Top 8 Estate Planning Mistakes
"In this world nothing can be said to be certain, except death and taxes."
Poets rage against it, daredevils defy it, undertakers depend on it, but the end comes for all of them in turn. Still, as Franklin observed, the problem is death and taxes. While facing your own mortality isn't pleasant, proper estate planning can save you - well, not exactly you, but those you leave behind - a lot of trouble. Avoiding these common mistakes is a good start.
Dying Without A Will
Dying without a will is like asking your family to hand-dig your grave without the benefit of shovels - things get messy, mud gets thrown and everybody just wants it to be over. Assuming this isn't the impression you want to leave your loved ones with, a will is essential. There are many things to consider, such as what to do if you end up on life-support, who will care for minor children, and so on. Resolving these issues will give you peace of mind now, and keep the family peace later. (See Getting Started On Your Estate Plan for more information.)
The Delight Is In The Details
There are lots of small details to take care of in estate planning. Some of these are obvious, like finding a guardian for living dependents and setting funeral arrangements, but others are more subtle. For example, you need to make sure that the beneficiaries on your retirement plans (IRAs, 401(k)s, RSPs, etc.) are up to date, and that you choose a reliable executor and set up durable power of attorney to direct assets and investments.
See Six Estate Planning Must Haves and Choose The Right Executor for more insight.
Not Enjoying It With Your Family
Waiting to die before dispersing your wealth raises the likelihood of a big tax bill. By taking advantage of tax-free gifts to family and friends each fiscal year, even the largest estate can be whittled down to a manageable size before the cut-off date. It is important to keep abreast of any changes in the annual gift-tax amount as well as overall changes in federal estate taxes. Changes in the latter will help you decide how much you need to give away to get within the tax-exempt estate limits. Besides, giving now will probably be more personally satisfying than giving posthumously.
Life insurance is vital to single-income and lower income families. If your estate doesn't amount to enough to replace your income in terms of supporting your family, then the death benefit from a life insurance policy may be the only way to provide for your loved ones. Calculating how much yearly income you will need to replace will determine how much life insurance you need to carry, but you need to make sure those calculations are redone when your financial/personal situations changes, such as if your beneficiary predeceases you or your mortgage is paid off. To learn more, read How Much Life Insurance Should You Carry?
Thinking Inside The Box
One the easiest slip-ups to make is not looking into alternatives. Gift giving is one example, but there are many ways to avoid a traditional estate transfer with the accompanying taxes. Revocable living trusts, joint ownership, gift splitting, credit shelter trusts and many more alternatives exist for people facing large post-mortem tax bills. With the ever-changing exemption limits on estate taxes, more and more alternatives are bound to pop-up. (See Tax Efficient Wealth Transfer for more ideas.)
The Long Goodbye
In addition to having accurate life insurance, you will need to pay careful attention to your medical coverage. If you are not covered in the case of long, terminal illness, you may find yourself out of pocket for medical expenses. The costs of an extended stay in a hospital, long-term care, new treatments, or a home nurse can make the distribution of your estate a moot point. Having a dread disease rider on your policy or catastrophic illness insurance can reduce the risk of losing your nest egg to medical costs. (To learn more, read Let Life Insurance Riders Drive Your Coverage and Long-Term Care Insurance: Who Needs It?)
Time Is On Your Side
The fact that you're reading this suggests that even if you've made one or more of these estate planning mistakes, it isn't too late to reverse the damage. Withdrawing life support, funeral arrangements, and who gets what are very personal decisions, but there are professionals to help once you have the basics done. Consulting with your accountant or estate lawyer may be necessary if you have a complicated estate involving many tax issues (how to transfer the family business, etc).
To get started, check out our Estate Planning tutorial.