Even though making the simplest estate plan is better than not having one, some problematic issues may arise if you establish an estate plan without understanding the common mistakes. Properly drafted estate planning documents can enable you to get the most out of your assets and give your beneficiaries the maximum value of your estate. If not, avoidable errors in the estate plan can lead to:
- Inadequate property distribution
- Higher tax liabilities
- Asset mismanagement
- Unintended beneficiaries included
- Unexpected financial burden
Knowing the most common estate planning pitfalls will help you cover any loopholes others may exploit or limit the financial burden your loved ones may experience. So, whether you are drafting your first estate plan or want to improve an existing one, this article will help you tick all of the boxes on your estate planning checklist.
5 Common Estate Planning Mistakes and How to Avoid Them
Estate planning mistakes occur partly due to the individual or their lawyer not considering the entire financial picture. Understandably, it is easy to overlook some estate planning issues. The following are five common estate planning mistakes and tips on how to avoid them.
1. Not creating an estate plan
According to D.A. Davidson's 2022 estate plan research, only 34% of American adults have an estate plan. The reason behind not creating one is that the respondents did not have enough assets to put in a Will (37%), they had been postponing it (32%), and others did not know where to start (25%).
Regardless of the reason behind not creating an estate plan, you are risking the financial future of your loved ones and putting your assets at risk of diminishing in value after your demise. In addition, your likely beneficiaries will struggle to put things in order while avoiding being robbed of their rightful assets.
How to Avoid
Start working on your estate plan even if you have few assets. You do not have to spend money hiring attorneys to do it for you. You can use free online estate planning documents from reliable and professional websites.
2. Including only one beneficiary
In an unfortunate event where the primary and only beneficiary dies shortly after your demise, the estate automatically goes to probate. As a result, the remaining family members may incur costly probate battles in court and experience more family disputes over your estate.
How to Avoid
To avoid unnecessary family disputes and control who gets your property, always include a secondary beneficiary in each asset, policy, and account—preferably one or two people.
3. Not maximizing on tax exempt gifting
A common and costly estate planning mistake people make is failing to reap the benefits of giving financial gifts that are exempt from taxation. For instance, the IRS states that if you gift your spouse up to $17,000 annually, that amount will be exempted from estate tax. In addition, you can give a large lifetime gift of up to $12.92 million (in 2023) without incurring a gift or federal tax—this law remains valid until January 1st, 2026.
How to Avoid
Add and specify the gift you want to leave each beneficiary in your estate plan. The gifts can range from money, real estate, or personal property.
4. Picking the wrong person to handle the estate
It can be challenging to know who will perform the executor's role effectively after your demise, especially in managing your trust fund. People commonly name the surviving spouse or child as executor. But ask yourself:
- Do they understand financial matters such as investments and taxation laws?
- Do they know how to manage a large estate?
- Are they financially responsible enough to make the right decision for the good of the other family members?
Sometimes, naming a spouse or child may do more harm than good to your estate, more so if they like overspending. Undoubtedly, this is one of the most common estate planning mistakes of the rich and famous.
How to Avoid
It is not a must you choose a close family member as the executor, talk to an estate planning attorney to help you find the best person for the job.
5. Failure to transfer life insurance policy to life insurance trust
Although life insurance death benefits are exempt from federal or income tax, the proceeds may still be taxable if you had an incident of ownership upon your demise. Meaning you had the right to change beneficiaries, borrow money from it, or modify the policy. If you do not transfer the policy to a life insurance trust, the proceeds may be included as part of a taxable estate (after your beneficiary's death).
How to Avoid
To avoid your insurance benefits from incurring estate taxes, make your existing policy a gift to an Irrevocable Life Insurance Trust (ILIT). Another option is to request an attorney to create a new trust. You will then purchase a new policy and specify the intended person as owner and beneficiary.
What Assets Should Not Be in a Trust?
Surprisingly, not all assets can be placed in a trust. Adding them to your estate plan will cause more challenges to your beneficiaries and incur higher taxation. Examples include:
- Health Savings Accounts (HSAs): Subject to specific tax rules
- Qualified Retirement Accounts: Designated directly on the account
- Basic savings and checking bank accounts: Designate transfer/payable-on-death on the account
- Low financial value property: The cost of including them may outweigh the benefits
- Motor Vehicles: This creates complications during registration and insurance matters.
Knowing what to include and not to include in your estate plan can be a challenge. We provide the documents you need to create valid and reliable estate planning records to help you cover all legal and personal grounds. These documents include the following:
Helpful Resources:
Internal Revenue Service - Definition of a Trust
FTB.ca.gov - Estates and trusts
D.A. Davidson - Two-Thirds of Americans Do Not Have an Estate Plan
Even though making the simplest estate plan is better than not having one, some problematic issues may arise if you establish an estate plan without understanding the common mistakes. Properly drafted estate planning documents can enable you to get the most out of your assets and give your beneficiaries the maximum value of your estate. If not, avoidable errors in the estate plan can lead to:
- Inadequate property distribution
- Higher tax liabilities
- Asset mismanagement
- Unintended beneficiaries included
- Unexpected financial burden
Knowing the most common estate planning pitfalls will help you cover any loopholes others may exploit or limit the financial burden your loved ones may experience. So, whether you are drafting your first estate plan or want to improve an existing one, this article will help you tick all of the boxes on your estate planning checklist.
5 Common Estate Planning Mistakes and How to Avoid Them
Estate planning mistakes occur partly due to the individual or their lawyer not considering the entire financial picture. Understandably, it is easy to overlook some estate planning issues. The following are five common estate planning mistakes and tips on how to avoid them.
1. Not creating an estate plan
According to D.A. Davidson's 2022 estate plan research, only 34% of American adults have an estate plan. The reason behind not creating one is that the respondents did not have enough assets to put in a Will (37%), they had been postponing it (32%), and others did not know where to start (25%).
Regardless of the reason behind not creating an estate plan, you are risking the financial future of your loved ones and putting your assets at risk of diminishing in value after your demise. In addition, your likely beneficiaries will struggle to put things in order while avoiding being robbed of their rightful assets.
How to Avoid
Start working on your estate plan even if you have few assets. You do not have to spend money hiring attorneys to do it for you. You can use free online estate planning documents from reliable and professional websites.
2. Including only one beneficiary
In an unfortunate event where the primary and only beneficiary dies shortly after your demise, the estate automatically goes to probate. As a result, the remaining family members may incur costly probate battles in court and experience more family disputes over your estate.
How to Avoid
To avoid unnecessary family disputes and control who gets your property, always include a secondary beneficiary in each asset, policy, and account—preferably one or two people.
3. Not maximizing on tax exempt gifting
A common and costly estate planning mistake people make is failing to reap the benefits of giving financial gifts that are exempt from taxation. For instance, the IRS states that if you gift your spouse up to $17,000 annually, that amount will be exempted from estate tax. In addition, you can give a large lifetime gift of up to $12.92 million (in 2023) without incurring a gift or federal tax—this law remains valid until January 1st, 2026.
How to Avoid
Add and specify the gift you want to leave each beneficiary in your estate plan. The gifts can range from money, real estate, or personal property.
4. Picking the wrong person to handle the estate
It can be challenging to know who will perform the executor's role effectively after your demise, especially in managing your trust fund. People commonly name the surviving spouse or child as executor. But ask yourself:
- Do they understand financial matters such as investments and taxation laws?
- Do they know how to manage a large estate?
- Are they financially responsible enough to make the right decision for the good of the other family members?
Sometimes, naming a spouse or child may do more harm than good to your estate, more so if they like overspending. Undoubtedly, this is one of the most common estate planning mistakes of the rich and famous.
How to Avoid
It is not a must you choose a close family member as the executor, talk to an estate planning attorney to help you find the best person for the job.
5. Failure to transfer life insurance policy to life insurance trust
Although life insurance death benefits are exempt from federal or income tax, the proceeds may still be taxable if you had an incident of ownership upon your demise. Meaning you had the right to change beneficiaries, borrow money from it, or modify the policy. If you do not transfer the policy to a life insurance trust, the proceeds may be included as part of a taxable estate (after your beneficiary's death).
How to Avoid
To avoid your insurance benefits from incurring estate taxes, make your existing policy a gift to an Irrevocable Life Insurance Trust (ILIT). Another option is to request an attorney to create a new trust. You will then purchase a new policy and specify the intended person as owner and beneficiary.
What Assets Should Not Be in a Trust?
Surprisingly, not all assets can be placed in a trust. Adding them to your estate plan will cause more challenges to your beneficiaries and incur higher taxation. Examples include:
- Health Savings Accounts (HSAs): Subject to specific tax rules
- Qualified Retirement Accounts: Designated directly on the account
- Basic savings and checking bank accounts: Designate transfer/payable-on-death on the account
- Low financial value property: The cost of including them may outweigh the benefits
- Motor Vehicles: This creates complications during registration and insurance matters.
Knowing what to include and not to include in your estate plan can be a challenge. We provide the documents you need to create valid and reliable estate planning records to help you cover all legal and personal grounds. These documents include the following:
Helpful Resources:
Internal Revenue Service - Definition of a Trust
FTB.ca.gov - Estates and trusts
D.A. Davidson - Two-Thirds of Americans Do Not Have an Estate Plan
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