Estate planning mistakes can upend your best efforts to protect your family's finances after your death. Everyone can benefit from an estate plan, a process that entails getting your financial affairs in order so that your assets and possessions get passed on to the people or organizations you want to inherit them.
Having a comprehensive estate plan will also spare your loved ones the pain and expense of determining how to allocate your money and property while they’re grieving your loss.
But creating an estate plan can be complex and emotionally challenging, which may explain why two out of three Americans don’t have any estate planning documents, according to Caring.com’s 2023 Wills and Estate Planning survey of 2,483 adults ages 18 and older. And around a quarter of those without a will said they don’t ever plan on creating one.
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Here are eight common estate planning mistakes to avoid.
1. Procrastination
You certainly don’t want to become incapacitated because of a health emergency, such as a stroke or heart attack, and lack an estate plan. Yet over 40% of Americans without a will said they plan on waiting for a medical diagnosis to create a will, the Caring.com survey found. So don’t wait to get your estate plan in order.
2. Creating an estate plan on your own
Estate planning documents that are incomplete or contain errors can cause complications when you pass Consider hiring an estate attorney to help you craft a comprehensive estate plan and understand the legalese.
Generally, estate lawyers charge $200 to $2,000 for an estate plan, depending on the complexity of the client’s assets, according to Legal Match. (Many estate attorneys offer free initial consultations.) You can find an estate attorney in your area using an online directory such as Justia, Legal Match, or the American College of Trust and Estate Counsel (ACTEC).
3. Leaving loved ones uninformed
Sharing your estate plan with your family and heirs can help prevent confusion, conflict, and unnecessary stress in the future. Sit down with the relevant people and have an open conversation about your intentions.
4. Keeping estate planning documents in a safe or safe deposit box
Don’t keep your estate documents in a safety deposit box or other place that’s difficult to access. For good measure, provide copies of your estate plan to your appointed executor or trustee, a trusted family member, and your estate lawyer.
5. Missing key documents
An incomplete estate plan can create confusion — and the potential for disputes among heirs when you pass. Make sure your plan includes these essential documents:
- Last will and testament. Often simply referred to as a "will," a last will and testament outlines your final wishes and instructions for the distribution of your assets and the management of your affairs after you pass.
- Beneficiary designations. Make sure to assign beneficiaries for 401(k) and IRA accounts, pensions, and life insurance policies.
- Durable power of attorney for medical care. This appoints a person to make medical decisions for you, on your behalf, should you become mentally incapable of making them yourself. It often includes an advanced healthcare directive, which instructs your family and doctors to use or not to use life support.
- Durable financial power of attorney. This assigns an individual to manage your assets if you become incapacitated.
- Funeral instructions. Specify whether you’d like a burial or a cremation and the type of funeral service you want.
- Proof of identity. Gather your social security card, birth certificate, marriage and/or divorce certificate, and any prenuptial agreements.
- Deeds or loans for large assets. Collect this paperwork for homes, boats, and other big assets.
6. Overlooking digital assets
Many people forget to account for their digital assets, such as cryptocurrencies, social media accounts, cloud storage, and digital files when creating an estate plan. Consider assigning a digital fiduciary in your estate plan who has the right to access your digital assets when you pass.
7. Not updating your plan
Failing to review and revise your estate plan after major life events — a marriage, divorce, birth of children or grandchildren, or the acquisition of new assets — can lead to consequences, such as assets being passed to the unintended beneficiaries.
8. Appointing the wrong executor or trustee
Choosing someone who may have a conflict of interest can lead to problems when it comes time for them to administer your estate. Select an individual (or individuals) who are unbiased, and get their permission before you assign them as an executor or trustee.
FAQs
What Is 5 by 5 Power? A 5 by 5 power clause in a trust document gives the beneficiary the right to withdraw either $5,000 or 5% of the fair market value of the trust account per year, whichever is greater. This is in addition to the regular income payout benefit of the trust.
What is poor estate planning? ›
The “poor man's estate planning” sometimes refers to the practice of putting your child on the title to your deed. The idea is that when you die, the property automatically transfers to the child without having to go through the probate process.
What is the biggest mistake parents make when setting up a trust fund? ›
The Biggest Mistake When Setting Up a Trust Fund
The answer may surprise you as it could be easily avoided: lack of proper planning. Trusts can be complex with lots of moving pieces, which means you need to consider all aspects of how they are set up and how they will function in the future.
What is the most important decision in estate planning? ›
If you have life insurance, make sure your beneficiaries are up to date and listed correctly. In terms of timing, this might be the most critical part of your estate plan. Your heirs will need immediate access to some of your assets for their daily needs as well as to plan for your funeral.
What are the six basic steps to the estate planning process? ›
- Planning your estate.
- Step 1: Set your estate planning goals.
- Step 2: Document your assets and debt.
- Step 3: Create your Last Will.
- Step 4: Create your Power of Attorney.
- Step 5: Create your Health Care Directive (Living Will and Medical Power of Attorney)
- Step 6: Create your End-of-Life Plan.
Hanging powers consist of both non-cumulative and cumulative demand rights. The non-cumulative demand right lapses when not exercised by the beneficiary. The amount subject to a non-cumulative right is limited to the greater of $5,000 or 5% of trust assets.
How do you fairly divide an estate? ›
Three common strategies for dividing an inheritance include:
- Per stirpes. One of the simplest strategies for asset distribution among heirs, this method requires that the estate be divided equally among each branch of the family. ...
- Per capita. ...
- Per capita by generation.
Thinking about dying, even indirectly through estate planning, makes many people uncomfortable. There are various complicated psychological explanations for why this happens. But for many people, it comes down to a belief (perhaps subconscious) that talking about death will somehow hasten it.
What are the three primary goals of estate planning? ›
At Stein Sperling, we have three primary goals in helping clients with estate planning: protecting assets through life and for future generations; minimizing negative tax consequences through the architecture of a careful plan; and planning for disability and death.
What is the downside of putting assets in a trust? ›
Your Assets Might Not Be Protected: Another crucial point to note is that not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets. Potential Tax Burdens: Finally, trusts can carry potential tax burdens.
While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000. That's certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth.
Can a beneficiary reject a trust? ›
Your beneficiary can refuse a trust distribution if they meet the federal government criteria. What happens with the disclaimed assets depends on the steps you've taken in setting up your trust. The trust settlement process follows the terms you establish with your successor trustee.
What are the four must-have documents? ›
She classifies them as “must have” documents and discusses them at length on her website. These specific documents are a will, a living revocable trust, a durable power of attorney for healthcare and an advance directive.
What are the 5 key elements of a good estate plan? ›
Here is an estate planning checklist of items every estate plan should include:
- Will/trust.
- Durable power of attorney.
- Beneficiary designations.
- Letter of intent.
- Healthcare power of attorney.
- Guardianship designations.
If you want your assets and your loved ones protected when you can no longer do it, you will need an estate plan. Without one your heirs could face big tax burdens and the courts could designate how your assets are divided—and even who gets to raise your children.
How does a 5 and 5 power work? ›
Key Takeaways. A 5 by 5 Power in Trust is a clause that lets the beneficiary make withdrawals from the trust on a yearly basis. The beneficiary can cash out $5,000 or 5% of the trust's fair market value each year, whichever is a higher amount.
What is the 5 5 5 rule life? ›
The five by five rule means you shouldn't spend more than five minutes worrying about something that won't matter in five years.
Which of the following is true concerning the 5'5 lapse rule? ›
Option A is true: The 5/5 Lapse Rule deems that a taxable gift has been made when a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder.
What is the disclaimer of 5 and 5 power? ›
In a Disclaimer Trust, the 5 by 5 Power lets the surviving spouse, who is the Beneficiary, disclaim any part of the Trust's principal. This passesthe disclaimed assets to the remainder beneficiaries without incurring any estate taxes.
