Problems to Avoid in Your Estate Planning
Estate planning in Huntsville, AL, is all about getting initiatives to properly manage your assets and protect them from any inherent risks at the end of your life and later on. It’s also about taking control of your current and future situations regarding the potential need for long-term care for yourself, guardianship for minor children, and managing your affairs should an unfortunate situation leave you mentally incapacitated.
While it’s not pleasant to think about all of these things, it is necessary. Your Huntsville attorney will assure you that thinking about these things is much less painful than leaving your loved ones behind to clean up a mess or losing out on much-needed financial support simply because you made a few mistakes in your estate plan.
This article will cover the most common estate planning mistakes and what you can do to avoid making them ensure your estate and loved ones are protected. Keep reading to learn more.
The Most Common Estate Planning Mistakes
Creating a solid estate plan takes a lot of time and effort to get right. That’s why it’s essential that you avoid making the following mistakes:
Not Working with an Attorney
No matter how you look at it, estate planning is a complicated process. It’s also not something you want to tackle by yourself, so you shouldn’t even think about forgoing a professional estate planning attorney for a DIY estate planning ‘kit.’
To put things in simple terms, you’re not an estate planning attorney, and DIY estate planning kits aren’t made to fit specific bequests or handle complex asset allocations. They also can’t give you advice or guide you through familial disputes.
Only an experienced Huntsville attorney understands the ins and outs of the state laws regarding estate planning. Therefore, they can develop the best tax planning and asset protection strategies for your unique situation. Moreover, they can ensure that your estate plan is airtight and can stand up to legal challenges.
Choosing the Wrong Executor or Trustees
Regarding your last will and any trusts you create, you’ll need to appoint an executor and trustees (respectively). These people will carry out your last wishes, make the proper notifications and manage and distribute your assets accordingly.
It goes without saying that the people you appoint for these positions in your estate plan are incredibly important, and it’s not a choice to be taken lightly. Of course, most people would choose their surviving spouse as the executor of their will. However, this is just one of the many mistakes people make during the estate planning process.
For example, your surviving spouse may be too overwhelmed to manage the state of your affairs. They may also not have the best understanding of investments and other legalities — not to mention they may disagree with your last wishes and therefore disregard your instructions.
Not Funding Your Trusts Properly
Trusts are key components of an estate plan. However, there’s a difference between creating a trust and funding one.
Essentially, there are multiple steps you need to take in order to set up a proper trust. This would include ensuring that you have your taxpayer identification number (TIN), title your assets correctly, choose a proper beneficiary, appoint a trustee to manage the assets, and so on. Of course, the most important thing is to ensure that the trust remains funded throughout its entire lifespan. Otherwise, your beneficiary won’t receive your intended assets. Your trustee won’t get paid for the work they do for the trust, either.
Not Discussing Your Plans with Your Loved Ones
The general rule of thumb here is: If they’re in your estate plan, be it a beneficiary, executor, trustee, etc., then it’s essential to discuss your plans with them. But, most importantly, you’ll need to discuss your plans with your immediate family, especially since they’ll need to have an understanding of what to do and how when the time comes.
The goal is to set and manage expectations to avoid the likelihood of contention or disputes about your estate. You also want to ensure that your executors and trustees understand their role in the management and distribution of your estate and that they know where to find important documents.
Understandably, there may be people you want to leave out of your estate plan and will therefore be avoiding the subject with them as well. In this case, you may wish to specify instructions for anyone you think might contest your last will. You can also add a clause in your will that specifies anyone who contests will automatically be written out. If you choose to use any of these clauses, you’re going to want to let your executor know, as well as any other immediate family members involved.
Not Planning For Disability
Disability — whether it’s from work or other events — is always more of a risk than you think. But, unfortunately, it’s also something that can render you physically or mentally inactive for years.
Unfortunately, most people aren’t prepared for the potential impacts of unexpected disability before retirement. Fortunately, you can plan for it and prevent its effects, starting with a revocable living trust. A revocable living trust for the event of disability or mental incapacitation allows you to appoint someone you trust to be your durable power of attorney (DPOA) for a certain amount of time so that they may make critical decisions on your behalf for your affairs.
Depending on your plan, you can assign your POA to be “temporary.” This means that once your health is back in good standing and you’re ready, you will return to business as usual, and your POA will step down from their duties.
Only Naming One Beneficiary
While you’ll likely have particular beneficiaries receiving certain assets, you’ll still want to name more than one beneficiary for certain circumstances. This is also referred to as a contingent or subsequent beneficiary, and they would be second in line to receive certain assets in the event that your first beneficiary cannot.
For example, you may want to leave your business to your longtime business partner, the eldest child, or even your spouse. However, any of these people could end up passing away before you do, which is why you want to create a backup plan to ensure your last wishes can be carried out as planned.
Putting Your Child’s Name on the Deed to Your Home
One of the most common mistakes you can make is adding your child’s name to the deed of your family home. Parents do this often to protect their house from creditors and other liens, and they also assume it’s the best way to transfer property. However, there are inherent risks in doing this.
When you add your child’s name to the deed of your home, you’re essentially giving them legal ownership interest. This could actually lead you to lose control of your home as an asset, meaning you won’t be able to refinance your mortgage or sell without your kid’s permission. Moreover, your child could turn around and sell their share of your property without your consent and even kick you out if they wish.
Of course, if you were thinking about adding your child’s name to the deed of your home, it’s probably because you trust them enough to ensure that the above scenario won’t happen. However, even in the best-case scenario, this would count as a taxable gift — and there are plenty of other ways you can pass your family home down to your children along with its value tax-free.
Leaving Out Your Digital Assets
The concept of ‘digital estate planning is still relatively new. However, we do live in a digital world now, and given that everything is uploaded and stored on cloud-based servers, you have a little more leg work to do when estate planning.
Your digital assets could be anything from social media accounts, photos, important documents, online banking accounts, email accounts, and obviously much, much more. You may want to keep these things private, have them deleted, or distribute them to your surviving spouse. Therefore, you would need to incorporate a digital estate plan, naming a digital executor to handle and distribute your digital assets appropriately.
Forgetting About Income Taxes on Beneficiaries
You may not have to worry much about state estate taxes in Alabama, but your Huntsville attorney will likely warn you about the taxes that your beneficiaries may incur. In addition, some assets end up generating income taxes, such as your individual retirement accounts (IRAs) or 401(k).
While these types of accounts are typically associated with required minimum distributions (RMDs) after the age of 70.5, they may also be subject to RMD upon inheritance. Should an adult beneficiary incur taxes from an inherited retirement account, the entire distribution from the account will be taxable. If your beneficiary is a high earner in their profession, they’ll likely become subject to the maximum marginal tax rate, which significantly reduces the value of the asset they’ve inherited.
To prevent this, you could switch to a Roth IRA, which provides tax-free growth. In fact, you’ll want to do this if they’re already in a higher tax bracket than you are.
Not Thinking About Your Children’s Future
One of the most important aspects of estate planning is thinking about your children’s futures. This is especially true if you have minor children.
For example, let’s say you name a guardian in your will for your children. That’s great — but did you leave instructions on how their guardian should raise them in your absence or how they should spend assets allocated for the children? These are essential things to think about and document to ensure your children are being raised precisely how you would have wanted.
Other missteps include assuming that your children will want something specific or will reach a particular milestone. For example, maybe you want to leave the family vacation home to your adult child with the notion that they’ll get married, start a family of their own, and spend time there. But what if your child doesn’t want to become a homeowner at the time of your passing? Or, maybe they’re married and struggling with their first home.
You could end up sticking your kid with property taxes, maintenance expenses, and more. Sure, they could sell it — but there’s no telling what the market will be like when the time comes.
Essentially, it’s essential to consider what you want for your children and what they may want for themselves. Of course, this is a bit more difficult with minor children, but it’s something your Huntsville attorney will discuss with you at great length to ensure that your estate plan has your children’s best interests in mind for the future.
Not Updating Your Estate Plan Frequently
There’s no such thing as a one-and-done when it comes to creating an estate plan. Your circumstances will undoubtedly change over time, as will your assets and net worth. Therefore, it’s crucial that you update your estate plan every few years or as things change.
This will ensure that your estate plan best reflects your wishes and directives so that nothing is left unprotected and unaccounted for.
How to Avoid Making These Mistakes
There is only one surefire way to ensure that you don’t make any of the above mistakes or any of the other common mistakes not listed in this article. (Yes, there are A LOT of places you can go wrong in estate planning).
That way, to work with an experienced estate planning attorney. Only a professional can help you navigate estate laws in Alabama and ensure that you have an effective and legally sound estate plan.
Call us to start your estate planning in Huntsville, AL, and schedule a consultation with Sarah S. Shepard or another experienced Huntsville attorney. We’ll ensure your estate plan is mistake-free so you can have the peace of mind to enjoy your family and your life.