Watch out for these common estate planning mistakes

Careful consideration will help you avoid common estate planning mistakes.

Whether we like to admit it or not, one day we are all going to die. Accepting the realization that death - like taxes - is inevitable not only gives us the perspective necessary to live every day to the fullest, it also lets us make contingencies to provide for loved ones after we are gone. Failing to plan means that your loved ones could be at the mercy of state intestacy laws, estate taxes and probate court. Of course, that is not what you would want for the people that mean the most to you, so it is of the utmost importance to plan ahead.

That being said, there are errors that can seriously undermine your intentions regarding your wishes and the disposition of your property after you are gone. Knowing what these mistakes are, and having a plan in place that prevents them from occurring, is the best way you can protect your heirs.

The issue of inadequate planning

Any estate planning attorney or financial professional will tell you that the most common estate planning mistake is not having a plan at all. Even having a simple will is better than nothing. There is no "one size fits all" approach to estate planning, which is why boilerplate forms and do-it-yourself will kits often fall short. Your financial situation is unique, so you need a tailored estate plan capable of addressing all issues that may arise.

For example, let's assume that, years down the road, you become incapacitated and are no longer capable of making important medical and financial decisions. If you have planned ahead, you will have a power of attorney and healthcare proxy that give a specific person, group of people or other third party the ability to make decisions for you regarding your medical care, financial matters, living arrangements and other important issues. If, however, you haven't appointed people to make those decisions, you could be at the mercy of an estranged spouse or someone else who might not necessarily have your best interests at heart.

Failing to plan can also leave your property vulnerable to tax consequences, might mean that particular loved ones cannot inherit anything at all and could open the door for in-fighting amongst your heirs.

The wrong kind of planning

Many assets can be handled more than one way in an estate plan. Life insurance proceeds are a good example. They can pass directly to your beneficiary by means of a single payment or annuity, or they could first be placed into what is known as a "life insurance trust." Some might assume that the difference between the two options is small, but the wrong choice could have a huge financial impact.

By having life insurance proceeds flow directly to the beneficiary, any money received may be subject to state and federal estate taxes. This could mean that the Internal Revenue Service or New York State Department of Taxation and Finance will end up with a huge chunk of the funds that were meant to provide financial security for your loved ones. Filtering the money through a trust first will avoid those tax consequences.

Failing to update your plans

Some people take the right steps toward estate planning by having a professional draft a will, trust or other documents to handle their estate. There may come a day when circumstances have changed, though, and the original plans no longer serve their intended purposes. Estate plans need to be updated after any major life event, including:

  • Divorce
  • Childbirth
  • Adoption
  • Marriage
  • Death of heirs or beneficiaries
  • Disability/incapacity

Clearly, there is much more to know about estate planning than can be discussed in a single article. Thankfully, answers to all of your estate-related questions and concerns can be found at the office of an experienced estate planning attorney.

Keywords: estate planning, wills, trusts, heir, beneficiary, healthcare proxy, healthcare proxies