Plan

Beneficiary designations are contractual agreements between the account owners and the asset holder. Assets passing under a beneficiary designation to a specific individual or charity will pass outside of an estate plan directed under a will or trust. Therefore, a poorly thought out beneficiary designation can undermine an otherwise thoughtful estate plan. This could result in an unintended inheritance or disinheritance of an heir or a negative tax consequence. Beneficiary designations must be carefully drafted to be consistent with the overall estate planning goal of the individual.

Incorrect Titling of Asset

Like beneficiary designations, the way an asset is titled is another contractual agreement between the individual and the asset holder. The title of the asset and whether it is held by owners as their separate or community property, as a tenant in common or joint tenant with right of survivorship, can impact the way an asset passes upon the individual’s death. This designation, in the absence of careful attention in the estate plan, can result in an asset passing to an unintended heir or beneficiary potentially jeopardizing the estate or tax planning in the documents. Also, by addition an individual to your assets, you could be putting your estate at risk if that individual were to get used or divorced.

Insufficient Estate Money to Fund Costs of Estate, Fulfill Bequests, or Pay Taxes

When an individual passes away, assets can pass in any number of ways including, but not limited to, beneficiary designations, joint tenancies with rights of survivorship, pay on death designations or transfer on death deeds. While these choices may offer some estate planning benefits, they force the asset to pass outside of the estate planning document. In some circumstances, if all the assets pass outside of the distribution in a will or trust, there may not be enough assets to fulfill an individual’s estate planning goals as outlined in their estate planning documents.

For example, imagine a woman, Melanie, who has an approximate estate size of $500,000. Melanie has one child and would like most of her estate to pass to that child. However, it is also very important to her that she leave a $50,000 gift to her favorite charity. Her will directs this charitable distribution be made and all other assets to her child.

Assets: $500,000 including

  • $250,000 home
  • $150,000 bank account
  • $100,000 401K retirement account

Melanie has told her advisors that she wants to simplify her estate plan and avoid a probate if possible. As a result, those well-meaning advisors recommend she execute a transfer on death deed (beneficiary deed for real property), name her child as the beneficiary of her 401K and as a joint tenant holder with right of survivorship on her ban account. This, they believe, will help her to meet her goals. After following the advice of her advisors, Melanie has made the following changes:

Assets: $500,000 including

  • $250,000 home with a transfer on death deed directing the home passes to her child
  • $150,000 bank account held as joint tenant with right of survivorship to her child
  • $100,000 401K retirement account with a beneficiary designation to the child
  • $500,000 assets passing automatically to her child and nothing left for the charity

If all assets pass under these different tools, there will be no remaining funds to help cover any of Melanie’s final costs, fulfill her charitable goals, or pay any potential tax obligations. While these tolls may have helped to serve some of Melanie’s goals, they also undermined her over all estate planning desires by failing to make available the funds passing under the estate to pay the charity.

As this example shows, it is critical, therefore, to consider all the ways assets will pass to ensure all the estate planning goals are going to be met.

No action at death of first spouse (Might get rid of this one and use in one for married couples)

Surviving spouses often assume the assets they share with their partner will pass to them automatically. While this may be true, it often is not. Legal action is often required to transfer ownership of assets and ensure the surviving spouse has clear and outright title to the shared marital assets. Also, important gift and estate tax planning strategies may be available both for couples who have done their estate planning, as well as for those who have not. Those tools, however, are only available for a limited time after a first spouse passes away. Legal advice should be sought with the first spouse passes away to ensure the proper passing of assets and use of gift and estate tax strategies.

Forgetting about Out of State Property

When an individual passes away, their estate typically must be administered in the state in which the individual passes away as well as the state in which the individual held title to real property. This includes for example, time share interests that are transferred with a deed, mineral rights or interests, or ownership in burial plots. Forgetting to plan for out of state real property can be costly and time consuming to correct. Proper planning for those assets can often help to ease the administration process and keep costs down when the loved one passes away.

Forgotten Property

Some assets are not part of our everyday lives and therefore, we simply forget about them when doing an estate plan. For example, copyright interests, bonds, or paper stock certificates sitting in a safe deposit box can often be overlooked when doing an estate plan. Careful consideration should be given to these assets to ensure they pass smoothly and with minimal costs. A simple check of unclaimed property can also help to ensure all assets are included in an estate plan.

Avoid these common mistakes and you are ahead in helping to protect your estate plan!

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Disclaimer: The information contained in this article should not be considered tax or legal advice and is not a substitute for such advice. State and federal laws change frequently and the information in this article may not reflect your own state's laws or the most recent changes in state or federal law. For current tax and legal advice, please consult with an accountant or attorney licensed to practice in your state.
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