Most of us treat estate planning like a trip to the dentist: We know it’s necessary, but we’ll find any excuse to put it off.
Maybe you think you’re not rich enough to need a plan, or perhaps you’re convinced that a quick DIY will from the internet has you covered.
Here’s the cold, hard truth: Estate planning isn’t just for the yacht-club set. If you own a home, have a retirement account or care about who raises your kids, you need a plan.
And you need to get it right. If you don’t, you’re leaving behind a legal nightmare.
I’ve seen families torn apart over things as small as a kitchen table because the paperwork wasn’t clear. Don’t let that be your story. Here are the biggest estate planning blunders nearly everyone makes — and how you can avoid them.
1. Thinking a will is the end of the story
Many people believe that once they’ve signed a will, they’re done. It’s a “set it and forget it” deal, right? Wrong. A will is only one piece of the puzzle, and it’s often the least efficient one.
Wills generally have to go through probate, which is the court-supervised process of distributing your assets. It’s slow, it’s public and it can be incredibly expensive.
In some states, probate fees can eat up 3% to 7% of your estate’s total value before your heirs see a dime.
If you want to keep the courts out of your business, look into a living trust. It allows your assets to pass directly to your beneficiaries without the probate headache. Plus, it stays private, so the neighbors won’t know exactly what you left behind.
2. Ignoring beneficiary designations
Your will doesn’t control everything. Accounts with named beneficiaries — like your 401(k), IRA and life insurance policies — pass directly to whoever is listed on those forms.
If your will says everything goes to your current spouse, but your 401(k) still lists your ex from 20 years ago, guess who gets the money? Your ex. The financial institution is legally obligated to follow the form, not your will.
You’ve got to review these designations every year. It takes five minutes, and it prevents your hard-earned savings from ending up in the wrong hands. Don’t make these common beneficiary mistakes.
3. Failing to fund your trust
Creating a trust but failing to fund it is like buying a high-end safe and then leaving your jewelry on the kitchen counter. A trust is just a stack of paper until you actually move your assets into it.
This means you have to retitle your house, your brokerage accounts and your bank accounts into the name of the trust. If you don’t, those assets are still yours in the eyes of the law, and they’ll head straight to probate court when you pass away.
I’ve talked to many folks whose parents paid thousands in attorney fees to set up a trust but then never bothered to change the deed on the house. So their kids ended up in court anyway. Don’t be that person.
4. Forgetting about the living part of the plan
Estate planning isn’t just about what happens after you’re gone. It’s also about what happens if you’re still here but can’t make decisions for yourself. A stroke, car accident or sudden illness can leave you incapacitated in an instant.
If you don’t have a durable power of attorney and a health care proxy — someone who can make medical decisions for you — your family might have to go to court just to pay your bills or talk to your doctors. It’s a layer of stress they don’t need during a crisis.
You need to name someone you trust to handle your finances and someone to make medical decisions on your behalf. It’s not fun to think about, but it’s the most loving thing you can do for your family. Here’s a guide on essential estate planning documents you shouldn’t skip.
5. Overlooking state taxes
You might have heard that the federal estate tax exemption is huge — $15 million per person currently. Because of that, you might think you’re in the clear. But don’t celebrate just yet.
While you might dodge Uncle Sam, your state might still want a cut. Many states have their own estate or inheritance taxes with much lower thresholds. In some places, the tax man starts knocking on estates worth as little as $1 million.
Check your state’s specific laws. If you’re in a high-tax state, you might need more advanced strategies to keep your money with your heirs, where it belongs.
