Common Estate Planning Mistakes and How to Avoid Them
Estate planning is something that a lot of people know they need to take care of, but only about 34% of American adults actually have an estate plan. As more and more people are learning about the benefits a customized plan can bring them, they’re also learning about common mistakes that can come with the process. We would like to help you avoid those pitfalls!
At Diamond Legal, our estate planning team has decades of experience. We take the time to talk with you, ask and answer questions, and create a plan that is tailored specifically to your needs. We don’t stop there, though – we also provide a binder with all of your paperwork and walk you through each step of the process.
What are some of these mistakes though, and how can you avoid them? Good question!
Common Estate Planning Mistakes
Not Updating Your Estate Plan
Your estate plan is not a “set it and forget it” process. Our team will create a plan that is tailored to your family and needs at the time, but as things change, you will want to update it. We’re happy to help!
Whenever a major life change happens like a marriage, divorce, birth of a child, having a child turn 18, or starting a business, your estate plan should be updated. The death of a beneficiary can also be a reason to update your plan. Failing to do so could end up leaving someone out of your will or trust unintentionally, which can cause problems down the road.
There are bigger reasons for these updates, though. When a child turns 18, you as a parent are no longer able to contact their doctor or help them make healthcare decisions. If they’re in another state for college or work, or if they get sick or injured, you could be left without the ability to get information or help. Having a Medical Power of Attorney created can solve all of this.
Likewise, if you open a business, placing it in a trust and creating a succession plan can help your family significantly if something were to happen to you. Without these documents in place, your family can be left scrambling, trying to figure out how to keep things running and keep your clients serviced when they would otherwise be able to focus on more important things. Including your business in your estate plan is often a good solution.
How Often Should You Update Your Estate Plan?
Everyone’s life and situation is different, so there is no one “set” answer to this, but in general you should update your estate plan every three to five years. If a major change (like those mentioned above) occurs, please come in to see us sooner!
Overlooking Assets
When you create your estate plan, our legal team will talk with you to learn more about your goals and situations – as well as to learn more about your assets. It’s not uncommon for people to forget a smaller retirement account, a vacation home or cabin, or assets that they own jointly with other people.
It’s also not uncommon to forget to place new assets, accounts, or properties in your estate plan as you acquire them. This is another reason it’s important to have regular update meetings!
If you forget to place an asset in your plan before you pass away, there are ways for your attorney to create a sort of “blanket” document that can state your intention to add them in, but this will often still cause the courts to ultimately get involved.
In the same way, failing to name beneficiaries can cause your estate to have to go through the probate process – a long and (very) expensive process that no one really wants to deal with. By updating your plan regularly and communicating with your attorney, you can make sure everything is up to date!
Ignoring Estate Taxes
Although Illinois has a graduated estate tax system, estate taxes are still something to be aware of. We recommend working with a financial advisor or tax planner (especially if your entire estate is near or worth $4 million or more), but it’s also important to understand how taxes will affect your estate.
You might be wondering, “what is estate tax?” Simply put, it’s a tax levied on the estate of someone when they die, but before assets are allocated to the beneficiaries. It can significantly reduce the value of your beneficiary’s inheritance.
Illinois does not have an inheritance tax (which is a tax that beneficiaries have to pay on their inheritance), but some states do – and some of those impose a tax on assets that are based there (like a vacation home), even if your beneficiaries don’t live there. This is another important reason to talk with your attorney and financial advisor about all of your assets!
There are, however, ways to minimize your estate tax liability. By putting assets into a trust, making charitable contributions, or gifting assets during your lifetime, you can reduce this tax burden. Make sure to discuss all the options with your attorney and financial advisor first!
Failing to Plan for Incapacity and Long Term Care
Many people consider their estate plan as a way to plan ahead for when they die – but many forget to think through what they want to happen if they become incapacitated or need long term care.
Planning for your death is never easy, but it is a necessity; it happens to everyone at some point. We don’t like to think about it, but it’s not a question of “if”…it’s a question of “how will my family be taken care of when.”
Physical or mental incapacity or the need for long term care is something that is just difficult to anticipate, especially if you’re younger or are in good health. However, it can happen very unexpectedly, and it can affect your family’s finances in significant ways.
On average, long term care in Illinois can cost anywhere from $53,000 to $85,000 per year; for memory care, that cost can jump to over $100,000 per year.
In addition, if your care decisions are not clearly documented, your wishes regarding nursing home care, life saving actions, or life support may not be followed. However, you can anticipate and plan for all of these things in a strong estate plan – and our attorneys can help you do it.
Neglecting to Communicate Your Plan
One of the questions we hear often is that while our clients are happy to be putting their own plans in place, they have no idea what their parents, siblings, or adult children have – and they don’t know how to ask.
This is completely understandable; it’s an awkward conversation. If you’re trying to ask someone who may have you as a beneficiary (like your parents), it can feel like you’re anxious to get your inheritance – and no child wants to come across that way.
It may be an awkward conversation to start, but it’s an important discussion to have. When you create an estate plan with us, our legal team will prepare a binder for you and walk you through how to have that conversation with your family and anyone else who needs to know about your plan.
This way, when your family needs to put any part of your plan in action, they’ll know exactly where to find it and what to do – and if you or they have any questions, we’re here to help.
Estate planning can be complex, but when you work with the right law firm, it doesn’t have to be. At Diamond Legal, our team is here to help you create the plan that best fits your family, your goals, and your needs. Give us a call today to set up your free consult – see what we can do for you!
What Are the Risks of Not Having a Will or Trust in Place?
One of the most significant common estate planning mistakes is not having a will or trust in place. Without these essential estate planning documents, you risk leaving your financial affairs and final wishes in the hands of state laws, which may not reflect your personal intentions.
Without a last will or living trust, the distribution of your remaining assets is subject to estate taxes and state income taxes, reducing what is passed to your loved ones. Additionally, minor children may end up with a court-appointed guardian, and your assets, such as bank accounts, investment accounts, and retirement accounts, may be divided in a way that does not align with your wishes. For instance, failing to update beneficiary forms like the IRA beneficiary form can lead to unintended consequences, such as assets going to an ex spouse or an outdated beneficiary designation form allowing distributions to the wrong party.
Not having a comprehensive estate plan also puts your digital assets like social media accounts at risk of being mismanaged. Without a power of attorney or health care power, critical medical decisions or financial decisions may be made by someone who doesn’t understand your preferences, potentially causing distress for your loved ones.
Additionally, failing to establish a living trust or a revocable living trust means your estate could be subject to probate, a process that can be time-consuming and expensive. The lack of a trust document may expose certain assets to potential creditors or nursing home costs, diminishing the value of your estate.
A common mistake is assuming that life insurance policies or retirement plan assets will transfer seamlessly without updated beneficiary designations. However, without proper planning, death proceeds from a life insurance policy may not go to the intended surviving spouse or contingent beneficiaries, and an irrevocable life insurance trust could help avoid probate while providing asset protection.In short, neglecting to create a will or trust can lead to significant tax consequences, unintended consequences, and unnecessary complications for your loved ones.
DISCLAIMER: Any information contained herein is solely for informational purposes. While it is important that you educate yourself, nothing herein should be construed as legal advice or create an attorney-client relationship. For specific questions, we urge you to contact a local attorney for advice pertaining to your specific legal needs.
