What are the top 5 estate planning mistakes that people make?
Estate planning is serious business. Mistakes in your will can lead to major headaches in the future, especially for your loved ones and beneficiaries. Still, you’ll be surprised by how common these mistakes actually are.
Don’t Cut Out People From Inheritances
There have been cases wherein loved ones were accidentally cut out of inheritances, forcing them to go through expensive legal battles just to fix it. You will want to avoid these unpleasant and sad scenarios. You will want your will to be carried out as smoothly as possible.
That is why you need help from a financial planner and an estate planning attorney. Together they can ensure that every detail of your will is ironed out and that nothing is left vague or undefined.
Here are 5 of the most common estate planning mistakes we’ve encountered, and why you should avoid them.
1. Not Thinking About Beneficiaries
It’s surprising how many people forget to consider their beneficiaries when coming up with a will. Some forget to name a contingent beneficiary on retirement accounts and insurance policies. Some fail to review their beneficiaries.
If no contingent is picked, the default is likely your estate. No contingent beneficiary means no stretch IRA. Also, if you forget to change an ex-spouse on an IRA, you can encounter some disastrous consequences for your new spouse or family.
You also need to consider what happens when one of your beneficiaries die. Where does the money go? Would it go to the other beneficiaries? Would it go to the family of the one who died?
2. Not Planning Ahead
We don’t often think about our own mortality. It’s natural for us to forget that we’re all going to die someday. It’s an uncomfortable thought for sure. But whether you want to face that reality or not, you have to consider it.
There are so many things that can go wrong after someone dies. What happens to your business? What happens to your children? All you need to do is plan ahead.
And speaking of planning, you should plan for other unexpected scenarios, not just your death. What if your health or your spouse’s health suddenly declines? What if there’s a divorce? There are so many things that you’ve probably never even thought about, but you probably should.
3. Not Writing Your Will Properly
Having a will is something most people don’t even consider. But those who do take the initiative to get a will can still make a serious blunder. For example, some people name specific investments in their will. But what if that person died and the investment isn’t their property anymore? This might force the estate to buy the investment at a much higher price before it could be given to the beneficiaries.
Additionally, some wills are written in a way that’s too restrictive or specific that it can cause problems along the way. If your will says that your property could not be sold under certain circumstances, your beneficiaries might struggle with that in the future.
Some people don’t include a residuary clause in their will. It deals with everything you didn’t specifically name in your will, or forgot to put in. It also deals with things you don’t own yet but will before your death. There are also things you might not know you own. It happens more than you think! And so a residuary clause is necessary.
4. Selling Property for $1
This one may sound pretty bizarre, but it was actually popular years ago in areas that saw very rapid land appreciation. Years ago, you can pay $50 for land in certain areas and it would sell for $2 million now.
In theory, you should be able to sell property for a very low price and avoid taxes on the gain. However, the problem with this is that the IRS will deem it as a gift if it is less than market value. Your heirs will lose the “step up” in value. There’s also the problem of buying a property for $1, selling it for $1 million and then having to pay tax on the $999,999 gain.
So to summarize, it’s not a good idea.
5. Not Dealing with Guardianship Issues
There are those who will leave their assets directly to a minor without dealing with guardianship issues. You have to ask yourself how will they handle the money? What does “for their benefit” entail?
You will have to name a guardian for children who are minors.
Thanks to Kiplinger for the inspiration to this article.
Please remember none of the content found on this page substitutes for legal advice. Please contact Gudeman & Associates to set up a consultation.