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Experienced estate planners see a high percentage of clients with these recurring mistakes. They know if you’ve never seen an estate planner or haven’t had a plan revised within the last three years, your plan is likely to have at least one of these costly mistakes. (Remember, even if you haven’t seen an estate planner, you have an estate plan, and it’s probably not a good one.)
In this post, I begin a seven-part series on the estate planning mistakes that are committed frequently and can be very damaging to your goals and loved ones.
Mistake #1: Relying Only On A Will
Of course, a written will is essential to every estate plan. People often are criticized for not having wills. But a will isn’t enough.
A complete estate plan includes key documents that might be needed before your passing, such as a power of attorney and advanced medical directive. These documents empower one or more people to make decisions and take actions regarding your assets or medical care when you aren’t able to.
Without these documents, many actions are taken only after a court appoints someone to act for you, and it could be someone you wouldn’t have selected. Or doctors take the actions they deem best, even if it’s not what you would have decided.
I’ve often heard people say there’s no rush to execute these documents. They say they’re in fine shape and “aren’t there yet.” What I’ve seen over the years is the need for the documents most often arises in two scenarios. One scenario is the occurrence of a sudden event, such as an accident or a health crisis, such as a stroke. Once that occurs, it’s too late to have the documents executed. The other scenario is a steady decline that isn’t apparent to the person or the person is in denial. By the time others are ready to intervene, either a lot of damage has been done to the person’s estate or the legal capacity to execute the documents no longer is there. The bottom line is you need to execute the documents well before there’s a need for them.
Another reason a will isn’t enough is that ownership of many assets transfers outside the will and probate process. These assets include annuities, life insurance, retirement accounts (such as 401(k)s and IRAs), jointly-owned property, and more. The beneficiary designations of these assets decide who inherits them, often without reference to your will.
You need to review periodically the beneficiary designation forms for these assets. Numerous court cases and IRS rulings have concluded that the owner’s intent and statements in the will rarely matter. The only thing that matters is what was written in the latest beneficiary designation form.
Trust, with their many uses and flexibility, are another reason a will isn't enough.
Trusts can accomplish many goals that a will can’t. With a trust, your assets can avoid probate. Your privacy can be maintained. A trust can protect assets from creditors of you and your heirs. The right trust can provide security for your heirs while protecting the wealth from them.
Once the province of the very wealthy, trusts provide so many benefits they surpass wills as the key documents in many estate plans. We’ll discuss some of these uses of trusts in more detail in this series.
Bob Carlson is the editor of Retirement Watch.
