Avoiding Estate Planning Pitfalls
March 27, 2024- Preserving wealth for future generations is a significant part of the financial planning process that is sometimes overlooked or misunderstood. It encompasses far more than simply writing a will; it involves structuring your financial affairs so that more of your wealth is used for enjoyment and benefit to you and your loved ones, rather than being consumed by taxes and various legal complications. Creating a lasting legacy takes grace and thoughtfulness to achieve the desired outcome. To help understand common pitfalls and how estate planning can help you avoid them, we’ve compiled a list of ten mistakes wealthy families sometimes make in estate planning.
1) Ignoring asset protection implications of the estate plan
Wealthy families sometimes overlook the risk of their assets being seized in a lawsuit, by creditors, or as a result of divorce. A thoughtful estate plan not only dictates how your property will be distributed upon your death but can also include measures to protect your assets from such risks. It is crucial to consider how the legal structure and titling of property can achieve both estate planning and asset protection objectives simultaneously.
2) Not understanding probate versus operation of law
Probate can be a lengthy, costly, and public process. Assets that pass by operation of law, on the other hand, typically avoid the intricacies of probate and allow for private distribution. Awareness and understanding of these mechanisms is essential in structuring an effective estate plan.
3) Incomplete instructions regarding digital access
In today's technological culture, access to email accounts, mobile passcodes, and multifactor authentication methods can shape the course of estate administration. Incomplete or missing instructions can lead to unnecessary difficulties and delays. Ensuring this information is kept current and available to someone you trust can make carrying out your instructions smoother.
4) No immediate access to cash
Wealthy families usually have plenty of assets, but it is essential to ensure immediate access to cash upon a death. Particularly in cases where the surviving spouse is less involved in financial matters, planning for cash to be available empowers the widow or widower with immediate financial control.
5) Absent or incomplete estate planning documents
It is crucial to remember to not only create estate documents, but also to execute them properly – an unexecuted document is as good as nonexistent. The cornerstone of your estate planning documents is the will, however wills can become less important over time. The importance of medical directives and powers of attorney should not be underestimated when drafting documents as they help while still living. Trusts, operating agreements, and other documents may be necessary. Estate planning relies on detailed, accurate documents that clearly convey your wishes.
6) Forgetting to update the estate plan after significant events
Failing to consider your estate plan when significant events happen can result in unintended recipients and bitter family disputes. Changes like a birth, death, marriage, divorce, retirement, inheritance, and financial windfall should consequently trigger a review and possible changes to your estate plan. Estate and income tax laws change over time. Estate plans need to change with them.
7) Joint inheritance arrangements among children
While it may seem like a good idea to have children inherit assets together, this often strains relationships among them, sometimes into the next generation. For the sake of maintaining family harmony, it is worth considering minimizing joint inheritances such that family members inherit separately. Planning for how inheritors receive their intended portion of an estate can help protect relationships. There are exceptions, such as a large family business.
8) Oversharing with the children
It is important to communicate thoughtfully with your children about your estate plan, however, oversharing can trigger changes in their work habits, spending habits, or their spouse’s habits, especially if they foresee a large inheritance. This is particularly true in families with an inheritor who is facing financial struggles or is likely to be irresponsible with a large inheritance.
9) Not sharing enough with the children
Conversely, not preparing children for a surprising or complex inheritance can create its own set of problems. A balance must be struck, ideally leaning towards financial education over time.
10) Gifting assets before death
While it may be tempting to distribute assets while still living, this can trigger unintended tax liabilities for the next generation because of the “step up” in basis at death. Exceptions do exist, particularly for families facing potential estate tax issues, but this decision requires careful thought and planning.
Remember, the more complex your family's financial situation is, the more thought should be put into the estate plan. It isn’t a single event, but a continually evolving process that should adapt to changing family dynamics, financial fluctuations, and the legal environment.
No matter your situation, reviewing your estate-planning strategies with your advisors can help ensure a fit with your situation and overall financial plan. At Timberchase Financial, we provide thoughtful, comprehensive financial advice. If you would like to start a conversation about how our CERTIFIED FINANCIAL PLANNER™ professionals may be able to help you with your financial plan, or if you are in need of a second opinion on your estate plan, please reach out to us.
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Information presented is for educational purposes only and is not personalized investment, financial, legal, tax, or accounting advice. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated are not guaranteed. Be sure to consult with tax, legal, accounting, and financial professionals about your specific situation before implementing any planning strategies. Investment Advisory Services offered through Timberchase Financial, LLC, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training.