4 Mistakes to Avoid During Estate Planning

While you may have invested time and energy setting financial goals for how you want to live your life, estate planning is not usually top-of-mind. Getting your estate in order is essential to leaving your legacy in good hands when you’re gone. Without a solid plan in place, your assets might not be distributed according to your wishes and your family may not have control over the decisions that are made on your behalf through probate court (the process of determining what happens to your assets after you die, if you don’t properly specify what your wishes are while you are living).

Let’s take a look at some common mistakes along with tips to help avoid additional challenges during this process.

1. Having a “set it and forget it” mindset with your estate

With so many strategies and items to employ during our financial planning journey, it’s easy to fall into the mindset of “set it and forget it.” You can set 401(k) contributions, adopt certain investment strategies, and automate savings. While we advise many of our clients to commit to the routine of these practices, it is important to remember to regularly revisit these strategies - particularly when change occurs. This is especially important when it comes to your estate planning:

• Has anything substantially changed in your personal life since you drafted your original estate documents and set beneficiaries for your accounts? For example: if you have experienced a divorce or the death of a spouse, you may need to update your beneficiaries.
  
  
• Have you set up joint accounts with the right of survivorship? There are many different options to consider:
• Joint tenancy with a right of survivorship
• Tenancy by the entirety
• Tenancy in common or community property with the right of survivorship

It’s important to work with a professional to determine what makes the most sense in your situation. Figuring this out now will alleviate a lot of headaches for your heirs should anything happen to you unexpectedly.

• Pay attention to ever-changing laws. For example, a present federal law taxes estates worth over $27.22 million for joint filers. This only affects a small percentage of Americans currently, but it has a sunset date, which could cut this exemption threshold in half. Staying up-to-date and making adjustments as laws change is crucial for estate planning. 

The key takeaway here is simply to be conscious of anything you have set to auto-pilot and understand how any personal or federal tax law changes might impact your estate. Then, we recommend consulting with a financial advisor for direction.

2. Missing an opportunity to be strategic about charitable giving

Partner Kyle McFarland and Managing Partner Adam Newman give a quick rundown on charitable giving as part of our Byte Size Retirement series.

What you choose to do with your assets can define your legacy, and charitable giving may be an important consideration for you and your family. Not only can your money benefit organizations and causes in need, but there is a strategic element to charitable giving that can be beneficial in the context of your estate. Here are some tips to keep in mind:

Take advantage of a special IRA tax advantage

Consider the difference between donating directly from an IRA rather than your bank account. There are tax advantages when you do this correctly after age 70 ½. 

Live your legacy 

Pair Roth conversions with contributions to a Donor Advised Fund (a special tax-sheltered charitable account), if age 73 or younger to reduce your tax bill and witness the impact of your generosity.

Using a Donor Advised Fund, you can make annual charitable contributions to the organization(s) of your choice starting now (while realizing the tax benefits), rather than having donations kick in after you pass away.

Wealth Advisor Kyle McFarland and Partner & Senior Partner Adam Newman compare the benefits of living vs. leaving a legacy in retirement as part of our Byte Size Retirement series.

Gift highly appreciated securities, instead of cash

If you bought securities at $10 per share and they’re now worth $100 per share, you would earn $90 per share worth of gains upon sale. You’d be taxed for that, even if you intend to give the proceeds to charity. If instead you give the securities directly to the charity of your choice, you can avoid realizing the $90 of gain and they can sell the shares tax-free and enjoy the benefit of your contribution.

3. Lack of communication with your loved ones

Like many things in life, communicating early and often about the intentions of your estate will go a long way. Many families experience stress, rifts, and hurt on top of the painful experience of losing a loved one when there is confusion around the decedent’s wishes. 

Here are some tips to help ease potential tension:

• If you’re married, make sure both you and your partner are comfortable talking with your financial advisor and have a clear understanding of one another’s wishes. If one of you passes away unexpectedly, it will be helpful knowing the other is confident about their path forward and who to work with on making any adjustments as needed.
• Designate someone you trust and who is willing to lead the probate process. Knowing who this person is ahead of time will help ensure your loved ones understand who you want to be in charge.
• If you’re not comfortable sharing your wishes with family ahead of your death, that’s OK. The key in this situation is getting organized and having a trusted advisor that will guide your loved ones through the process when the time is right. 

4. Missing key components in setting up a trust

Trust creation involves various steps and considerations. It is important not to overlook any elements throughout the process. Keep the following guidance in mind:

• Engage with an attorney to draw up your trust document, designating that your assets go into the trust now or in the future.
• For property, you may need to retitle assets in the name of the trust (e.g. you’ll need to update your property title(s) so that the owner listed is the trust itself, and not you.)
• For investment accounts, you may need to open a new account in the name of your trust and transfer assets as indicated by the trust document and attorney. 
• Choose a trustee who is willing and able to take on the associated responsibilities. This person will be in charge of the assets in the trust - executing transactions and managing distributions. If your intention is to name co-trustees, consider family dynamics and how that could impact the process, depending on the size and complexity of your estate. 

When a loved one passes, it’s already a difficult time. When the respective estate isn’t in order to go along with it, family and friends may undergo extraordinary strain with the weight of sorting it all out. While they will face the brunt of these challenges more than you will at that time, you may be inclined to help smoothe over their path with diligent estate planning well in advance of your death. 

Solid understanding of what needs to be done will lead you to make disciplined, informed decisions today. This will enable you to avoid mistakes by way of emotional decisions in the future—either by you or your loved ones.