There is no shortage of mistakes that can occur in estate planning. There are three very common mistakes to avoid that could cause you and your loved ones big headaches and big expenses.
1. Not having an estate plan at all.
Having an estate plan allows you to direct how your assets are distributed and who receives them. However, if you die without an estate plan, the laws of the state where you live dictate how your property will be distributed. You may be in for an unpleasant surprise.
In Pennsylvania, for example, if you are married with children and die without a will, the state will divide your property between your spouse and your children. This is a problem for several reasons. First, most people want their property left solely to their surviving spouse during his or her lifetime and to pass to their children only upon their spouse’s death. Second, having young children inherit property outright is a problem because minors, with narrow exceptions, cannot legally hold, receive, or sell property. If your minor child inherits property outright from you, a court appointed guardian must oversee your child’s assets, which involves considerable time and expense. Third, in Pennsylvania, a guardianship terminates when the minor turns 18, which means your child will get full control of their inheritance at an age when they are not well equipped to manage large sums of money. Planning in advance can help avoid this scenario entirely.
2. Failing to understand how assets pass at death
A common misconception about estate planning is that a will controls how all of one’s assets will be distributed after death. In reality, many people own some assets that are distributed based on the terms of their will and other assets that their will does not control but are instead distributed based on who they name to receive that asset in a beneficiary designation. For example, assets that are distributed based on your will are those that you own solely in your own name, such as a house, other real estate, or bank accounts. These assets will need to go through a court supervised probate process before being distributed to your beneficiaries. In contrast, IRAs, 401(k) accounts, and investment or bank accounts with beneficiary designations, are not controlled by your will. Rather, they are distributed directly to beneficiaries after death based on the beneficiary designations you make during your lifetime. The distinction is important because if you own assets that will pass outside your will, you want to make sure that your beneficiary designations for those assets are consistent with your overall estate planning objectives and do not conflict with your will.
3. Not periodically updating your estate plan
Life changes. People get married, have children, buy homes, and sometimes get divorced and remarried, among other possibilities. Perhaps your children are grown and their needs have changed, or you purchased a vacation home. Yet, people often neglect to update their estate plans after experiencing major life changes. The potential consequences can be that your estate plan no longer reflects your wishes and your assets may be inherited by people you no longer want to receive them.
Divorce is one event where it is important to update your estate plan for several reasons. First, if your spouse is named as your health care agent in a Health Care Power of Attorney or as your agent to act on your behalf in a General Power of Attorney, those designations are revoked when you file for divorce in Pennsylvania. What this means is that unless you have named another person to act on your behalf in your General Power of Attorney or Health Care Power of Attorney, those documents no longer have any legal effect once you have filed for divorce. Second, when you get divorced in Pennsylvania, your spouse is automatically disinherited in your will once the divorce is complete, unless your will shows that you intended otherwise. Third, not all beneficiary designations on your financial accounts are revoked even after you get divorced; specifically, beneficiary designations you make for your employee benefit plans are not invalidated by a divorce. You should consider changing all your beneficiary designations on life insurance policies, employee benefit plans, and other financial accounts after a divorce to make sure they reflect your wishes.
In future posts, I will cover additional common estate planning mistakes to avoid.