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A n estate plan should be a clear roadmap, one that guides your assets to your chosen beneficiaries with a minimum of time and expense.
That's what it should be, but too often it's not. Inaction and inadequate planning can result in disaster for your loved ones. Your estate can fall into the wrong hands... the IRS can end up with far more than its fair share... your heirs can battle endlessly.
None of this will happen to your estate as long as you avoid the most frequent and damaging planning mistakes...
1. Not having a will. If you die without one, your assets will be divided according to state law, which may not be the disposition you desire. For example, in some states, your spouse and children split your estate.
2. Focusing solely on taxes. To many people, estate planning is synonymous with tax planning. They reason that since the federal estate tax exemption is now $1.5 million -- scheduled to rise to $2 million in 2006 -- they won't owe estate tax and don't need to do any planning.
The size of your estate -- taxes or no taxes -- should never determine whether you have a comprehensive plan. Most estate-related family disputes are not even about money. They occur because people ignore the human element of estate planning. Examples...
Heirs may squabble over furniture, inexpensive jewelry, family photographs, etc. -- things you might never think they would fight over.
You might name one child as executor, and inadvertently slight your other children no matter how the assets are divided up.
3. Being mysterious. It may make good TV drama, but there's usually nothing to be gained by keeping heirs totally in the dark about your intentions. Explain your choices to them, and specify your bequests. Give away heirlooms while you're alive -- you'll get to see your heirs enjoying them, and they won't have to fight over them later. And, as we saw in the case of Terri Schiavo, it's vital to let your family know what you would want done if difficult medical decisions have to be made.
Strategy: Discussions with family are not legally binding. Neither are personal notes. Include your wishes in formal legal documents to prevent fights. Have a living will drafted stating your health-care wishes. Get a health-care proxy appointing an agent to make decisions.
4. Failing to update beneficiary designations. Life insurance policies, retirement accounts, payable-on-death (POD) accounts set up at banks and with brokerage firms and certain other assets will pass to the beneficiaries you have named in the accounts' paperwork, no matter what it says in your will. You should check periodically to make sure your beneficiary choices in these accounts are current.
After a divorce, for example, you probably won't want your ex-spouse to be the beneficiary of your life insurance or your IRA.
5. Relying on outdated documents. Assets change, families change and laws change. All of your estate-planning documents -- will, trusts, letters of instruction to your executor, power of attorney -- should be reviewed at least once every three years... and anytime a relevant law changes.
Example: A common strategy has been to leave the amount of the estate tax exemption to a bypass trust for the children and the balance of the estate to the surviving spouse, since spousal bequests are automatically tax free.
The estate tax exemption is scheduled to rise, though, so such a plan may leave too much to the kids and too little to your spouse.
6. Naming the wrong executor. After your death, your executor will become the quarterback of your estate plan, responsible for handling all the assets that transfer under your will.
Trap: If you name your spouse, he/she might be too overcome by your death to function well. Similarly, it may not be practical to name your son, who lives across the country.
Strategy: Name a younger relative who lives nearby, someone who is organized and detail-oriented. If you think your spouse's feelings will be hurt, designate such a person coexecutor along with your spouse.
Whoever you name, make sure to ask him if he is willing to serve. Name two or three backups, too, in case your first choice is unable or unwilling to act.
7. Making things difficult for your executor. If your financial papers are scattered everywhere, handling your estate will be more difficult and time-consuming. Valuable assets (such as life insurance policies) may be overlooked.
Strategy: Keep copies of your documents in one place, such as a looseleaf binder or folder. Write on each copy where the original is located -- and let your executor know where the originals can be found -- such as with your lawyer, who may have your original will. Simplify things for your executor by consolidating accounts with one bank, one broker, one mutual fund company, one insurance company, etc., to the extent that is practical.
8. Improper use of joint ownership. As you grow older, you might want to add the name of a relative, such as your daughter, to your bank or brokerage accounts. This joint owner could write checks, handle investments and so on, if you become unable to manage your own affairs.
Trap: Your co-owner will automatically inherit that asset, freezing out all other heirs no matter what's in your will.
Strategy: Instead of joint ownership, give your trusted friend or relative a durable power of attorney over your accounts. This person will be able to handle your affairs if need be, yet your will shall remain fully in effect.
If you want one younger relative to be able just to write checks for you, name him as joint owner of a checking account where relatively modest sums are maintained.
9. Underestimating the size of your estate. Despite all the talk of estate tax repeal, the federal estate tax is still on the books.... and most states are increasing their estate taxes.
If you leave a sizable estate, chances are that your heirs will owe some tax.
Trap: Even if you don't think of yourself as rich, if you die while owning real estate, life insurance policies and a retirement account, you may be in estate tax territory.
Strategy: Some planning can help reduce the tax burden you'll leave to your loved ones.
Example: In 2005, you could give up to $11,000 per year to any number of recipients with no tax consequences. That number will increase in future years with inflation.
You also may want to arrange for insurance on your life to be purchased in a trust if your estate will need cash to cover an expected estate tax bill. Talk to your financial adviser.
10. Not coordinating advisers. Good estate planning involves a variety of skills. Having all your legal documents (will, trusts, etc.) in order may not guarantee a sound estate plan if your life insurance isn't handled properly. Similarly, you might need a tax adviser to see if tax planning is necessary and a financial planner to handle your investments.
Key: Make sure all of your advisers know about each other -- and about your entire estate plan -- so they can work with each other to ensure a happy ending.
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