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Common Estate Planning Mistakes

| January 10th, 2022

Common Estate Planning Mistakes

Estate planning is one of the most critical aspects of financial planning and something millions of us fail to do. In 2021, just over 30% of Americans had any estate planning documents. If you’re among that 30-plus percent, congratulations! You’ve taken an essential step in protecting your family.

But as both an attorney and a financial advisor, I see some common estate planning mistakes, and these mistakes can have dire, unintended consequences for your family. Let’s examine some common estate planning mistakes so you can take steps to avoid them, and your estate plan will protect your family as you intended.

Failing to Plan for Your Passing or Incapacity

Discussing estate planning is uncomfortable; it forces us to face our mortality. Family members often don’t like to discuss it either because it forces them to think about losing you. But uncomfortable conversations are often the most important ones to have. Don’t spring these conversations on your family. Give them a head’s up that on X date, at X time, you want to sit down and discuss your wishes. This gives them time to get a bit more comfortable with the idea and write down a list of questions they may have, something you should encourage them to do.

The Unintended Consequences

If you die without an estate plan, a state statute will determine what happens to your estate. State laws are fair, but they may handle your estate in a way that you would not have preferred. In Indiana, for example, if you leave behind a spouse and children, 50% of your assets go to your spouse, and 50% is split between your children.

Most people prefer to create their own plan, one that provides for their spouse for the spouse’s lifetime and then passes the remaining assets to their children. If you and your spouse were to die before your children become of age and you didn’t create an estate plan that named a guardian, it can create terrible infighting between relatives over who will take custody at a time that is already devastating for all involved.

When we think of estate planning, we typically think of directing what will happen to our assets after we’re gone, but that’s only part of estate planning. A complete estate plan must also include directions for what you want should you be unable to make financial and medical decisions for yourself.

Powers of attorney and medical directives will cover those bases for you. But for an attorney to create these documents, you must still have the mental capacity to make these kinds of decisions. If you wait too long, your family may have to seek a guardianship or another complicated court proceeding to legally make decisions for you. Again, at a time that is already very stressful.

Failing to Complete a Plan

Intending to create an estate plan or starting the planning process isn’t enough. Once you start your estate planning, you have to follow it through, so everything is legal and official. I often see trust documents that either left out some assets or had literally no assets transferred into them. This essentially means you spent a lot of money to accomplish very little.

Once you create a plan, make sure to talk to your legal counsel and financial advisors about correctly titling your assets.

Failure to Communicate

You don’t have to disclose every aspect (or any aspect) of your estate plan to your family. And you may have your reasons for not doing so. But someone close to you has to know where the relevant documents are or which professional to contact in the event of your death or incapacitation. This includes the usernames and passwords to any relevant accounts.

Failing to Update

A good estate plan is created in a way that allows it to adapt and includes contingency plans for various events automatically. But it’s always a good idea to, at a minimum, review your estate planning documents whenever you have a significant life event in your immediate family—a change like a birth, adoption, marriage, or divorce.

Be sure to update beneficiary designation, too, as certain state laws that correct unintended consequences in wills may not apply to beneficiary designations on things like 401k and IRA accounts. Failure to make these additional updates can mean a former spouse inherits those assets.

Misunderstanding Types of Joint Account Roles

Designating someone on a bank account seems like an easy decision. When you open the account, your bank or financial firm gives you some forms, and you scribble down answers without really considering them. But this can cause significant problems should you improperly designate someone.

There are typically three primary ways to designate other parties on your accounts:

Joint Owner: A joint owner literally jointly owns the account. The joint owner has the same rights to the account as you do. They can take money out of the account, and it can be counted as their asset by the joint owner’s creditors. On your death, most financial accounts pass automatically to the joint owner.

Power of Attorney: A power of attorney is just a signatory who can act on your behalf in your best interests. Often an older adult might want to name a child as power of attorney on an account to let the child transact business for them as handling such matters becomes more challenging physically or mentally. The money is still only your’s though, and the power of attorney simply lapses upon your death. The person with power of attorney is legally obligated to act on your behalf and not for their own gain.

Beneficiary: A beneficiary designation (or pay-on-death designation) merely designates a party or parties who will inherit the account upon your death. The beneficiary has no ownership interest until your death. This is really just a very simple form of estate planning.

I often see people naming a joint owner when they didn’t mean to do so. Perhaps they meant to name a child as their power of attorney but instead named a joint owner. That child would then inherit the account and could legally cut out other intended heirs. Or perhaps they meant to name a beneficiary but instead named a joint owner. I had a client discover this mistake when a child they had accidentally named as a joint owner ran into serious financial trouble. The joint account became subject to possible recovery by the child’s creditors.

Estate planning can be complex, but the mistakes people most often make are pretty simple, easy to spot once you’re aware of them, and easy to correct if you find them.

Grant Reeves is an attorney with Barada Law Offices and a financial advisor with coreVISION Financial Group.  The concepts discussed are for informational purposes only.  Consult with your own counsel for legal advice specific to your own situation.