Estate planning is one of the most important steps you can take to ensure that your loved ones are taken care of and your wishes are carried out after you’re gone. However, many people overlook key aspects of estate planning, which can lead to confusion, legal disputes, and financial loss.
To help you avoid these pitfalls, I’ve put together an infographic that highlights 7 common mistakes people make when setting up their
estate plans. In this blog post, we’ll dive deeper into each of these mistakes, explain why they are so critical, and offer tips on how you can avoid them.
Mistake 1: Failing to Update Your Estate Plan After Major Life Changes
One of the most common
estate planning mistakes is neglecting to update your plan after significant life events. Marriage, divorce, the birth of a child, or the death of a loved one should all prompt a review of your estate plan.
For example, if you’ve recently had a child, you’ll want to ensure that your estate plan includes provisions for their care and guardianship if something happens to you. Similarly, a divorce may necessitate removing an ex-spouse from your will or trust. Failing to update your plan can leave assets going to unintended recipients or create complications for your family.
Tip: Review your estate plan annually or whenever a major life event occurs to ensure that it reflects your current situation and wishes.
Mistake 2: Not Appointing Alternate Fiduciaries
Many people carefully choose a primary executor or trustee to manage their estate but forget to name alternate fiduciaries. If your first choice is unable to serve due to illness, death, or personal reasons, your estate may face delays while the court appoints a replacement.
By designating alternate fiduciaries, you ensure that someone trustworthy is always in place to carry out your wishes, even if your primary choice is unavailable.
Tip: Name at least one alternate for each key role in your estate plan, including executors, trustees, and healthcare proxies.
Mistake 3: Failing to Fund Your Trust
Setting up a trust is a powerful estate planning tool, but it’s only effective if you fund it. Many people go through the effort of creating a trust to protect their assets, only to leave assets out of it. When assets are not properly transferred into the trust, those assets may need to go through probate, defeating one of the primary purposes of having a trust in the first place.
To avoid this, you need to ensure that assets such as real estate, investment accounts, and other valuable items are properly transferred into the trust.
Tip: Work with your attorney to make sure all relevant assets are titled in the name of your trust. Regularly review and update the funding of your trust as your financial situation changes.
Mistake 4: Overlooking Digital Assets
In today’s increasingly digital world, many people have significant online assets that can be overlooked during estate planning. These may include social media accounts, online banking information, digital photos, or even cryptocurrency.
Failing to include digital assets in your estate plan can leave your family scrambling to access accounts and handle your digital affairs after your death. Make sure your estate plan includes provisions for managing these assets, including access to passwords and instructions for what should happen to each account.
Tip: Keep a secure, up-to-date list of digital assets and passwords, and ensure that your executor or trustee knows how to access it. You may also want to include specific instructions in your estate plan for
handling digital assets.
Mistake 5: Not Considering Estate Taxes
Although many individuals in Massachusetts may not be subject to federal
estate taxes due to the high exemption threshold, Massachusetts has its own estate tax with a lower threshold. If your estate exceeds $1 million, your beneficiaries may face significant tax liabilities, which could reduce the inheritance they receive.
Planning for estate taxes can help reduce the impact on your estate. Options such as gifting assets during your lifetime, setting up trusts, or making charitable donations can help lower your taxable estate.
Tip: Work with an estate planning attorney to understand your estate tax liability and explore strategies to minimize it. Even if your estate is under the $1 million threshold, it’s important to be aware of potential tax consequences.
Mistake 6: Failing to Designate Beneficiaries for All Assets
Another common mistake is failing to designate beneficiaries for certain assets, such as retirement accounts, life insurance policies, or payable-on-death accounts. If these accounts don’t have a named beneficiary, they may need to go through probate, delaying distribution and adding unnecessary legal fees.
Make sure that all relevant accounts have up-to-date beneficiary designations. This includes checking to see if any beneficiaries need to be added or removed, particularly after major life events.
Tip: Regularly review the beneficiary designations on all of your financial accounts to ensure they are current. If needed, update them to reflect your wishes.
Mistake 7: Not Accounting for Incapacity
Many people focus on what will happen after they pass away, but an important part of estate planning is making sure you’re protected in the event of incapacity. Without documents like a healthcare proxy or durable power of attorney, decisions about your medical care and finances could be left to the courts. This could lead to delays or decisions that do not align with your wishes.
To avoid this, make sure your estate plan includes provisions for incapacity. A healthcare proxy allows someone you trust to make medical decisions on your behalf, while a durable power of attorney enables them to manage your financial affairs.
Tip: Designate someone you trust as your healthcare proxy and durable power of attorney. Make sure they understand your preferences and have access to important documents.
