What Are the Common Mistakes to Avoid in Estate Planning?

Estate planning is a crucial aspect of financial and personal preparedness. It ensures that your assets are distributed according to your wishes and that your loved ones are cared for in your absence. Despite its importance, many people make significant mistakes during the estate planning process, often without realizing it. These mistakes can lead to unnecessary complications, increased taxes, and even disputes among family members. If you’re considering updating your estate plan, it’s essential to understand and avoid these common pitfalls.

The Six Most Impactful Estate Planning Mistakes to Avoid

When it comes to estate planning, certain mistakes can have particularly severe consequences. Avoiding the following errors can help ensure that your estate plan serves its intended purpose:

1. Not Having an Estate Plan at All: Perhaps the most significant mistake is not having an estate plan in place. Without a plan, state law will determine how your assets are distributed, which may or may not align with your wishes. Moreover, the lack of a plan can lead to family disputes, lengthy legal battles, and unnecessary stress for your loved ones.
2. Failing to Designate Beneficiaries: Many people neglect to designate beneficiaries for life insurance policies, retirement accounts, or other available payable-on-death accounts. This oversight can result in these assets being included in your probate estate, which can delay distribution and increase costs. The worst-case scenario is not having any named beneficiaries on a tax-deferred retirement account (IRA, 401(k), etc.). In such cases, the distribution will commonly default to your probate estate, which can cause the taxable money to be distributed from the account much faster than if it were payable to an individual beneficiary or beneficiaries and may result in the estate paying hefty income taxes. Always ensure that your beneficiary designations are up-to-date and reflect your current intentions.
3. Ignoring the Need for a Living Will or Healthcare Proxy: A Living Will and a Healthcare Proxy are essential components of an estate plan. These documents specify your wishes regarding medical treatment if you become incapacitated and appoint someone you trust to make life-and-death healthcare decisions on your behalf. Without them, your loved ones may face difficult decisions without knowing your preferences, leading to confusion and potential conflicts.
4. Underestimating the Importance of a Trust: Trusts can be powerful tools in estate planning, especially for those with substantial assets or complex family situations. However, many people underestimate their importance, or mistakenly believe that trusts are only for the ultra-wealthy. Properly drafted and funded Trusts can help you avoid probate, reduce estate taxes, protect your property from potential long-term care costs, and ensure that your assets are managed and distributed according to your wishes.
5. Not Planning for Incapacity: While estate planning is often focused on what happens after death, it’s equally important to plan for the possibility of incapacity. Failing to do so can leave you vulnerable to financial exploitation, resulting in your assets being mismanaged, or leave your assets exposed to extremely high long-term care costs. It is therefore vital to include a well-drafted Durable Power of Attorney in your estate plan, which allows a trusted individual to manage your finances if you become unable to do so.
6. Failing to Consult with an Attorney: Estate planning is a complex process that entails many legal, practical, and financial considerations. While it may be possible to create a basic Will on your own, many self-written Wills are found to be ineffective after death because of improper signing, or because the language used did not convey the legal effect that one actually desired. When making decisions about transferring all that you have worked so hard to accumulate in your life, consulting with an experienced estate planning attorney is highly recommended. An attorney can help you understand the nuances of estate planning, avoid common mistakes, and ensure that your plan is tailored to your specific needs and goals.

If you have further questions or would like to create a comprehensive estate plan, please don’t hesitate to contact Lacy Katzen LLP today.