How to Avoid the 5 Common Estate Planning Mistakes

Legacy planning forces us to consider a time after we’re here, giving us the opportunity to ensure that the ones we leave behind are properly cared for.

Nevertheless, estate planning can be arduous and time-consuming if it’s not done right. Make it a little easier on yourself by knowing what you shouldn’t do when planning your estate.

Here are common mistakes people make when they’re estate planning:

MISTAKE #1: Disorganized Paperwork

You may have a paperwork system that works for you, but what happens when you’re not around to explain your “unique” filing system? Make sure that all important documents and your financial portfolio are organized and accessible for the people left behind to manage your estate.

MISTAKE #2: An Outdated Legacy Plan

Legacy planning is an on-going process and all too often, people build an estate plan and then they forget about it. Scheduling a yearly check-in on your estate plan stays current, ensuring that your assets will be managed and distributed exactly how you want them to be.

These updates should consider:

  • Changes in your job
  • Changes in your marital status
  • The death of beneficiaries
  • New beneficiaries
  • Whether or not you still have dependents
  • Changes to your asset status

MISTAKE #3: No Contingent Beneficiaries

All too often, people fail to name a contingent beneficiary on their financial contracts, and this can create a problem if the beneficiary predeceases the owner.

Here’s an example:

  1. Susan names her husband, Tim, as the beneficiary to her IRA. Sadly, Tim predeceased her, and Susan forgets to name a new beneficiary. Because there was no contingent beneficiary, the contract’s default language stipulates that the funds go to the estate.
  2. Susan wanted their IRA to go to their children. She passed the residual estate to her brother, but because the IRA contract didn’t name a contingent beneficiary, Susan’s brother now gets the estate and the IRAs and Susan’s children receive nothing.

This is why a contingent beneficiary is always part of prudent estate planning.

MISTAKE #4: Not Knowing the Difference Between Natural and Non-Natural Beneficiaries

Sometimes people name a person as the beneficiary for a contract. Other times, people establish a trust into which assets will be funneled upon death. For retirement savings plans, like IRAs, those who’ve been named as beneficiaries of a trust must collect these IRAs at an accelerated rate, which can have a major tax implication.

Based on the new SECURE Act, a spouse can take out inherited IRA funds over their lifetime. For children or other beneficiaries, they must take the full value over 10 years.

MISTAKE #5: Unclear Directives

Creating the right legacy plan means mapping out the exact way you want your assets to be distributed. It also means creating contingency plans for that distribution, should certain changes arise.

For example:

  1. If you have a jointly-owned contract, make sure that the directions on the contract are in-line with your overall succession plan, ensuring that no posthumous alterations can be made.
  2. Decide how you’d like your assets to be distributed in the event that one of your beneficiaries dies or predeceased you. Do you want the deceased beneficiary’s share to be split between the other beneficiaries (per capita) or distributed to the beneficiary’s lineal descendants (per stirpes)?

Answering these questions will help you create a clear outline and direction for your estate plan.

Knowing these common mistakes to avoid when legacy planning is actually a great first step to developing a solid estate plan.

Ensure that your hard-earned money is left to help the people you care about, even after you’re gone.

To find out more, talk to a financial advisor.

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