Why Your Estate Plan is Probably Wrong (And How to Fix It)
Did you know that a staggering number of people either do not have an estate plan or have one that is severely flawed? According to estate planning experts, one of the most significant mistakes individuals make is not having an estate plan at all, which can lead to state laws dictating the distribution of their assets, often in ways that contradict their wishes. This oversight can result in unnecessary legal and financial stress for loved ones, including probate fees and disputes over asset distribution[1].
The implications of not having a proper estate plan are far-reaching. Without a plan, minors may lack guardianship provisions, leaving their care decisions up to the courts. Additionally, joint accounts and beneficiary designations, which often bypass the terms of a will or trust, can lead to unintended consequences if not properly aligned with the estate plan. For instance, failing to update beneficiaries after life changes such as marriage, divorce, or childbirth can result in assets being distributed to unintended recipients[1].
Given these potential pitfalls, it is crucial to understand the common mistakes in estate planning and how to correct them. Here is a closer look at why your estate plan might be wrong and how you can fix it.
KEY POINTS
- Estate Planning: Many individuals procrastinate or assume they do not need an estate plan, but having one is vital to ensure your wishes are respected and to avoid state intestacy laws dictating asset distribution[1].
- Asset Protection: Failure to account for joint accounts and beneficiary designations can undermine the effectiveness of your estate plan, leading to assets being passed to unintended beneficiaries[1].
- Legal Updates: Staying informed about changes in federal tax laws, such as the increased lifetime exclusion amounts and annual gift tax exemptions, is essential for optimizing your estate plan[3].
- Wealth Protection: Regularly updating your estate plan after significant life events, such as marriages, divorces, or the birth of children, is necessary to ensure that your assets are protected and distributed according to your current wishes[1].
Not Having an Estate Plan
One of the most fundamental mistakes in estate planning is simply not having a plan. This can happen due to procrastination or the misconception that estate planning is only necessary for the wealthy or elderly. However, every individual, regardless of age or wealth, benefits from having an estate plan.
Without an estate plan, state laws will govern the distribution of your assets through intestacy laws. This can lead to several undesirable outcomes, including:
Unintended Distribution of Assets
State laws may distribute your assets in ways that do not align with your wishes. For example, if you have children from a previous marriage, they might not receive the inheritance you intended if you do not specify it in a will or trust.
Legal and Financial Stress
Loved ones may face significant legal and financial stress, including probate fees and potential disputes over asset distribution. Probate can be a lengthy and costly process, adding to the emotional burden of dealing with a loved one's death.
Lack of Guardianship Provisions
Minors may lack guardianship provisions, leaving their care decisions up to the courts. This can result in a guardian being appointed who may not be the person you would have chosen.
To avoid these issues, it is imperative to start your estate planning as early as possible. Consulting with an experienced estate planning attorney can help ensure that your plan is tailored to your specific needs and circumstances.
Failure to Account for Joint Accounts and Beneficiary Designations
Joint accounts and beneficiary designations are often overlooked in estate planning, yet they can significantly impact how your assets are distributed. Here are some key considerations:
Joint Ownership
Joint ownership of property and accounts can lead to inequities if not planned effectively. For instance, if you have joint ownership with a spouse or another individual, the surviving owner will typically inherit the entire asset, regardless of what your will or trust states.
Beneficiary Designations
Beneficiary designations on life insurance policies, retirement accounts, and other assets can bypass the terms of your will or trust. If these designations are not updated after life changes, such as a divorce or the birth of a child, the wrong individuals may receive these assets.
To address this, regularly review your joint accounts and beneficiary designations to ensure they align with your current estate plan. Consulting with an estate planning attorney can help coordinate these designations effectively[1].
Doing It Yourself
While the idea of creating your own estate plan using DIY kits or online templates might seem cost-effective, it can lead to costly mistakes. Here are some risks associated with DIY estate planning:
Improper Execution
Many people fail to properly sign and witness their documents, which can render them invalid or lead to costly legal battles to rectify the issues.
Lack of Customization
Generic forms often fail to address unique family or financial situations. For example, adding seemingly harmless language to a trust document can have unintended tax consequences, as seen in the case where modifying a Family Trust to include distributions for "comfort and welfare" resulted in the trust being included in the survivor's taxable estate[2].
Overlooked Legal Requirements
Estate planning laws vary by state, and failing to comply with local laws can cause significant complications. Working with an experienced estate planning lawyer ensures that your documents are properly executed and tailored to your specific needs and circumstances[1].
Failing to Update Your Plan
An estate plan is not a one-time project; it requires periodic updates to reflect changes in your life and circumstances. Here are some reasons why updating your plan is necessary:
Life Changes
Significant life events such as marriages, divorces, births, or deaths necessitate revisions to your estate plan. Failing to update your plan can result in ex-spouses or estranged relatives inheriting assets or new family members being unintentionally excluded.
Tax Law Changes
Tax laws can change, altering the effectiveness of your estate planning strategies. For example, the federal gift and estate tax exclusion amounts have increased to $13,990,000 per individual as of January 1, 2025, but these amounts are set to revert to a lower base amount on January 1, 2026, unless Congress acts otherwise[3].
To ensure your plan remains effective, review it at least every three to five years or after any major life event. Consulting with an estate planning attorney whenever you have a significant life change can help keep your plan aligned with your current wishes and circumstances[1].
Conclusion
Estate planning is a critical aspect of ensuring that your wishes are respected and your loved ones are protected after your death. However, many people make significant mistakes that can lead to unintended consequences. By understanding the common errors in estate planning, such as not having a plan, failing to account for joint accounts and beneficiary designations, avoiding DIY estate planning, and neglecting to update your plan, you can take proactive steps to correct these issues.
In summary, having an estate plan is vital to avoid state intestacy laws, ensuring that your assets are distributed according to your wishes. Regularly reviewing and updating your plan, especially after significant life events, and seeking the advice of an experienced estate planning attorney can help mitigate the risks associated with estate planning mistakes.
Frequently Asked Questions
What happens if I don't have an estate plan?
If you do not have an estate plan, state laws will govern the distribution of your assets through intestacy laws. This can lead to unintended distribution of assets, legal and financial stress for loved ones, and lack of guardianship provisions for minors[1].
How often should I update my estate plan?
You should review and update your estate plan at least every three to five years or after any major life event, such as a marriage, divorce, birth of children, or significant financial changes[1].
Why is it important to consult with an estate planning attorney?
Consulting with an experienced estate planning attorney ensures that your documents are properly executed, tailored to your unique needs and circumstances, and compliant with local laws. This can help avoid costly mistakes and ensure that your wishes are carried out as intended[1].
What are the current federal gift and estate tax exclusion amounts?
As of January 1, 2025, the federal gift and estate tax exclusion and the generation-skipping transfer (GST) tax exemption have increased to $13,990,000 per individual, or $27,980,000 for a married couple[3].
