An estate plan outlines how you wish your finances to be handled in the event of your death.
It’s essential to help preserve, manage, and distribute your assets after death. When planning your estate, it can be overwhelming and easy to make mistakes that could have negative impacts later on.
But instead of avoiding it altogether, know what to expect going in and take the time to really consider how you want things handled when you aren’t here to manage them yourself.
Here are the most common estate planning pitfalls and how you can avoid them when you’re ready for estate planning.
What are the three main issues to consider in estate planning?
Three main elements to consider when coming up with an estate plan:
1. A will or trust.
These documents outline your exact wishes for your estate.
A will goes into effect after that person’s death. This is when all assets are distributed per the will that person drafted.
A trust also goes into effect after that person’s death. It is a legal entity that holds their assets until they pass away.
Then, the assets are distributed according to the deceased person’s instructions. A person can have:
- just a will
- both a will and trust
- just a trust
2. Power of Attorney.
A Power of Attorney (POA) is someone you assign to be legally in charge of your estate.
You can appoint a medical and financial POA to make financial and medical decisions if you are not in a position to yourself. Picking the right person to be your POA is crucial to keep things moving and making hard decisions.
3. Beneficiary designations.
Your beneficiaries are people who you choose to inherit your assets.
It would be best if you designated a beneficiary for insurance policies, retirement accounts, and in your will. This will give your POA directive on splitting assets if you make a clear plan of who you want to receive your assets.
When creating an estate plan, it’s essential to consider these critical issues to help you create a comprehensive plan.
Understanding each of these three areas can help you be more prepared when putting together your estate plan.
6 Common Estate Planning Mistakes to Avoid
Professionals have found that there are six common mistakes that most people make when estate planning and how you can avoid making these yourself:
1. Failing to plan or procrastinating.
Starting the estate plan process early is crucial to making the best arrangements for your assets.
You may need to discuss with family members, develop alternate ideas, and speak with a lawyer. If you don’t have a will or trust, your assets may not be distributed as you wish because a court will make those final decisions for you.
2. Not updating your plan.
Once you have a will or trust in place, it’s important to review and update your plans regularly.
Things change, and you may need to add a new beneficiary or change your Power of Attorney. As you build a family, you want to have your family involved in whatever you decide.
3. Not considering all of your assets.
When working on a will or trust, make sure you have a list of all of your assets.
Common assets people overlook are digital assets and life insurance policies. Don’t leave these out of your planning, because you may have someone in your family you want to leave these to.
4. Naming the wrong beneficiary.
Choosing beneficiaries can be a difficult decision, but it needs to be made.
Not making a choice can cause a lot of strife in your family as they have to deal with a court making decisions. To avoid this frustration after your passing, choose the appropriate beneficiaries for your assets.
5. Choosing the wrong Power of Attorney.
A Power of Attorney has a lot of control when it comes to your estate.
If your will is not as detailed as it could be, they can decide how to divide assets. This can cause a lot of tension, especially if the POA doesn’t get along with the rest of the family. Try to choose a neutral party as your POA. This can even be someone outside of your family, like a family friend.
6. Failing to plan for incapacity.
Often, people associate estate planning with death.
This is just one aspect of estate planning.
Medical estate planning is also important, because if you are ever in a medical state where you cannot make decisions, someone will have to step in. Making plans for who will be in charge of your estate during a situation like this can alleviate stress on your family.
These common mistakes in estate planning can cause many negative consequences for you and your family.
Making a plan early can give you enough time to decide who should be your Power of Attorney or your beneficiaries. Your family will also be thankful that you made proper plans so they can spend their time mourning rather than dealing with the legal and financial implications.
Make Sure You Have an Estate Plan
Estate planning is a crucial step in proper financial planning.
Making sure all of your assets have a beneficiary and having a will can ensure that your wishes are being met.
Without adequate planning, courts and other people can get involved and cause more issues with your family. Avoiding these common mistakes can help make this difficult time easier for your loved ones.
Editor’s note: This article was originally published Apr 18, 2023 and has been updated to improve reader experience.
