The old adage, “Fool me once, shame on you; fool me twice, shame on me,” applies in most situations, but sometimes you don’t get a chance to learn from your mistakes. This is the case with estate planning. If you write a mistake into your will or fail to take a comprehensive approach to estate planning, you’ll be powerless to correct it. The people you hoped to protect will face an expensive and difficult probate battle and have to suffer with the results. Whatever those results are, if you made a serious error when planning your estate, they probably won’t be what you intended.
Luckily, there’s an even older adage that applies here: “The wise man learns from fools’ mistakes.” If you understand the most common mistakes people make when planning their estates, you can avoid the same mishaps and rest assured that your loved ones will benefit from your foresight long after you’ve gone.
Common mistakes of estate planning
Appointing the wrong person as your power of attorney, healthcare proxy, executor, children’s guardian, or trustee.
When planning your estate, a lot depends on the people you choose to trust. First, you’ll want to choose a reliable and experienced an attorney. After that, though, you’ll need to choose an executor, a children’s guardian, a trustee, a healthcare proxy, and someone to hold power of attorney. These individuals have very different roles.
- Executor: Handles your will, collecting and distributing assets immediately after you die, and through the probate process.
- Trustee: Administers your estate after the probate process. This is especially important if you aren’t turning over all your assets to beneficiaries immediately after your death (as, for example, if you have young children or grandchildren).
- Children’s Guardian: Takes care of your children in the event of your death.
- Healthcare Proxy: Makes medical decisions if you are incapacitated.
- Power of Attorney: Makes legal decisions if you are incapacitated.
Very often when a person meets with an attorney to make plans for an estate, he or she can think of only one or two people to take on all these important roles. Some overlap is alright – for example, spouses generally pick each other as healthcare proxy and power of attorney – but these roles deserve serious contemplation before you come to a decision.
The executor and trustee, for example, need to be good with money, and confident in making important decisions. The trustee, however, needs to be comfortable and willing to handle your affairs over a longer period.
The best trustee might not be the best guardian – and vice versa. Pick a person good with children, financially comfortable, morally capable, and fully willing to be guardian. (Your parents might not really want to raise another set of teens, so think twice before picking them.)
Finally, your healthcare proxy needs to be someone who can handle the weight of life-and-death decisions, as well as someone who understands your moral, religious, and philosophical beliefs.
Not updating your will, power of attorney, healthcare proxy, and life insurance after divorce.
It’s easy to forget about other legal needs after the long wrangling of a divorce, but estate planning and divorce are inseparably connected areas of the law. If you pass away without replacing the will you wrote during your marriage, your former spouse will get everything that the terms of that will provide. If you’ve begun a new relationship, your significant other won’t have any claim over your assets. If you married again after your divorce, your current spouse is entitled to a share of your estate – $50,000 or one third of the whole, whichever is greater – but to prevent your former spouse from getting anything, your current spouse would have to contest the will in probate.
Failing to choose a new healthcare proxy or power of attorney could be even more disastrous. Your loved ones would face a very difficult legal battle if you became incapacitated and they needed to remove your former’s spouse’s privileges to make legal and medical decisions for you. They might not win in time, and they might not win at all.
Life insurance policies, likewise, will stay with a beneficiary until you change that beneficiary – a divorce doesn’t automatically remove one spouse from a policy.
If you’re nearing the end of your divorce, you probably don’t want to see another lawyer. Estate planning, however, should be one of the first things on your mind, and changing your will, power of attorney, healthcare proxy, and life insurance should be your first order of business after the divorce is finalized.
Trying to disinherit a spouse.
Most attempts to disinherit a spouse are futile. The “right of election” entitles your spouse to $50,000 or one third of your estate – whichever is the greater sum. There are only three scenarios in which you can disinherit a spouse:
- The spouse has signed a prenuptial or postnuptial agreement waiving rights to certain assets, or to any of your estate.
- You have lived apart from your spouse for at least one year.
- You divorce your spouse and then change your will.
Any other attempt to disinherit a spouse not springing from one of these scenarios is seriously misled, and will fail.
Creating joint accounts immediately before death.
You can avoid probate and estate taxes by putting some of your assets into a joint account with “rights of survivorship.” This means that the account or property will pass to one of the persons named when the other dies. These assets are not subject to probate, and in fact are beyond the purview of your will entirely.
However, if you add a person to an account immediately before you pass away, and that person does not have time to contribute anything to the account, the IRS could view that as a gift, subjecting the surviving account holder to federal gift tax. The current federal gift tax exclusion is $14,000 – the IRS will tax anything above that.
Failing to avoid estate tax where possible.
If your estate is below $5 million, you probably don’t need to worry about estate taxes. However, you might be worth more than you know. Bank accounts, properties, pensions, investments, life insurance policies, and other assets add up.
There are many ways to avoid estate taxes, maximizing the value of your estate for your beneficiaries. One way is to create joint accounts (taking the precautions mentioned above). Another method would be giving away gifts. The current federal limit on gifts is $14,000, but this is a per person limit. If you have many people you’d like to benefit from your estate, you can make gifts below this amount to each one, each year, reducing the value of your estate and minimizing or even avoiding estate taxes.
However, you should consult with an estate planning attorney about which assets you should give away. If you have stocks that should appreciate in the near future, these could increase estate taxes: consider giving them to your inheritors sooner. If, however, you have stocks already at a great value, you might want to hold on to them: if they pass to your children and they sell them at their current value, they will escape capital gains taxes.
Failing to plan beyond your will.
Too many people think that “estate planning” is synonymous with “writing a will.” As should already be clear to you, estate planning involves much more.
The goal of estate planning is maximizing the value of what you pass on to your loved ones. This involves drafting an airtight, up-to-date will, but it also involves non-probate assets outside the will, like life insurance policies and jointly held accounts. In some cases, good estate planning actually calls for you to reduce the value of your estate to avoid estate taxes. It also could involve creating trusts, allowing your assets to continue to grow after you’ve gone.
When you make plans for your survivors, be sure to find an attorney who can help you see the “big picture.”
Experience, Thoroughness, and Foresight
You can learn about other common estate planning mistakes here, and try to anticipate concerns you might have when planning your own estate. It’s never too early to get started. No two estates are the same, however. If you’re serious about estate planning, schedule a legal consultation with Attorney Robert Friedman at Friedman & Ranzenhofer, P.C., a trusted firm serving the New York community’s estate planning needs since 1955.