Common Estate Planning Mistakes

Posting by Geoffrey D. Brown, CPA

October 21 – 27 is National Estate Planning Awareness Week, which is designed to raise awareness and provide education around this important financial issue. I’ve had the opportunity to help many families and family businesses preserve their legacies over the past thirty years, and, unfortunately, there are some common estate planning mistakes and misconceptions that seem to come up time and time again.

Think your assets are not significant enough to necessitate a plan? Think again – estate planning is important for every family and covers a range of issues, from property to life insurance to guardianship. And, even if you have a plan in place, if it is not regularly updated and/or adequately structured, you could still put your family at risk.

I’ve listed three of the most basic estate planning errors that you can easily avoid:

1. Avoiding the “What-Ifs.” A proper estate plan needs to take a holistic approach, considering a number of possibilities and “what-if” situations. What if one parent dies first; what if both parents die at the same time? All of these situations, and more, need to be accounted for in your estate plan. You should also plan for incapacitation – who will manage your finances if you become incapable of doing so?

While it is often difficult – and depressing – to think through all the worst-case scenarios, it is a critical part of the process in order to ensure that your family – and your family business – is financially and logistically equipped to handle almost any situation.

2. Not Updating the Plan. Estate planning is an ongoing process; your plan should be updated every three to five years to account for changing laws and tax exemptions. Additionally, whenever there is a significant change in your life status or finances (a job change, retirement, children/grandchildren), you should talk with an advisor about updating your plan.

You should also update your will to align with your beneficiary designations in other areas – such as your 401(k) plan and life insurance. Your will does not necessarily trump your beneficiary designations; in fact, quite the opposite usually happens. For example, if the deed of your house has your ex-spouse’s name, he/she may very well end up receiving your home when you pass, despite what your will specifies.

Updating the plan is also deeply important for business valuations. If your family business valuation significantly changes due to economic and market trends, you will need to update any buy-sell arrangements. An out-of-date valuation could mean that you pay an exiting partner based on a previous, larger valuation, which could place undue financial hardship on your family business.

3. Failing to Plan. While this may seem like a cliché response, it is honestly the biggest mistake you can make. Unfortunately, over 120,000,000 Americans do not have an estate plan.

No matter how small you believe your estate to be, or how young you are, an estate plan is necessary to ensure that the heir(s) of your choosing receives your assets. If you die without a will it is called intestate and the state applies its own laws regarding how your assets are distributed. Here are some examples of what could happen in the Greater Washington DC region if you pass without a proper estate plan for your family:

If you die without a will in Virginia, your spouse will inherit everything, even if you have children with that spouse. If you have descendants, at least one of whom is from someone other than your spouse, your spouse would receive 1/3 of the estate and your descendants would inherit 2/3.

If you die without a will in Maryland, your estate will be split 50/50 between your spouse and your minor children. If your children are over the age of 18, your spouse will receive the first $15,000 of probate assets, plus one-half of the balance. The remaining assets would then pass to your surviving descendants or parents.

If you die without a will in DC, your spouse would receive 2/3 or your estate and your children would receive 1/3. If your children are not your spouse’s children, it is split 50/50.

Again, the actual result will depend on the number of survivors and their blood relation to you, but the broader point remains – each state has its own intestacy laws and your estate may not end up with the heirs you would choose.

Proper estate planning will help to minimize the tax liabilities associated with your estate, allowing you to leave more assets to your family upon your death. There are a number of tools –trusts, buy-sell agreements, family loans – to ensure that your heirs maintain control of family wealth and the health of your family business is preserved for the next generation. A team of knowledgeable lawyers, accountants, and financial advisors can help you determine the solution that works best for your particular financial situation.

Like so many other important endeavors, estate planning is not easy, but it is well worth it. It is not a one-time decision, but rather an ongoing process involving trusted financial and legal professionals who understand your unique needs. Don’t put your family’s – and your family business’s – financial future in jeopardy – avoid these common estate planning mistakes in order to protect and provide for your family, regardless of the situation.

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