Creating an estate plan is one of the most important things that you can do to protect your legacy for your family. However, when you create an estate plan, there are pitfalls you need to avoid. These pitfalls can affect the outcome you're hoping to accomplish with your estate plan.
Ensuring that you understand some of the most common estate planning pitfalls will help you avoid making them. After all, being aware of mistakes other people make gives you the chance to learn from them and do what’s best for you and your family.
Pitfall 1. Not Having An Estate Plan
The biggest mistake people make is not having a plan in place. An estate plan details how you want things like your finances or your healthcare handled if you're unable to make your own decisions. A comprehensive estate plan can even have a plan if you're unable to take care of your children that details who should care for them and what values you want your children raised with.
Pitfall 2. Failing To Remove Beneficiaries
Many married couples name one another as the beneficiary and executor of their estate. However, if your marriage ends in divorce, then it’s recommended to remove your former spouse as a beneficiary and fiduciary. By removing them from your estate plan, you can ensure that your estate will be distributed properly.
Pitfall 3. Failing To Add Beneficiaries
Life-changing events serve as a reminder for you to review and update your estate planning documents and beneficiaries. If you've had a new child or grandchild, and you want to leave them something, you'll need to update your estate plan's list of beneficiaries to ensure they receive their inheritance without error.
Though we can never predict when life-changing events will take place, it’s our firm’s job to work together and forecast how your situation and the law may change in the coming years or decades. As a result, most estate planning documents are written to account for future descendants.
Pitfall 4. Hiding Your Estate Plan
You might hear that you should put your will and estate planning documents in a safe place, however many people interpret this to mean that they should hide their documents. This can have a disastrous outcome, because if nobody can find your estate plan, then they cannot use your estate plan in the event that you are incapacitated.
Besides the copy your estate planning attorney has in their records, it’s good practice to make another copy and give it to your power of attorney or named executor. This ensures that someone that you trust knows where the documents are and lessens the risk of losing your estate planning documents.
Pitfall 5. Not Putting Everything In Writing
Verbal wills are only legally binding in cases where the person creating the will is deemed to be in the final stage of an illness. Because of this, verbal wills aren't an effective estate planning measure.
If you want a verbal promise to be followed through, you'll need to add it to your estate plan in writing. You can update your estate planning documents as often as needed to include any changes.
Pitfall 6. Failing To Fund A Trust
When used properly, a trust is an excellent estate planning tool. However, establishing a trust is not the end of your estate planning. You must also use the trust as intended and ensure it gets funded.
For instance, if you create a revocable living trust to transfer your wealth to your children and spouse after your death but do not fund it, your entire estate will remain outside the trust and might go to people you did not intend. Failing to use a trust as intended is as bad as not establishing a trust. Register your assets in the trust’s name to gain maximum benefits from the use of this tool.
Pitfall 7. Not Reviewing Your Plan
It’s easy to believe that once you’ve created your estate plan, you can tuck the documents away for safe-keeping and not worry about them. But your life will change from the first time you create your estate plan, and those changes need to be documented to ensure that all of your assets and beneficiaries are accounted for. Because of this, it is important to review your estate plan regularly and ensure it still works according to your goals.
For example, suppose you have children that were minors when you first executed your plan but are now adults. In that case, you will want to update your plan to reflect your current circumstances. It would be important to consider if you’re leaving your children a trust, how financially responsible they are, and if you want to protect their inheritance from future life events, such as marriage.
Pitfall 8. Never Review Your Assets
Creating your estate planning documents is not the end of the estate planning process. For anyone with a trust as part of their estate plan, it is important to fund that trust. This means you need to be prepared to put assets into the newly created trust.
Even for those that do not have a trust as part of their estate plan, it is important to update any payable-on-death beneficiaries to reflect who should inherit the benefits. For example, if someone redid their estate plan after getting divorced but never updated the beneficiary on their life insurance policy, that money could end up in the hands of their ex-spouse.
Pitfall 9. Unaware of Different Protections Available
Creating an estate plan doesn’t have to only focus on how you want your assets distributed after your death. Your estate plan can also be set up to protect your assets that you’re leaving for your beneficiaries. With the proper trust planning provisions, your beneficiaries could have their inherited assets protected from future lawsuits, creditors, bankruptcy, and divorce.
For example, let’s assume you leave $100,000 to your child outright in a will. A year or two after receiving the inheritance, your child’s spouse files for divorce and claims $50,000 in the divorce settlement. But if you put the money into an asset protection trust for your child, even if their spouse filed for divorce, your child’s inheritance is safe from the divorce proceedings.
Carolina Family Estate Planning: We Help Families Build Better Lives By Planning For A Secure Future
Carolina Family Estate Planning has helped thousands of North Carolina residents take control of their future with our estate planning and long-term care solutions, and we can do the same for you. Our team will sit down with you to develop a comprehensive estate plan tailored to your situation.
There’s no need to wait to get your estate plan in order.
To find out more or schedule a FREE needs assessment, call us at (919) 899-2606 or fill out our contact form today. We look forward to helping you organize your affairs and getting you started on achieving peace of mind and security for your future.