Estate planning helps with financial peace of mind by protecting family assets and helping ensure they’re distributed according to your wishes, in addition to playing an important role in maintaining family harmony.
Too many estate plans are undermined by oversights and mistakes. Here are three common ones to avoid:
- Failing to Update Beneficiaries
- Not Leaving Instructions for Property Distribution
- Neglecting to Set Up Trusts
Let’s take a look at each issue.
Failing to Update Beneficiaries
We’ve all had the experience of naming beneficiaries when setting up retirement accounts or taking out insurance policies. But many of us fail to revisit our designations when a major life change happens, such as children coming along, divorces occurring or after the loss of a spouse. As a result, old beneficiary choices often don’t match current wishes.
There are innumerable cases of death benefits going to an ex rather than a widow or widower. But it’s also common to be predeceased by a beneficiary or for charities that were named as beneficiaries to cease operations. In such cases, courts may decide where assets should go. Wills or trust directives may not help. Beneficiary designations for retirement accounts and insurance policies generally take precedence over will and trust directives unless a trust is named as a beneficiary.
You can update beneficiaries by contacting your investment firm or insurance company. In some cases, you’ll need to fill out paper change-of-beneficiary forms, and for others, you can handle the task online. It’s a simple step that can spare your survivors a huge headache down the road.1
Not Leaving Instructions for Property Distribution
Failing to properly designate beneficiaries for real estate and personal property can also cause a mess. One example might involve a Transfer on Death deed, which is a popular way in many states to transfer a home to beneficiaries without going through the probate process. These deeds allow homeowners to designate multiple beneficiaries, each entitled to an equal share of the property: If there are four beneficiaries, for example, each will get 25%. If one of the beneficiaries dies before the original homeowner, however, their share typically won’t automatically be divided among the surviving beneficiaries. This is another case in which failing to update a key document can lead to a legal tug of war.
Likewise, a lack of clear instructions can lead to family tension over personal property, notably items with deep sentimental value. A good way to avoid the problem is by itemizing specific bequests in a will. For example, a parent might direct that the estate be equally divided between his three children, but also attach a statement specifying who gets what: the heirloom pearl necklace to the elder daughter, for instance, the piano to the son and the baseball card collection to the nephew.
Neglecting to Set Up Trusts
Living trusts are another popular way to transfer personal property while steering clear of probate. It’s important to be specific when titling items within the trust. General descriptions like “jewelry” or “furniture” can lead to trouble, so any highly desirable items should be itemized and assigned to specific heirs.
Trusts can help you control your assets both during your lifetime and after your death. These ensure that assets are distributed how and to whom you want. There’s good reason they are popular estate planning tools.
By allowing you to avoid the probate process, trusts help ensure that your financial information and the distribution of your property will remain private. Trusts can help minimize estate taxes so that more of your wealth ends up in the hands of people and organizations you care about. They can be used to protect family wealth against claims by creditors, and, should your children or grandchildren divorce, claims by the ex-spouses. Trusts enable you to prearrange the care of a child or an adult with special needs. They allow you to effectively support beneficiaries who may not be financially responsible.
Reviewing Your Estate Plan
If it’s been a few years or you’ve experienced a life changing event, it would be advisable to meet with your wealth team, including an estate planning attorney, to review your plan and make any necessary changes.
Estate planning can help to give your wealth meaning and can serve as a powerful expression of how you feel about those you’ll one day leave behind. Devoting the time and attention needed to make sure it’s current and reflects your wishes is one of the most important ways you can take care of your family and protect the assets you’ve worked so hard to accumulate.
Footnote:
1“The Importance of Updating Retirement Account Beneficiaries”
