Contemplating one’s mortality is not a pleasant thought. However, it is a necessary one. The earlier you can plan your estate, the more time you have to spot potential problems, and the easier the process becomes for your heirs.
While the estate planning process can seem complicated, the basic elements are easy to comprehend, even for someone without legal expertise.
The Most Common Estate Planning Mistake and How to Prevent It
Consider celebrities such as Michael Jackson, Kurt Cobain, and Prince. When they passed away, they left behind incomplete or even non-existent estate plans, resulting in confused and angry heirs, drawn-out courtroom battles, and other complications.
The number one mistake people make involving estate planning is failing to plan at all. In the event someone dies without a will or trust specifying their wishes, the distribution falls to the state’s probate court. Once in court, judges and lawyers use predetermined formulas to determine asset division. It is impossible to know whether this division is aligned with what the deceased would have wanted.
Keep Wills Updated
A will is not a document you sign and then file away until death. Instead, you will need to review it regularly (at least every five years) to determine whether any updates are warranted. Common life changes that need to be reflected in your will include:
- Having Kids or Grandkids
- Significant increase in wealth
- Receiving an Inheritance (especially if it is received in trust)
For instance, it may have made sense to leave your estate directly to your children after the death of the surviving spouse when you and your spouse first executed your wills because you may have had a very small estate. Now that you have amassed some wealth, it may make sense to leave your children’s inheritance in trust to protect it from creditors and divorce.
Additionally, named executors and trustees may have passed away or fallen out of favor. It is a good idea to review your fiduciary appointments and update them as needed.
Dividing Assets Among Multiple Heirs
Even a fairly simple financial portfolio likely has several different elements, such as IRAs, Roth IRAs, life insurance policies, brokerage accounts, and bank accounts. Not all of them should be treated the same for inheritance purposes.
For example, a sole living parent has two daughters and two retirement accounts, a traditional IRA (tax is paid upon distribution) and a Roth IRA (tax was paid at time of contribution). One earns over $500,000 a year while the other earns $50,000. Leaving the higher-earner the Roth IRA makes sense because she’s in a higher tax bracket. Even if the value of the Roth IRA is less than assets given to the second daughter, the total amount received could end up the same because the first daughter avoids the larger tax penalty.
“With a bit of planning, you can exercise significant control over what, specifically, your heirs inherit,” said Paul Romano, from Romano & Sumner, PLLC. “You can reduce their tax burden and otherwise make the transfer of wealth a smooth process. It’s easier for you to figure these issues out now instead of leaving them for your heirs to deal with.”
Failure to plan for asset distribution following your death can result in a host of problems for your heirs. Not only do you want to create a thorough estate plan, but you need to update it regularly to reflect your current relationships and financial condition. While end-of-life issues are unpleasant to consider, you can find peace of mind knowing your loved ones will have security even after you are gone.