When it comes to planning for what happens to wealth after dying is not a task most people take on with relish. Estate planning is a reminder of one’s mortality – something most of us finds unpleasant.
But, proper estate planning for high-wealth individuals is needed for a smooth transition of an estate. This whole process is a way to lessen taxes for heirs, and split an estate according to the deceased person’s wishes.
That said, estate planning has several pitfalls that a certified financial planner or wealth manager can help clients avoid. Following are 7 mistakes to avoid when making an estate plan.
1. Procrastination
This is the No.1 mistake that high-net worth people make. Often, if asked why they haven’t created an estate plan they answer “I’m too young, I’ll do it when I am nearer to retirement.”
Unfortunately, a driver can drift over the center line and kill you in a head on crash. Accidents happen and people should prepare, on paper at least, for a premature passing. An early passing could expose an estate to avoidable taxes, or fail to name guardians, or determine how an asset is divided following a second marriage.
2. Not Updating Estate Documents
The second-most common error in estate planning is having outdated documents. Following a divorce, a will needs to be changed, insurance policies updated, and accounts secured. Following every life changing event like a birth, death, marriage, divorce, buying a home and others mean that an update to a will and other estate planning documents must be done.
3. Choosing an Executor Who is Not Qualified
Executors are often family members or close friends. Often, parents believe that if they have appointed a guardian for their child, they should make that person the executor of their estate. This could be a tremendous mistake.
Being a more than capable parent figure simply does not qualify a person to be the executor of an estate. The planning process often takes a year or more, and is riddled with stumbling blocks.
Also, by separating your estate administrator from a child’s guardian, you have built into your plan an assurance that only legitimate child care expenses are paid to the guardian. Appointing a competent executor avoids the estate becoming embroiled in lawsuits, challenges, and tax liabilities.
4. Improper Beneficiary Designation
Often, people believe that their will dictates how an estate goes to heirs, but this is not true. Life insurance policies and retirement plans require a designated beneficiary(ies). These designations trump a will, so it is necessary to ensure that wills and these plans agree as to the beneficiary. If not, the flawed estate plan can trigger lawsuits.
5. Poor Communication Flow
While some think that by remembering someone in their will should be a surprise or simply choose not to discuss their estate plan with family members are making a huge mistake.
An example of this error might be a physician whose parents supported him or her until completion of medical school, and paid their tuition for medical and undergraduate school might want to leave that child less than a sibling who went to a local state college with low tuition. This student lived home during college and did not go to graduate school. At a family meeting, the person whose estate is under discussion can explain why one sibling is getting more than the other.
6. Not Funding a Living Trust
Living trusts are documents drawn up by a lawyer that allows a person to pass assets to heirs without the need for probate. But, there are two steps to set up a living trust. The first is to have a living trust created by an experienced attorney, the second is to fund it by retitling assets into the trust. Without funding, a living trust is useless.
7. Making an Estate the Beneficiary of an IRA
While this may seem a fair way to distribute an IRA, leaving it to your estate makes it subject to claims and creditors during the probate process. As probate can take a while, the amount of an IRA can be significantly reduced or wiped out. In addition, by not leaving an IRA to the estate, instead of leaving it to individual heirs gives heirs the ability to keep it as is and continue to grow.
High net worth people should seek the advice of a qualified estate planner. With large estates, the potential for costly errors is too great for less than a professional’s help.
Regards,
Ethan Warrick
Editor
Wealth Authority
