The Seven Deadly Sins of Estate Planning (And How to Avoid Them)
Protecting your assets, preventing probate, and planning for a financial future all play a role in estate planning. While these are all fairly universal objectives, there are plenty of ways to fall short — leaving you with frozen assets, massive expenses, and even portions of the estate lost entirely.
We've put together some of the most common mistakes we see throughout the estate planning process so that you can avoid them and safeguard your financial future for generations to come.
Deadly Sin #1: Forgetting to Update Beneficiary Designations
Having proper beneficiary designations ready to go is a must when it comes to estate planning. After a death, certain assets are left in the balance — but with proper designations, these will go to the right beneficiaries. This is a preliminary decision that's made during the creation of life insurance, retirement accounts, and estate planning.
However, life is unpredictable and dynamic — meaning that these designations could change during a client's lifetime. Whether it's a falling out with a specified beneficiary or an unexpected death of a beneficiary — updated designations need to be made in order to preserve the estate planning strategy.
During the estate planning process, clients should review existing beneficiaries along with considering any changes in who will receive assets if something were to happen in the future. There are essentially two outcomes for forgetting to update beneficiary designations:
- Retirement funds, life insurance payouts, and specified assets may go to an unintended individual. Whoever is listed as the beneficiary will receive these assets — regardless of the wishes of a client. This is especially common for ex-spouses being listed as beneficiaries before children are born — and no updates are made. This causes assets to end up in an ex-spouse's hands instead of a client's children.
- Certain assets can only pass to beneficiaries. If there is no listed beneficiary for these assets, the only available option is to go through the probate process — which we want to avoid.
Deadly Sin #2: Failing to Update Estate Planning Documents
An estate plan is a living document, which means you can't just make one and forget about it. You'll need to update documentation continuously as life changes around you, whether it's asset changes, legal changes, or changes with beneficiaries and fiduciaries. Here are some notable moments where you'll need to update your estate planning documents:
- Family dynamics play an important role in estate planning, which means major changes within your familial structure need to be reflected in your estate plan. This could include divorce, marriage, birth, or even death.
- An increase in assets will also need to be reflected in your estate plan, as there will be tax planning steps to address. The goal of estate planning is to maximize asset value for beneficiaries. Failing to make changes when major asset increases occur can have a devastating effect come tax season for designated beneficiaries.
- Relationship changes or deaths with beneficiaries should also be top-of-mind. As we mentioned in deadly sin #1, you'll need to update beneficiaries to ensure that assets go to the intended recipient.
Deadly Sin #3: Choosing the Wrong Trustee
Choosing the wrong trustee is one of the more obvious deadly sins, but it's important to understand why. Qualified trustees aren't always the most obvious choices, and many times we've seen appointed trustees make poor choices or be too old for the responsibilities at hand. Choosing a trustee is an important step, and with the help of a trusted estate planner — they can help you make sound decisions during this crucial process.
Here's a brief checklist to help with the process:
- Make sure the selection is current
- Ensure that the selection will carry out your wishes with the estate
- Choose a trustee who is organized, dependable, and responsible
- Select a trustee who is a U.S. citizen (or else it could become a foreign trust)
- Choose a trustee in good physical and mental health
Finding someone who is both responsible and financially literate is key. You will want someone who is understanding of the overall goals of your estate and has the ability to make sound decisions, whether through efficient management or investment diversification.
Deadly Sin #4: Ignoring Post-Death Distribution
An unfortunate aspect of life is that it's unpredictable and sometimes messy. Life and death don't always occur according to "plan." Entire families can pass away in tragic accidents, or children can die before their parents. While these are not the most pleasant scenarios to discuss, they do occur.
Seasoned financial planners and estate planners can help go over these possibilities and assist in determining contingent beneficiaries. Additionally, there can be plans put into place as to how the assets are handled by beneficiaries after death. These can be well-documented in advance so that the assets have a roadmap for after you're gone.
Deadly Sin #5: Leaving Out Retirement Assets
One of the more valuable assets you can have is your retirement accounts. You spend years contributing to either Roth IRA or 401(k) accounts, which makes them a significant addition to your estate plan.
During the planning process, these retirement accounts need to be considered and allocated to the right beneficiaries. A primary beneficiary can have full control over these assets after you pass away — which means they can designate additional beneficiaries as well. With the right estate planning — you can designate how these assets can be managed after your death.
Deadly Sin #6: Not Taking Into Account Creditor Protection
When it comes to estate planning, divorce is a serious variable that needs to be accounted for throughout the process. One of the most common creditors is divorce, and while overall divorce rates have dropped — they have risen for people in the 55-65 year age range.
You need to protect your assets and estate from creditors. This can be difficult to do on your own unless you are well-versed in financial literacy and estate management. Speaking with an experienced estate planner will showcase how you can deploy actionable strategies for irrevocable trusts.
Deadly Sin #7: Making Unnecessary Requirements
Many estate plans include mandatory distributions at certain ages. While this is a well-thought-out strategy, it can have some disadvantages that aren't always apparent at the surface level. Yes, handing off the entirety of an estate to young adults can seem irresponsible — but consider this: age-based distributions leave assets vulnerable to creditors — and assets could become marital property. So, while your plan is to have these distributions sprinkled throughout a child's life to help with major financial hurdles like college — they could get cut in half in the case of a divorce.
How To Avoid These Sins
Those are our seven deadly sins for estate planning. If you haven't noticed, they all have one common solution. It seems simple, but hiring an experienced estate professional can be a crucial step when managing assets long into the future.
You've spent a lifetime accruing wealth, assets, and planning for your children or loved one's future. It's essential to invest in safeguarding your estate so that your hard work and dedication pay off long after you're gone.
There can be no assurance that the content made reference to directly or indirectly in this blog post will be suitable for your individual situation, or prove successful. Due to various factors, including changing conditions and/or applicable laws, the content is only reflective of current opinions or positions and is subject to change at any time and without notice. Moreover, you should not assume that any information contained in this blog post serves as the receipt of, or as a substitute for, personalized investment advice from Affiance Financial. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives.