I was at a charity event recently and a friend was bidding on the silent auction item of time with an estate planning attorney. They said it was finally time to talk about taking care of their children if something unfortunate happens. It got me thinking about all the estate planning mistakes I have seen this year.
1. Incorrect Beneficiaries on Retirement Accounts
First, the most prevalent mistake I see (outside of not having a will/trust), is having the wrong beneficiaries on retirement accounts (IRA, 401(k), 403(b)). I often find ex-spouses, old friends, siblings or parents who have passed away. Maybe these beneficiaries were appropriate at one time, but usually not after a couple has been married for many years and they have young children. Check your beneficiaries, and do not forget to go back to your employer and see what they have on file for your 401(k) plan and life insurance. Also note, listing people (parents, siblings and friends) as a joint owner on accounts can lead to gift taxes and generally should be avoided. While reviewing your beneficiaries, double check you do not have other people listed on any of your accounts or property.
2. Assets Not Being Re-Titled
Second, the lack of implementation surprises me. Usually when an attorney is done drafting estate plan documents, they will send a titling letter to explain how one is to re-title accounts and beneficiary forms. If you have done an estate plan and not re-titled your assets or changed beneficiary forms, call your attorney back and find out what steps need to be taken. Keep in mind most attorneys just assume you have completed this part on your own.
3. Not Being Up-to-Date on Estate Laws
Third, know the law, because when it changes you might need updates. People should revisit their estate plan every three to five years. Yet sometimes big changes occur and more frequent updates might be needed. In 2010 the estate tax went away (but capital gains taxes upon death came back). This can cause problems in an estate plan, depending on the language in your documents. And what if Congress decides to retroactively change the law so as of January 1, 2010 an estate tax is applied? For people considering changes right now, this needs to be taken into account. (For related reading, see: How Estate Taxes Work, a Real Life Example.)
4. Not Communicating Your Estate Plans
Finally, communicate your plans. Communication between the generations is one of the hardest steps to take because parents do not want the children to think they are getting a free ride and children do not want to appear greedy. Yet there is anxiety on both sides as well—parents worry (rightfully so) children will not know how to handle money and children worry about Mom and Dad being taken care of later in life. I have found communicating your estate plan with your children (you do not have to share numbers) will ease the concern on both sides and begin a dialog. Children should never find out at the last minute they are making healthcare decisions or deciding who gets Dad’s coin collection. That just leads to fights—you work hard as a parent to have your children get along, why ruin that?
This is not an exhaustive list of mistakes one can make in an estate plan, but this is what I have been seeing a lot of in the last few months. Give yourself, and your heirs, permission to review and discuss this topic so your future is well planned out.
(For more from this author, see: How You Invest Now Can Affect Taxes in Retirement.)