Every day people make the same common mistakes that have a negative impact on their estate plan. There’s a lot that goes into an estate plan, and upon your demise, you need to make sure everything is in order to ensure your estate’s wishes are met.
People die every second that haven’t put a thought into their estate plan.
Families are torn apart from a lack of proper planning. Even close families bicker and fight when a loved one dies without a will in place. It’s a tragedy that the deceased couldn’t foresee when they were alive.
But there’s far more than a will that dictates a proper estate plan.
If you know what pitfalls to avoid when making an estate plan, you’ll be able to make an estate plan that’s ironclad and meets your wishes.
1. Conflicting Beneficiary Designations
Beneficiaries can be added to your will and various accounts. Your assets that allow a beneficiary to be named must be updated and non-conflicting when writing a will. A good example of this can be seen below:
- Bill works for Costco and has a life insurance policy and retirement account with the beneficiary named as Joanna Smith.
- Bill and Joanna are happily married, and he names Joanna as his beneficiary of his accounts in his will and accounts.
- The two begin to bicker and a happy marriage turns sour and they divorce.
- Five years later, Bill finds true love in Jennifer. Bill updates his will to name Jennifer his beneficiary of his life insurance and retirement accounts.
- Bill dies suddenly.
Bill is dead, and now there are conflicting beneficiaries. His thought was to update his will to ensure Jennifer is the beneficiary of his accounts. The problem is that the will conflicts with the beneficiary designation on his life insurance and retirement accounts.
Joanna and Jennifer may end up in court allowing the courts to decide Bill’s wishes because conflicting data exists.
In most cases, the asset will pass on to the beneficiary named on that asset and the will is ignored.
The solution: review and update beneficiaries regularly.
2. TOD or POD Don’t Match the Will
TOD (transfer on death) and POD (payable on death) beneficiaries can be added to certain assets or accounts. These accounts often include:
- Checking accounts
- Savings accounts
- Investment accounts
- Automobile titles
- Real property (depending on the state)
Many people don’t know that their will doesn’t override a TOD or POD beneficiary. These assets override a will, so in Bill’s case above, if he updated his savings account to name his new wife as the beneficiary but Joanna (his ex) was listed in his will, his new wife would still receive the money in his savings account.
TOD and POD beneficiaries need to be updated often.
A TOD or POD may include taxable assets, and complex estate planning tactics may be able to circumvent many of these taxes.
3. Not Planning for Disability
Death isn’t the only concern when drafting an estate plan. If a person is in an accident and remains in a coma, they’re not dead, so a lot of the wishes in a will are ignored. A person needs not only plan for their demise but also for a potential disability that changes their lives.
An estate plan for disability may include:
- Who will make healthcare decisions on your behalf
- Who will raise your children
- Who will handle your finances
A living trust and a power of attorney can help a person plan for these scenarios. The bank won’t wait for your mortgage payment and the bills you pay every month will pile up whether or not you have the mental capacity or being to pay for them.
If you fall into a coma for 3 months, would you be able to pay off three months of accruing debts and penalties?
Most people couldn’t.
4. Naming a Child on the Deed
The deed of a home may include a child’s name. This is an honorable action to take, but your child will need to pay a large portion of the home in taxes. A better method is to pass the home or the value of the home through inheritance to the child.
If you choose to add the child to the deed and you die, they may have to pay taxes on the value of the home above the $14,000 exclusion from the estate tax.
Whenever possible, make gifts to reduce your estate tax. The IRS allows $14,000 per year to be gifted. The goal is to gift as much of your assets and money as possible to avoid hefty estate taxes.
The Micklin Law Group, LLC is a New Jersey law firm focusing on family law. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. Brad has experience working with high asset divorce. You can read more on this topic by visiting our divorce blog. To set up a consultation, call 973-562-0100.