A crucial mistake you can make with your estate plan is not having one at all. More than two-thirds of Americans are making this critical error by not having a will.1 Even if you think you don’t have enough assets, creating a comprehensive estate plan is about more than just money and property — it’s about ensuring you have control over important decisions that can affect you and your family if you become incapacitated, as well as after you pass away. Otherwise, the state where you reside or people you may not trust could end up making those decisions.
Here’s a list of 10 common estate planning mistakes that we recommend you avoid:
1. Not updating your plan: There are three key situations that might require a reevaluation and revision of your estate plan: life events, tax law changes, and incapacity documents older than four years. Don’t wait until it’s too late to update your incapacity documents, trust(s), will, and beneficiary designations for retirement accounts, life insurance, and annuities to ensure they still align with your wishes.
2. Neglecting to name beneficiaries: Check that all your accounts and policies have designated beneficiaries. Also, name contingent beneficiaries in case the primary ones are unavailable. Note that beneficiaries are required to empty out all inherited retirement accounts within 10 years of the account owner’s death, which can incur significant tax implications for the beneficiaries. If no beneficiaries are named or a living trust is listed, the account may be subject to distributions within only 5 years. Consider establishing a retirement trust to preserve the 10-year distribution schedule and potentially build in asset protections for your beneficiaries from creditors. An irrevocable life insurance trust (ILIT) can cover estate taxes that may be owed by the beneficiary as well as save you taxes.
3. Choosing the wrong trustee: The trustee plays a vital role in your estate plan if you have a living trust. The individual or entity you select will be managing, administering, and distributing the assets in your trust per its instructions. When choosing a trustee, you should consider the complexity of your estate plan, the types of assets you have, and your personal preferences. For example, if you have minor children, beneficiaries with special needs, or business interests, the choice could be crucial for ensuring the best outcomes. Know a trustee’s responsibilities before choosing one.
4. Overlooking digital assets: If you are not specific in your will or estate plan about who can access and manage your digital assets, even your well-intentioned loved ones could end up being subject to potential privacy law breaches. Your accounts could also go into probate or become irretrievable forever depending on a company’s rules or a state’s laws. Take control of how you want your digital legacy to be managed: Compile a list of all your digital properties, familiarize yourself with each account’s user agreement, and determine who you want to access or own the accounts after you pass.
5. Not planning for disability and long-term care: It’s important to have documents in your estate plan that address long-term care needs, including a living will to state your preferred end-of-life decisions and a healthcare power of attorney document to designate someone to enforce your wishes. In addition, submitting HIPAA (Health Insurance Portability and Accountability Act) forms to your medical providers will give your designated loved ones access to information that can help them make health care decisions for you if you become incapacitated.
6. Ignoring tax implications: Understanding estate and inheritance tax laws can be daunting and may lead to getting a tax attorney involved. In general, inheritance tax is paid by the inheritor if it’s imposed by the decedent’s state, while estate taxes are paid to the federal government by the estate and not the heirs. Both types of taxes are based on the value of all assets and the applicable tax rate. If you have a large estate, advanced planning tools such as the generation-skipping trust (GST), which allows you to skip over your children and leave your assets to your grandchildren may help to minimize estate taxes.
7. Failing to communicate your plan: Discussing end-of-life preparations and finances can be emotional and difficult. But having discussions sooner rather than later can help with mitigating unnecessary issues that could arise upon your passing such as guilt or resentment, confusion, and stress. We have created a Family Records Workbook to help make it easier for you to organize the information your family or heirs could need from you to fulfill your wishes. Fill it out and share it with your loved ones.
8. Improperly structuring or funding trusts: Pick the trust structure that best matches your estate planning desires especially if you are married or in a domestic partnership. Generally, a “joint trust” is used for ease of administration when most assets are jointly owned and both spouses have the same beneficiaries in mind. Separate trusts are used when spouses have kept most assets separate, and the future beneficiaries are different. An estate planning attorney can help you decide which structure is right for you and your situation. Once you create a trust, be sure you transfer your assets into it — including accounts, property, and policies — or the trust won’t be effective. Properly title all the assets you intend to be part of the trust or designate your trust as the beneficiary of your accounts. If you are restating an older trust, check to be sure all assets were in the original trust. If the assets were funded to the original trust, they are generally still included in this new, updated version.
9. Not paying attention to location: The laws and tax implications of the country or state where you reside will be applied to your estate, not the location where you execute your estate planning documents or where your beneficiaries live (if different from your residence). For instance, as mentioned in mistake #6, inheritance tax is determined and imposed by each state. That’s why it’s important to understand estate and inheritance taxes by state and how your location could affect your heirs.
10. Disregarding flexibility in trusts: An irrevocable trust may require court involvement to make changes and also may remove your control from the assets you place in the trust. So why would you choose this option? Potentially to minimize estate taxes or protect your assets from creditors. Irrevocable trusts can also be useful for helping special needs beneficiaries retain government benefits. However, if you’re not wealthy or considering special needs, the potential benefits of an irrevocable trust probably won’t outweigh the lack of flexibility. Another consideration for flexibility, mentioned in mistake #8, is structuring your trust properly if you want to be able to accommodate changing circumstances or set up unequal distributions to beneficiaries. The type of trust and structure can both be crucial choices in limiting your flexibility and preventing an undesirable outcome.
Need assistance?
The common mistakes noted above indicate some of the complexities of estate planning and how they might apply to your circumstances. If you are concerned about accurately taking care of your heirs according to your wishes, the right professionals can help.
At Mercer Advisors, our comprehensive wealth management solution includes estate planning, as well as financial planning, investment management, tax planning, and insurance solutions. To help avoid these 10 common estate planning mistakes, and get guidance on how all your finances can work better when they work together, let’s talk.
1. “2024 Wills and Estate Planning Study,” Caring.com, July 30, 2024.
