Key Takeaways
- Comprehensive and strategic estate planning is essential for carrying out the decedent’s wishes and honoring the interests of the beneficiaries.
- Common estate planning mistakes include failing to update a plan after creating it, relying on informal arrangements, and not creating one entirely.
- Updating your estate plan regularly and consulting a skilled estate planning attorney in the process is important for ensuring that your plan remains consistent and reliable.
- In the event that a dispute arises regarding your estate plan after the fact, you should consult a skilled trust or estate litigation attorney as soon as possible to resolve the conflict quickly.
Introduction
Estate planning is a vital process for protecting your assets and ensuring your children and heirs have access to a respectable inheritance. The estate planning process can take several forms and often includes creating a will or trust, which are written documents that specify how assets should be distributed and to which beneficiaries of the estate.
However, it can be easy to overlook important considerations in your estate planning. If you are not careful, you might run the risk of unexpected issues or ambiguities, which could prevent your wishes from being carried out and put your heirs’ inheritances in jeopardy. This guide unpacks some common estate planning mistakes to be aware of so that you can avoid them and know what steps to take if they occur.
Importance of Estate Planning
Creating an estate plan is valuable for ensuring that your wishes are carried out properly after your death and reducing the stress on heirs during the grieving process. Without one, you run the risk of estate assets being distributed in contradiction with your true wishes. Developing a comprehensive estate plan offers all the following benefits.
Ensuring Proper Distribution of Assets
An estate plan ensures that there is a clear guide for how the estate’s personal representative should distribute estate assets following your death. By identifying beneficiaries in a will or trust and clearly specifying what share of an inheritance they should receive, you can minimize any ambiguity in the process.
To avoid any potential gray areas, it’s important to name beneficiaries as well as residuary beneficiaries to receive assets in case the primary beneficiaries are unable to accept them for any reason. Failure to create a clear plan and account for contingencies could result in the state having to distribute them according to state intestacy laws.
Minimizing Tax Liabilities
A clear and well-thought-out estate plan empowers you to plan ahead to minimize tax liabilities through multiple potential avenues. For example, funding a trust with assets helps remove these assets from your taxable estate and place them under the ownership of the trust, a separate taxable entity—this can reduce the amount of taxes you are required to pay.
Gifting assets to beneficiaries throughout your lifetime can also help reduce the size of your taxable estate and minimize tax obligations. It’s important to consider this option early so that you can separate any desired assets from your taxable estate and maximize financial benefits. All of these options should be considered as part of your estate planning process. Consulting a tax professional can help you determine the best possible approach to minimizing your tax liabilities.
Protecting Beneficiaries
Having a clear and up-to-date estate plan protects the interests of beneficiaries who have a stake in the estate and assets that may be inherited from it. Estate plans with ambiguities or any lack of clarity can lead to litigation and not only threaten a beneficiary’s interest, but potentially reduce their share through litigation and settlement agreements. A trust or a will ensures that these assets are accounted for and protected so that they can be transferred over to identified beneficiaries in the future without dispute.
Verbal agreements are not enough to guide the distribution of assets. In California, you need your plan in writing. Specifying which beneficiaries in a clear and legally executed estate plan ensures that your wishes for who should receive assets will be fulfilled.
Common Estate Planning Mistakes
Estate planning is a complex process and may involve several steps to adequately protect assets. The following are the most common estate planning mistakes that individuals make.
Not Having an Estate Plan
Not having an estate plan is the most common and most consequential mistake that individuals make. In fact, more than two-thirds of Americans do not have an estate plan in place, often due to the discomfort around discussing death or the lack of signs that it is a risk. However, without a proactive estate plan to identify beneficiaries to receive estate assets, there is no way to clarify the wishes of the decedent.
A lack of guidance from the decedent means that the administration of an estate will be guided by state intestacy laws rather than the true wishes of the decedent. State intestacy laws outline the line of succession for legal heirs to receive assets based on their relation to the decedent, rather than who the decedent wants to leave assets to.
Not only can intestate succession lead to longer court processes, but it may lead to beneficiaries not receiving gifts promised to them in life if the other beneficiaries don’t agree to distribution in that way or if gifts are unable to be properly equalized. Beneficiaries who were told one thing by the decedent may be caught off guard by intestate succession dictating a different distribution.
Although conversations about post-life plans are difficult, unforeseen events can occur that can catch families off guard, so it’s important to begin estate planning as soon as possible in order to avoid the risks of not having one.
Failing to Update the Estate Plan Regularly
Maintaining and updating your estate plan is an ongoing process. Changes in life or family circumstances may require you to make adjustments so that your estate plan reflects these changes and any ways in which your wishes may have changed.
For example, a birth, marriage, or divorce in the family can all affect how an individual wants their assets distributed after their death and warrant changes to a will or trust. Changes in estate tax laws or asset valuations may also affect how an individual wants to structure their estate plan. Consider consulting an estate planning attorney or tax advisor to help you take steps to adjust your plan for the most favorable terms.
It’s advisable to review and update your estate plan at least every two years to ensure it remains current. Be sure to assess whether your estate plan is consistent with other documented plans, such as listed payable-on-death beneficiaries for your life insurance policies, bank accounts, investment accounts, and other assets.
Neglecting to Name Contingent Beneficiaries
Contingent beneficiaries, or residuary beneficiaries, are individuals who are named as next in line to receive assets if something happens to the original beneficiary. Naming contingent beneficiaries ensures that there is clarity surrounding who is next in line to receive the assets in case the original beneficiary becomes severely sick or passes away.
If a situation arises where an original beneficiary is no longer able to receive assets, then it could leave the fate of these assets ambiguous. Unclaimed assets may revert to the estate to be distributed through the probate process—this could lead to potentially lengthy and time-consuming disputes among heirs regarding who should receive them, and a conflict with the wishes of the grantor.
Overlooking Digital Assets
As individuals prioritize real estate property and financial assets in their estate plan, they often tend to overlook the importance of including digital assets as well. These assets may include cryptocurrencies, digital investments, social media accounts, cloud storage, and more, and the risk of overlooking these assets is becoming increasingly common as these technologies become more prevalent.
Not only should these assets be included in an estate plan, but so should the information to access them. May often forget to include the login information, such as login credentials and passwords for these digital assets. Certain assets, like cryptocurrency, may end up completely irretrievable if this information is not provided, leading to lost potential value for the estate.
Including these assets and the information necessary to access them ensures that they will not go forgotten or left behind when the rest of the estate’s assets are distributed. It is advisable to appoint a digital fiduciary who specifically oversees digital assets.
Relying on Informal Arrangements
Often, interested parties in an estate believe that an individual communicating their estate plan is enough, but relying on verbal agreements or informal notes alone is risky. To be enforceable, any arrangements must be clearly documented in writing; otherwise, inheritance disputes may arise challenging such arrangements.
For example, if a car enthusiast tells a family friend that he plans to leave an antique car to him, the family friend will expect to receive it upon his enthusiast’s death. However, if the enthusiast never mentions this arrangement in his estate plan, then the family friend will have no legal right to own the car unless he is named as the beneficiary.
In such a case, the car will follow the line of succession as described by state intestacy laws. Often, the first in line to have a claim to such property is a surviving spouse, and then each surviving child has a right to an equal share, emphasizing the importance of solidifying an estate plan.
Not Understanding Tax Implications
A failure to understand key tax implications can result in you or your beneficiaries having to pay more in estate taxes than you might expect. Failing to properly fund a trust may lead to your estate being subject to higher estate or probate taxes, as assets would still be considered part of your taxable estate.
Meanwhile, the type of trust you create may also have its own unique tax advantages, so it’s important that you consider the different types of trusts and which may be the most beneficial for you. Consider how actions like gifting or creating a trust can affect your estate plan by consulting with an estate planning professional or attorney during the creation of your estate plan.
Improperly Funding a Trust
A trust is a common and incredibly useful estate planning tool that allows you to place assets under the control of a trustee and owned by a trust. However, a common potential pitfall is failing to properly fund the trust with sufficient assets. Often, document preparation services or online document drafting services (including and especially ChatGPT) do not assist you in actually transferring title of the assets to the trust. They may simply create the document and send you on your way. An estate planner can help you create and appropriately record the necessary documentation.
To properly fund the trust, you must ensure that the title of all assets is transferred into the name of the trust and that the trust has a valid taxpayer identification number. It’s also a good idea to ensure the trust is consistently funded with ongoing income from investments or other accounts so that you can build substantial wealth for your beneficiaries, as opposed to funding the trust solely once.
Professional guidance from an estate planning attorney can be significantly beneficial in ensuring that your trust is clearly established and properly funded. Ensuring that the trust is correctly funded and structured has the greatest chance of preserving the trust’s tax benefits and overall functionality.
Putting a Child’s Name on a Deed
Placing a child’s name on the title of a home or other property may sound like a beneficial step to take for preserving their future ownership of the property, but there are situations where this could lead to risks. For example, this move could place the property into sole ownership of the child, potentially causing the current owner to lose control of it during their lifetime. As the owner, the child would have full capacity to legally sell the property and keep the profits, even without consulting their parent.
Transferring a property deed may also be considered a taxable gift, which could lead to the child paying significantly as a result of obtaining the property. Be sure that your estate plan accounts for the present, the future, and everything in between so that planning for the future does not disrupt any processes in the present.
Sharing ownership through joint tenancy may be a beneficial workaround, but take note that this might also subject the parent and child to potential capital gains or gift taxes.
Vague Trust Terms
Vague terms in a trust or will can bring different interpretations by beneficiaries and the trustee, which can complicate the management and distribution of assets while potentially leading to disputes or litigation. Meanwhile, overly complex terms may also result in the misappropriation of assets that could lead to excess charges for estate taxes or investment losses.
It’s important to give the trustee the jurisdiction to make decisions around investments and asset management so that they have the flexibility to make decisions in the trust’s best interests. In any case, you should consider consulting an experienced attorney who can assist in drafting your estate plan to avoid any lack of clarity.
Consequences of Estate Planning Mistakes
The above estate planning mistakes can have several potentially harsh consequences. From a lack of clarity regarding how to distribute assets to subsequent disputes among family members, there are several concerns that can arise.
Some of the most common consequences of estate planning mistakes include
- Legal complications – An ineffective estate plan can lead to an unintended disinheritance or the risk of disputes amongst heirs.
- Financial disputes – Vague terminology in a will or trust can lead to varying interpretations by beneficiaries and trustees, which can lead to disputes and potential litigation surrounding the proper distribution of assets.
- Increased tax burden – Failure to solidify your estate plan could lead to a higher responsibility for paying estate and gift taxes.
- Distress for beneficiaries – The death of a loved one is already an emotional time. If estate planning mistakes are revealed during or prior to the administration of an estate, the process can be even more emotionally taxing.
All together, creating and clarifying your estate plan can help minimize confusion and stress to facilitate a clear estate administration process.
How to Avoid Estate Planning Mistakes
The most powerful step you can take, given the risk of estate planning mistakes, is to be aware of the potential pitfalls and establish safeguards. The following steps will allow you to establish a formidable estate plan that protects your estate.
Seeking Professional Advice
Professional advice is crucial at any stage of estate planning and administration. An estate planning attorney can help you avoid drafting and language problems caused by using generic or non-specific estate planning documents, while other professionals can help you understand potential financial benefits from developing a strategic estate plan.
During the estate planning process, consider consulting the following professionals:
- Estate planning attorney
- Financial planners
- Tax experts
- Investment brokers
Having a team of professionals to turn to can help ensure that your estate plan is clear, comprehensive, and able to maximize any potential financial or tax benefits. Professionals will have a strong understanding of the common estate planning pitfalls to help you avoid them.
Comprehensive Asset Inventory
Having a detailed inventory of assets is a crucial step for ensuring a smooth distribution of assets, so you should document all estate property in your will or trust instrument. Property may include homes, boats, and other valuable possessions. Often overlooked, but also important to include in an inventory, are digital assets, such as social media accounts, cryptocurrencies, and cloud storage.
This inventory should also include any relevant documentation related to these assets, such as titles and account statements. A clear asset inventory with all appropriate documentation should also identify which beneficiaries should receive what share of all assets to avoid.
Regular Plan Reviews and Updates
Once an estate plan is created, it’s important that you review the plan to account for any changes to your life circumstances or the law in general to ensure that it continues to align with your wishes. You can make an amendment to a will or a revocable living trust at any time through the same legal process you used to execute the document—the only case in which this ability is limited is when you have an irrevocable trust, in which case you must have the approval of the trustee and all beneficiaries.
It’s often advised to review your estate plan at least every three to five years, and whenever major life events occur. Common major life events include divorce, remarriage, or the birth of children.
Clear Communication with Beneficiaries
A lack of communication is a frequent contributor to family discord during estate administration—in fact, as much as 70% of estate plans fail due to a lack of communication with beneficiaries and family members. After all, this lack of communication can lead to confusion amongst beneficiaries and frustration if an estate plan does not end up being formulated as expected. As uncomfortable as it may be, having a family meeting where you express what your wishes are can be the difference between a smooth estate administration process and heavy litigation.
Misunderstood intentions can lead to potentially lengthy disputes and emotional strife, so it’s important that clear communication is a priority throughout estate planning. The creator of a will should maintain open discussion with beneficiaries and communicate their wishes to avoid any ambiguity before or during the administration of an estate.
Understanding State and Federal Laws
As you draft your estate plan, it’s important that you are well aware of state and federal laws that may provide limitations on your wishes or require additional consideration.
Other state and federal law considerations during estate planning include:
- Community property laws – In community property states like California and Texas, a surviving spouse has an inherent right to 100% of all property acquired by the decedent during marriage, and the grantor of a will cannot overrule this law.
- Estate and gift tax obligations – Laws around federal and state estate and gift taxes may influence how you choose to structure your estate plan, such as the type of trust you use or whether you decide to make lifetime gifts.
- Requirements for executing an estate plan – When executing an estate plan in most states, you must be of sound mind and sign the document before two witnesses for it to be considered valid.
- Intestate succession laws – If there is no clear or properly executed estate plan, the laws of intestate succession dictate that an inheritance should be distributed according to the legal line of succession.
- Changing laws – New legislation related to estate planning can require you to be mindful about updating the plan after drafting it to ensure it continues to account for any new legislation.
Understanding all applicable state and federal laws is crucial to avoid leaving any holes in your estate plan so that the estate administration process can proceed smoothly.
Protect Your Family’s Financial Future With RMO Lawyers
Careful estate planning is a vital tool for preserving your loved one’s wishes after their death and protecting the interests of their legal heirs. Taking active steps to create a cohesive and comprehensive will or trust can help you prevent the common estate planning mistakes that tend to affect families.
If you are facing a dispute regarding any form of estate plan, including wills and trusts, the probate estate litigation attorneys at RMO Lawyers may be able to help. We have helped countless families navigate conflict regarding estate administration and inheritance disputes, including but not limited to estate mismanagement or breach of fiduciary duty, disputes over estate plan modifications, and challenges to an estate plan’s validity.
Schedule a consultation with the attorneys at RMO Lawyers to discuss your case and any potential disputes.
Glossary
Community property – Any assets or property acquired by either spouse during marriage that is considered to belong to both spouses equally.
Estate executor – An individual appointed by a probate court who is responsible for managing and administering an estate and is named as executor in the deceased’s will.
Trustee – A trustee is a person who coordinates the administration of the trust, manages the trust’s assets and is responsible for distributing the assets to the trust’s beneficiaries.
Beneficiary – A beneficiary is an individual or entity identified in a trust or will as being entitled to receive benefits from the estate.
Probate – The court process in which the assets of an estate are gathered, accounted for, and distributed to the heirs or beneficiaries after an individual passes away, either in accordance with the deceased’s wishes if they had a will or following local intestacy laws if there was no will.
Probate litigation – A lawsuit filed by an interested party in an estate against another during the probate estate administration process.