How long did you spend planning for your last vacation? If you’re anything like me, you spent a lot of time and energy finding the perfect location, researching fun things to do, and making reservations at some amazing restaurants. Vacations are an important way to stay connected to our loved ones and to spend our money intentionally. But do you know what’s even more important than a vacation and still checks both of these boxes?
Even though estate planning is important, many people spend more time planning their vacations than working on a thorough estate plan. An estate plan is 100% necessary if you want to ensure that your loved ones are financially taken care of after you pass away. More than that, though, your estate plan can help define how you want your money spent.
Whether you’re deciding what to do with property you own, or how you want to distribute your accumulated wealth - an estate plan helps you to build your legacy and become intentional about the future of your finances. Let’s take a look at some common estate planning mistakes people make, and how you can fix them.
Mistake #1: Procrastination
This is easily the most common (and problematic) mistake you can make in your estate planning. I’ve always said: The hardest part of estate planning is scheduling the appointment with an attorney. That’s because so many people are aware that they should have an estate plan but never make time to create one. According to AARP, 60% of US adults haven’t started their estate plan - yikes! Don’t be like the majority - contact your family attorney (or ask around for a referral if you don’t have one!) today and take the first step.
Mistake #2: Adding Your Kids
When you add someone’s name to your account or on the title of your house, you’re legally certifying that they are co-owners of that money, property, etc. In short - they own everything you own now. Even if you completely trust your kids to handle your money the way you want them to, having them listed as owners on any of your assets opens you up to a significant amount of risk.
If they own everything you own, any creditors or collection agencies that come after them also get to come after your assets. That’s a huge problem, especially if you’re planning to use your money for other things (which you undoubtedly are!). Finally, putting your children on your home or bank account might be viewed as a taxable gift and require you to file a gift tax return. Instead, consider a Durable Power of Attorney. This gives your kids the authority to manage your affairs without putting your assets at risk.
Mistake #3: Forgetting About Your Digital Assets
You may not view your social media accounts as an asset, but it is. In fact, all of your online presence needs to be a part of your estate plan. You should discuss things like your Facebook Legacy Contact and who should manage your online passwords. Keep in mind that it’s wise to have an online password manager (like LastPass) rather than writing down all of your important information. This ensures that your list of passwords are up to date, and that whoever is left in charge of your online accounts will be able to access them easily.
Mistake #4: Naming a Trust as an IRA Beneficiary
Even if you want to support your children (or grandchildren) with a trust, naming the trust as an IRA beneficiary is a mistake. Because the trust is the only beneficiary, it’s possible that you’ll hurt your children’s financial situation. Trusts as beneficiaries of IRAs can cause complicated tax consequences for both you and the beneficiaries of your trust. This topic really deserves it’s own blog post because there are many nuances here - but for now, we’ll keep it short: It’s often in everyone’s best interest to simply have your children be the direct beneficiaries of your IRA.
Mistake #5: Leaving Property to Minor Children or Grandchildren
In Kansas, nobody can inherit property in their own name until they turn 18 (keep in mind that other states may have different rules). If you attempt to leave property to a child or grandchild who is a minor, the court will be legally obligated to assign responsibility of the property to the child’s legal guardian until they reach majority age. The legal guardian may be your child, but it might also be an ex-son-or-daughter-in-law or distant relative if their parents pass away.
Leaving property to minors is also a problematic way to encourage unwise financial decisions. 70% of wealthy families lose their riches by the second generation, and ⅓ of Americans who receive an inheritance end up blowing it. Instead of leaving a vast portion of your wealth to a minor, consider setting up clear stipulations, like delaying the age your heirs receive their inheritance, about how the inheritance should be used, or whether or not someone else should be involved in the management of these assets.
Mistake #6: Not Updating Your Beneficiary Designations
We all think about beneficiaries in terms of our will. As such, we often forget that we need to designate someone as a beneficiary for our retirement accounts and life insurance policy. Although we may be comfortable with who we declare as a beneficiary at the time we open the account, our lives evolve with time.
For example, Joe names his brother as the beneficiary on his retirement plan and life insurance when he opens the accounts because he’s still single and he and his brother are close. As the years go by, Joe gets married. He lists his wife as the beneficiary on his will. However, if he doesn’t also update his life insurance and retirement plan accounts to reflect his wife as the beneficiary there, too - the money will all go to his brother. The moral of the story: check all of your beneficiary information and make sure it’s updated regularly!
👉🏽 Download your FREE beneficiary designation checklist HERE!
Mistake #7: Not Understanding How Your Assets will Pass When You Die
This ties into Mistake #6. Most people believe that any information on their will and trust is the final word about who gets what when they pass away. In reality, the beneficiaries listed on your retirement accounts, annuities, life insurance, CDs, and bank accounts all supercede your will or trust. Make sure these forms are regularly updated.
Mistake #8: Leaving No Inventory of Assets
It’s in everyone’s best interest if you put together a clear-cut (and regularly updated) checklist that tells loved ones where they can find your birth certificate, Social Security card, marriage license, pre-nuptial agreement, military records, will, burial instructions, cemetery plot or cremation agreement, bank and credit card documents, mortgage papers, personal finance information, and safe deposit box or keys. Don’t force your loved ones to dig through piles of unorganized paperwork or hunt down all of the pieces of your financial puzzle.
One of the benefits of having most of your financial assets consolidated and under the management of a trusted CFP® is that you’re simplifying things for your heirs. They’ll have a single point of contact when facing a worst-case-scenario who can help them find and organize all of the paperwork and information they need to settle your affairs.
Your Estate Plan
Don’t try to handle estate planning on your own. Instead, hire a competent estate planning attorney. They’ll help to ensure your plan is locked in place and all changes are drafted correctly. Need a recommendation? Ask a family member, friends, or your CERTIFIED FINANCIAL PLANNER™. They’ll know someone in your area (or reach out to their network for referrals).
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.