Whether or not you’ve taken the time to plan your estate, you still have one. An estate is everything you own, including your car, home, life insurance, furniture, and investments.
What is estate planning?
Estate planning involves deciding what will happen to your estate when you pass away: who receives what and when they receive it. It will limit the need for costly court intervention and ensure a smooth transfer of assets to beneficiaries.
The main objectives of estate planning include:
- Assigning legal guardians for children
- Limiting taxes on estate
- Ensuring proper allocation of assets
An estate plan should include a will or trust, a list of beneficiaries, two powers of attorney, and a letter of intent, which can include information about how you want your funeral planned or anything else that is not outlined in a will or trust.
With an estate plan in place, you can make sure things fall into place exactly how you prefer. Everyone 18+ should plan an estate — whether it’s a basic will or a more complicated system with trusts — when they are sound of mind, in good health, and free of emotional stress that may complicate the process.
5 common mistakes when estate planning
Not having a plan
The first and most common mistake when it comes to your estate is not planning. There are many reasons why someone doesn’t plan their estate, such as assuming they don’t have enough assets to warrant a plan. But the truth of the matter is: everyone should create an estate plan.
“The worst thing someone can do is have no plan at all,” Clay Hartman, partner and senior wealth advisor at Frontier Wealth Management, said. “If you don’t have a valid will in place, the state may determine who receives your property and assets. Having a basic plan will keep that from happening and ensure your wishes are met.”
The most basic requirement of estate planning is creating a will or trust. This can be as easy as a checklist that outlines exactly how you want things divided. If you’re not ready to truly dive deep in to estate planning, this is a great place to start. Just note, do-it-yourself estate planning is only recommended for people who have simple allocations, such as only dividing assets between two people. Also, most states require that a will is not handwritten and was completed with two or more witnesses (in which none of the witnesses are a beneficiary).
Not understanding the plan
If you hire a professional to help plan your estate (which experts agree is the right move for most), it’s easy to be passive during the process. Although the estate planner is hired to help you make the best decisions based on your assets, it’s ultimately up to you how to finalize the plan.
“Sometimes a client will ask me for advice on dividing an estate,” Hartman said. “This is a process that is much more difficult that one may imagine, it’s imperative to understand exactly how your plan works.”
Hartman’s biggest piece of advice is to take detailed notes. Even better, bring someone with you, such as your power of attorney. It can be easy to understand something in the room with a financial planner but then get confused when you leave the office. Give yourself a reference point with notes so weeks or months later, you can remember exactly why you made each decision. Additionally, enabling your wealth advisor to work closely with an estate attorney can help can help to sufficiently incorporate all aspects of a comprehensive estate plan.
Forgetting to update
It’s best practice to review your estate plan annually. While this doesn’t mean you have to make any changes, it does give you a yearly opportunity to make sure things are still in line and accurate. For example, you will need to update your beneficiaries if you have another child.
You should also make sure to keep a fully updated inventory so your family will know where everything is. This includes things like important documents, keys, safety deposit boxes, and other assets that will be needed to properly settle your estate.
Not updating powers of attorney
A power of attorney (POA) is someone you will elect as the executor of your estate. You should have two powers of attorney: one that will act on behalf of your will, managing assets and paying bills, and another that will be in charge of your health care decisions if you’re unable to.
This is a very big decision to make. Some grant one of their children POA, while others prefer to hire a third party in order to avoid complicating family dynamics. You have the ability to change your POA at any time, so review this often to ensure the person chosen still best fits your wishes.
Giving away too much, too soon
According to MarketWatch, one third of people who receive inheritance had a negative savings account within two years of inheritance. Be responsible with your distributions to ensure that your beneficiaries have the best possible outcome.
Whether you have a large or small estate, it’s usually advisable to place a delay on inheritance for your beneficiaries. You can place provisions on your assets that restrict inheritance until a certain age or life change, or elect to give out assets in chunks, such as 50% at age 30 and the remaining 50% at age 40.
Whatever you decide, make sure it fits in your beneficiaries’ best interests, rather than their wishes.
Estate planning is a crucial, yet often overlooked, part of financial planning. But it is fairly complicated: Many states have their own laws and if you have many assets, it can be confusing and cumbersome to try and manage your estate planning on your own.
We suggest hiring a professional to avoid confusion and headache during the planning process. This will ensure that everything is set up impeccably so your loved ones can settle your affairs without hassle.