No one likes to contemplate his or her own mortality, but ignoring the need for an estate plan or procrastinating in the creation of one is asking for trouble. If you haven’t started the process, don’t delay any longer. However, for your estate plan to achieve your goals, there are six pitfalls that must be avoided:
Pitfall #1: You don’t understand your estate plan. Surprisingly, this is at the root of many estate planning debacles, despite the guidance of an experienced estate planning advisor.
Simply signing documents and not knowing what you’re signing, or what they mean, could cause problems. This is especially true if you don’t follow up with actions you’re supposed to take. This doesn’t mean you have to be a legal expert, but it’s important to grasp the basic concepts. Even though you can always rely on your advisor, knowledge is power.
Pitfall #2: You don’t update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities and life insurance policies. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.
Pitfall #3: You don’t properly fund trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated and exposed to public inspection. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.
However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.
Pitfall #4: You don’t properly title assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.
Not only is titling assets critical; you should review these designations periodically, just as you should your beneficiary designations. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.
Pitfall #5: You don’t coordinate different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them to be components that should be coordinated within your overall plan.
For instance, arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth. Also, naming a revocable living trust as a retirement plan beneficiary could accelerate tax liability.
Pitfall #6: You don’t review the plan. It’s critical to consider an estate plan as a “living” entity that must be nourished and sustained. Don’t allow it to gather dust in a safe deposit box or file cabinet. Consider the impact of major life events such as births, deaths, marriages, divorces, or job changes and relocations, just to name a few.
To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to your estate planning advisor. He or she can provide you with the peace of mind that you’ve covered all the estate planning bases.