1. Failing to Plan

The worst mistake you can make is not planning at all! Many assume that if they don’t create a will or formal estate plan, they have no plan. In reality, if you die without a plan, state law dictates how your assets will be distributed after your death. This process, called “intestate succession,” may not align with your wishes. For example, close friends, charities, or extended family may receive nothing. Taking the time to plan ensures that you control who gets your assets and minimizes costs for your family.

Worse yet, if you do not appoint agents to make decisions on your behalf regarding your finances and health care, and you become unable to manage your affairs, the court may appoint someone to make these personal decisions for you. Known as guardianship, this process can be expensive, time-consuming, and impersonal.

2. Relying on “Family Loyalty”

Many people believe that family members know, respect and will carry out their wishes during their lives and divide their assets after death. However, even in the best of circumstances, the absence of clear written instructions creates the environment for family dissension. By properly creating documents like a health care proxy and a power of attorney, you give a trusted person the legal authority to make health and financial decisions if needed. Without this clarity, family members may face unnecessary tension and the disruption of family harmony when it may be most needed.

3. Believing that Joint Accounts Simplify Planning

Some people think that having an account with a child or spouse is a shortcut to estate planning. While joint accounts do allow easy access to funds if one owner passes away, they can also create serious issues. For instance, if the child listed on a joint account faces lawsuits, creditors could seize funds from that account to cover debts, even if those funds were meant for the parent’s support.

Joint ownership can also lead to family disputes. If only one child is named on the account, legally that child has sole ownership after you pass. That child may be unable or unwilling to divide the funds fairly or without incurring tax consequences. Moreover, as far as the government is concerned, funds held in joint bank accounts are wholly yours. They are presumed to be part of your estate for tax and Medicaid eligibility purposes.

4. Improperly Funding Trusts

Often an estate plan will include the use of a trust to achieve probate by-pass and, in some cases, asset protection. However, simply setting up the trust is not enough; you must properly transfer assets into it. Without proper funding, the trust is ineffective, and the heirs may face probate delays, asset seizure and higher estate taxes than necessary. Making sure assets are transferred correctly allows the trust to function as intended.

5. Leaving Insufficient Cash for Estate Taxes

Estate taxes are due within nine months of a person’s death. If there’s not enough cash in the estate, your family may have to sell property quickly to pay these taxes. Real estate and other non-liquid assets can take time to sell at a fair price, and rushing this process can lead to financial loss. Planning for liquidity, or ensuring there’s enough cash or easily sold assets, can prevent a “fire sale” and give your heirs breathing room during a difficult time.

6. Gifting the Wrong Assets

Gifting can help reduce estate taxes, but it’s important to think about the tax implications. For example, giving away assets that have appreciated over time, like stocks, can burden the recipient with capital gains tax. However, if they inherit the asset instead, they may benefit from a “step-up” in basis, resulting in less tax. Knowing which assets are better to give away now versus later can help avoid unintended financial consequences for your heirs.

7. Choosing a Will Instead of a Trust for Asset Management

While a will determines who inherits your assets after death, it doesn’t help manage assets during your lifetime. Trusts, however, offer more flexibility and privacy. If you become incapacitated, a trust allows someone to manage your assets according to your instructions, avoiding a costly guardianship process. Trusts also bypass probate (the court process to validate a will), which can save time, money, and keep the details private.

8. Failing to Use a Trust When You Own Property in Multiple States

If you own real estate in more than one state,
your estate may need to go through probate in each of those states, which can be time-consuming and expensive. Placing property in a trust can avoid this multi-jurisdictional problem, since the trustee can transfer trust property privately. This reduces costs and simplifies the process for your heirs.

9. Neglecting Beneficiary Designations

IRAs, retirement accounts, and life insurance policies are great ways to pass on wealth, but failing to keep beneficiary designations up to date can lead to unexpected consequences. If no beneficiary is listed, the asset may need to pass through probate, leading to delays, creditor exposure, and possibly taxes. This can take away a significant portion of the account’s value. By ensuring beneficiaries are current and naming secondary (or contingent) beneficiaries, you can help your heirs avoid excessive taxes and receive the funds as intended.

10. Assuming You Don’t Need an Estate Plan

Even if you don’t have significant wealth, it’s still important to plan. Consider a case where a person dies in a car accident, leaving no will or plan. If they receive a wrongful death settlement, state law may dictate that estranged family members or former spouses are entitled to part of the proceeds, even if they were not close. Without a plan, the law may distribute assets in ways that don’t reflect your wishes, possibly leading to high estate taxes and less money for your intended beneficiaries.