You’re ready to build an estate plan that gives you peace of mind and ensures a healthy financial future for your loved ones. Before you can take control of your future, you’ll need to know the pitfalls lurking in these essential documents, ready to undermine your wishes and diminish your legacy.
Our legal team has prepared this list of estate planning errors, helping you catch mistakes that could cost your heirs time and money.
1. Outdated Beneficiary Designations
When did you last check the beneficiary you named on your life insurance policy, pension, bank accounts, 401(k), or retirement savings? These designations are binding regardless of when they were made, passing the balance of your account directly to the beneficiary instead of your estate.
Consider where this considerable portion of your estate will go if you haven’t updated your beneficiary after:
- Marital status changes. Forgetting to update your beneficiary forms after marriage or divorce can lead to contentious legal battles. The bulk of your estate could easily pass to an ex-spouse or their children decades into the future.
- Life changes. The birth or adoption of children, death of a family member, or passing of a beneficiary should spur you to rethink your designations. Your beneficiaries’ financial needs could also change over time, such as a child who was financially dependent on you has now become economically stable.
- Acquiring new assets. Over time, you may acquire new assets or change the nature of your investments. These changes can affect your overall estate, so aligning your beneficiary designations with your updated portfolio is essential.
- Creation of a trust. Any assets you wish to include in your trust should list the name of your trust as the beneficiary. Note: If you name the trustee as the beneficiary, funds will be distributed to the trustee personally—NOT to your trust.
How can I prevent outdated beneficiary designations? Monitoring your beneficiary designation is critical to avoiding this common estate planning mistake. It’s a good idea to name several beneficiaries on each account (listing your contingent beneficiaries in order of preference), just in case your first choice predeceases you or declines to serve. Update these designations at least every three years.
2. Underage Inheritance Falling Into the Wrong Hands
You may have named a minor child or grandchild as a beneficiary, assuming they would not inherit for years into the future. However, they could not inherit the account balance directly if something happened to you tomorrow. Consider what could happen if you were to pass away before your beneficiary’s eighteenth birthday:
- Guardianship issues. If you haven’t appointed a guardian or trustee for your underage children, the court will select one to manage the child’s inheritance until they reach the age of majority. The court could appoint someone you never would have chosen as guardian or an expensive professional trustee who reduces the amount of your assets.
- Limited access to funds. Trustees can restrict when and how the minor can access the inheritance, potentially impacting the child’s education or medical care.
- Potential family conflicts. If you name both minors and adults as beneficiaries, disputes may arise over how the assets are managed or divided. Money that could have been used to purchase a home or go to college can quickly be lost in legal battles.
How can I protect minor beneficiaries? Instead of leaving assets to a young adult, consider creating a trust for the child’s benefit. In addition to choosing someone you trust to manage and invest their assets, you can leave clear instructions on when distributions should be made to support your child.
3. Assets Left Outside of the Trust
Trusts can be invaluable, but they only accomplish their goals if properly funded. Any assets that aren’t retitled into the name of the trust will:
- Go through probate. Assets held in trust pass directly to your beneficiaries without probate. However, assets outside the trust must be probated upon your passing—negating one of the primary purposes of having the trust.
- Cause delays. Probate and late retitling can delay the distribution of your assets to beneficiaries.
- Be made public. In Florida, probate dockets are confidential to the parties, creditors, and attorneys involved. However, the docket itself is a matter of public record. A trust allows for a more private transfer of assets.
How do you set up a trust that will work exactly as intended? The most common way trusts go unfunded is through new acquisition of stocks, real estate, mutual funds, or other assets. In addition to having an attorney look over your documents at the initial creation of the trust, you should also consult with your estate planning lawyer whenever you acquire a new asset to ensure it’s retitled into the trust according to the law.
4. Failing to Protect Heirs from Future Creditors
Even if you trust your child’s guardian to manage their trust assets, the funds held in trust will be distributed to your children outright when they turn eighteen. Once outside the trust, an inheritance can quickly be lost due to:
- Lack of financial responsibility. Minors may lack the financial maturity to manage a significant sum, potentially misusing or squandering the funds within a few years of inheritance.
- Legal troubles. Any distributed funds become your child’s assets and can be used to pay damages if your child is named in a lawsuit.
- Divorce. Distributing funds to children at specific ages or milestones places the funds at risk during divorce proceedings.
When should I distribute trust assets to my heirs? An experienced estate planning attorney could set up a lifetime asset protection trust for your heirs’ inheritances to ensure they have the financial support they need throughout their lives.
5. Lack of Adequate Tax Planning
Florida residents with high net worth are at risk of incurring a 40% federal estate tax on a significant portion of their estate. In 2023, residents can own $12.92 million in assets (or $25.8 million per married couple) before triggering the estate tax. Fortunately, a little tax savvy can go a long way in preventing this costly estate planning error.
- Cash gifts. Florida residents can give a certain amount to each recipient tax-free each year, slowly reducing the size of their taxable estate during their lifetime. There are also lifetime exemption amounts that allow you to make larger gifts without incurring gift taxes. Also, there are specific strategies to make larger gifts, but spread those gifts out over multiple years. Indeed, one of these strategies makes for an outstanding education gift!
- Trusts. Trusts are invaluable in reducing taxes when passing property to the next generation. An irrevocable life insurance trust (ILIT) could remove a high-value life insurance policy from your taxable estate. At the same time, a qualified personal residence trust (QPRT) lets you gift your home to an heir while you continue to live in it.
- Charitable giving. Donations to qualified charitable organizations provide income tax deductions and reduce the size of your taxable estate.
- Survivor planning. Marital tax exemptions usually end with the death of the surviving spouse. For example, if a husband benefits from his deceased wife’s life insurance policy, he will receive the funds tax-free. However, any funds remaining from the policy at his death could be included in his taxable estate, potentially incurring estate taxes.
Proper Estate Planning Prevents Problems Down the Road
By far, the biggest estate planning mistake is not having one. Putting off these vital decisions risks everything you’ve worked for, your legacy, and the people you hold most dear.
No matter which selections you’ve made to protect your loved ones, we help you build a comprehensive estate plan that works the way you intend. Email Yolofysky Law today or schedule a 15-minute call to see how we can help protect your company now and in the future.