Trust and estate planning is an important part of ensuring the security of your family’s future.
Unfortunately, many people make mistakes in estate planning that can have serious consequences down the line. To help you avoid these errors, here are five common trust and estate planning mistakes and how to prevent them.
1. Not Planning Ahead
Failing to have an estate plan in place can be a costly mistake. Without a valid will or trust, your assets may not be distributed according to your wishes when you pass away. The laws of the state where you live will determine how your assets are divided and who will receive them. This can lead to complications and disputes among family members or other beneficiaries as they grapple with how the estate should be divided up. Without an estate plan in place, it is likely that probate proceedings will take much longer than if one had been created beforehand, resulting in increased legal costs for those involved. Ultimately, having no estate plan can result in considerable financial losses and unnecessary stress on loved ones during an already difficult time.
Common ways to plan ahead include:
- Setting up a will or trust to ensure that assets and property are distributed according to your wishes after you pass away.
- Making sure beneficiaries are specified for all retirement accounts, insurance policies, and other assets held by the deceased.
- Assigning an executor or trustee who will be responsible for carrying out the wishes and instructions outlined in the estate plan.
- Preparing an asset inventory that provides an accurate list of all investments, bank accounts, real estate properties, as well as any debt they may have left behind.
- Choosing to fund trusts for minor children so that their money is managed and invested responsibly, in ways that will benefit them long-term rather than supplying only immediate cash needs.
2. Failing to Update Your Plan Regularly
Laws and regulations change over time, and without updating your estate plan, parts of it could be no longer valid or effective.
Changes in life circumstances also affect how you achieve your estate planning goals.
When should you review your estate plan?
- Marriage or divorce
- Birth of a child
- Death of your minor child’s guardian
- Death of a primary or secondary beneficiary
- Starting a new business
- Purchasing a new home
It is essential that you review and revise your trust and estate planning documents at least once every three years (or more often depending on any major life changes) so they remain current and effective in their purpose.
3. Not Including Funeral and Burial Wishes
If you do not include funeral and burial wishes in your estate plan, your family may struggle to make important decisions about your service or memorial. Without these instructions, family members often feel overwhelmed and unsure about how to honor their loved one’s memory. Funerals are not only expensive, but they also come with hidden costs that many families may not consider. The cost of a traditional burial or cremation service varies depending on the type of services selected, but even basic funerals can cost thousands of dollars. Including funeral and burial wishes in your estate plan is essential if you want the process after death to go smoothly for those left behind.
4. Neglecting Tax Considerations
When it comes to trust and estate planning, one of the most important considerations is taxes. Making gifts or charity contributions to reduce estate tax is a popular strategy used by people who want to minimize the amount of taxes they have to pay on their estate. According to the IRS, gifts up to $17,000 a year (per spouse) may be exempt from estate tax, which can provide a significant benefit to a beneficiary.[1] However, there are certain risks associated with this type of tax planning that need to be considered before making any transfers. These risks include the potential for gift recipients to incur additional taxes on the gifts received, as well as the possibility of an audit if it appears that too much money was transferred in order to avoid paying estate taxes. Additionally, any transfer made through gift-giving could potentially be subject to challenge by beneficiaries or creditors in the event of probate proceedings. Therefore, it is important for anyone considering making gifts to understand the potential risks and consult with an experienced professional prior to taking action. Estate planning professionals can determine which strategies can be used to reduce taxes, such as setting up trusts, donating money/property to charitable organizations, or distributing assets to family members with lower tax brackets.
5. Failing to Plan for Incapacity
Incapacity planning is an often overlooked but essential part of the estate planning process. Without this important step, you could be leaving your loved ones with a difficult decision in the event that you cannot make decisions for yourself. When incapacity planning is not included in your estate plan, your family and friends may struggle to identify your preference for care and who should be responsible for making decisions on your behalf. Incapacity planning gives you peace of mind that the right person will make important decisions for you, if the need arises.
Common ways to plan for incapacity include:
- Creating a power of attorney document, allowing another person to manage financial and legal decisions on your behalf if you become incapacitated.
- Establishing guardianship for any minor children in the event of their parents’ death or incapacity.
- Drafting healthcare directives so that medical professionals know how to handle end-of-life care decisions if a loved one is unable to communicate them themselves due to illness or injury.
A durable power of attorney is a legal document which assigns an individual to make decisions on behalf of another if they become unable to do so themselves. This individual is known as the “attorney-in-fact”, and they are appointed by the incapacitated person while they still have capacity. The attorney-in-fact will then be responsible for managing financial, legal, and healthcare decisions as laid out in the document. It is important that your appointee understands both your wishes and objectives, as well as the legal ramifications associated with their position. Depending on your state’s laws, you may want to consider adding provisions such as who will pay the attorney-in-fact or how the power can be revoked in order to ensure that everything is handled properly.
Drafting healthcare directives should also be included in incapacity planning documents. These directives allow individuals to designate someone else (known as an agent) to make healthcare decisions on their behalf if they are unable due to illness or injury. Healthcare directives also allow individuals to define their preferences when it comes end-of-life care such as resuscitation efforts, organ donation wishes, pain medications administered, etc., so that medical professionals know exactly how those wishes should be carried out even if the patient cannot communicate them directly themselves due to their condition. Having these directives in place ensures that all medical decisions are made according to their expressed desires rather than somebody else’s values or opinions about what is best for them at that time in their life.
Trust and estate planning is a vital part of ensuring the security of your family’s future. By taking the time to understand common mistakes, you can avoid errors that may impact your family’s future. We hope this article has helped provide guidance on: not planning ahead, failing to update plans regularly, neglecting funeral/burial wishes, overlooking tax implications, and failing to plan for incapacity. With proper preparation and understanding, you can rest assured that your estate plan will take care of your needs and the needs of your loved ones.
Avoid Mistakes and Set Up Your Estate Plan the Right Way
Trust and estate planning can be complex, and it is important to approach the process with caution and expertise. Working with a trusted financial advisor who has experience in this area can help you protect your assets, minimize taxes, and ensure that beneficiaries will receive distributions in accordance with your wishes. A qualified professional can also assist in making sure that your plan is up-to-date and all these details continue to be handled correctly over time. With their assistance, you’ll have peace of mind knowing that everything is taken care of for yourself and your family’s future security. Don’t delay – start setting up your estate plan today!
[1] 2023 IRS gift tax exclusion per person
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