In this second installment of our series, we’re diving into the most common pitfalls in estate planning and, more importantly, how you can avoid them. If you think just having an estate plan in place means you’re set, think again. The reality is that even the best-laid plans can fall apart if you don’t know the landscape. Whether you’ve just started thinking about your estate or already have a plan in place, there are countless ways it can go sideways. So, let’s break it down into four categories of common missteps and how to dodge them.
The Biggest Mistake? Not Having a Plan at All
Let’s cut straight to it: the number one estate planning mistake is not having a plan. Full stop. If you don’t prioritize putting your estate in order, you’re leaving your loved ones and your assets vulnerable to unnecessary drama. When you don’t have a proper plan in place, the state decides what happens to your wealth when you’re gone—and trust me, the state’s version of “orderly distribution” probably doesn’t align with yours.
But even if you’ve taken the step to create an estate plan, don’t think that’s the finish line. Far from it. There are multiple ways to trip up, even with a plan, and that’s what we’re here to explore. Let’s break down four categories of mistakes that could create chaos in your estate plan.
Taking Shortcuts: Don’t Wing It
First up: trying to game the system. There’s a temptation to cut corners, especially if you’re busy or think a formal plan seems excessive. One of the most common shortcuts? Retitling assets jointly with another person to avoid probate. On the surface, this might sound like a smart move, but you’re setting up potential landmines.
Here’s the problem: once you create a joint account, both individuals have equal rights to all the assets, regardless of who contributed the funds. You’ve now exposed yourself to the legal risks of the other party. If they face lawsuits, creditors, or legal trouble, your jointly held assets are fair game. And if we’re talking about real estate, expect even more headaches—every joint owner needs to sign off on refinancing or selling property, which complicates things further. And don’t even get me started on gifting issues. Bottom line: shortcuts like this create more problems than they solve.
Ignoring Beneficiary Circumstances: Tailor the Plan
Next, you’ve got to consider the specific needs of your beneficiaries. Handing out assets without understanding the recipient’s circumstances is a recipe for disaster. For instance, leaving money directly to a minor? In most states, this triggers a court-ordered guardianship. Suddenly, your family is in a costly, time-consuming legal process just to manage the inheritance.
It’s even worse for beneficiaries with special needs. A direct inheritance could disqualify them from essential government benefits like Supplemental Security Income (SSI) or Medicaid. Instead, a supplemental needs trust can protect those assets while keeping their benefits intact.
And don’t forget the spendthrifts. We all know someone who struggles with managing money or has issues like addiction, legal battles, or creditor problems. For these folks, a trust is not just a smart choice—it’s essential. You’re not being harsh; you’re ensuring that their inheritance is managed in a way that actually benefits them long-term.
Surprising Your Heirs: Communication Is Key
Here’s the thing that gets overlooked: surprises in estate planning never go well. Litigators love nothing more than an heir whose expectations weren’t met, and families are often torn apart because of misunderstandings. One child gets more than another. A cousin gets something unexpected. Someone’s left out entirely. It’s fertile ground for resentment and legal disputes.
The solution? Have the uncomfortable conversation now, before things escalate later. Yes, some people worry that discussing their estate plan with beneficiaries will demotivate them. Others fear sparking current conflicts. But here’s the truth: a well-prepared discussion led by an experienced estate planner can diffuse tension and manage expectations. Everyone knows what’s coming, and that transparency goes a long way toward preventing fights after you’re gone.
Failing to Look at the Big Picture: A Plan Needs to Be Holistic
A comprehensive estate plan isn’t just a stack of documents. You need to understand how it interacts with your assets and how it all fits together. One common oversight? Forgetting about assets that bypass your estate plan altogether, like retirement accounts, life insurance, or annuities. These typically transfer directly to a named beneficiary, outside of your will or trust. If those assets represent a big chunk of your wealth, but you haven’t coordinated their distribution, you’re not really in control of your estate.
Don’t Forget About Income Taxes
Another tax issue to watch out for? Income tax on inherited retirement accounts. If you’ve left an IRA to your kids, for example, they’re going to face income tax on the withdrawals. Unless it’s a ROTH IRA, those distributions can shrink fast. Understanding these dynamics might even lead you to rework parts of your plan. Maybe that charitable bequest you were planning? It might make more sense to fund that with a portion of your IRA, leaving the tax-free assets to your loved ones.
The key takeaway here is that estate planning isn’t a one-and-done exercise. It’s a dynamic process that requires attention to detail, awareness of family dynamics, and a comprehensive understanding of your assets, taxes, and legal environment. Don’t go it alone. Working with a qualified estate planning attorney will help you cover all the angles and ensure that your plan does what you intend—without the mistakes that could unravel everything.
We’ve all heard the stories—young heirs who inherit significant wealth only to lose their drive, purpose, and focus. If you’re worried about leaving a “silver spoon” legacy that could backfire, consider an incentive trust. You can tie distributions from the trust to certain achievements, like completing a college degree or maintaining employment.
Let’s say you set up a trust for your child with the stipulation that they must attend college. The trust could cover tuition and living expenses as long as they stay in school. After graduation, you could even create a matching program where the trust matches their earned income, dollar-for-dollar, encouraging them to stay motivated. Finally, you could release a larger sum when they hit a milestone age, providing them with a nest egg when they’re mature enough to manage it.
In estate planning, small missteps can have big consequences—from not having a plan to overlooking key details that protect your assets and loved ones. Don’t leave your legacy to chance. Join us for our free seminar this Saturday, October 5th at 10am at the Westchester Library, and learn how to build an airtight estate plan that avoids common pitfalls and secures your family’s future.
Join us for a FREE Seminar on Strategic Estate Planning on Saturday, October 5th
Attorney Collins will lead her last in person seminar of the 2024 year with an insightful session on safeguarding your family’s wealth through effective estate planning. This is truly your opportunity to seize and understand comprehensive estate planning and ensure your legacy is protected.
Don’t miss this chance to secure your future. We look forward to having you with us!
OCTBER 5TH SEMINAR LINK
If you’d like to reserve your seat at our end-of-year October 5th webinar, please use the link above or call our office at (310) 677-9787. Don’t miss this final opportunity of 2024.
