An estate plan isn’t set-and-forget. Make sure yours stays airtight by steering clear of these costly errors.
So you have an estate plan. You’ve taken a major step in making sure you leave behind a legacy and that your assets are passed down as you see fit. But that, however, is not enough. There are plenty of potential mistakes that can torpedo your estate plan. That’s why you need to mobilize now to make sure your estate plan is bullet proof.
So let’s take a look at some of the mistakes to look out for and how to fix them.
Forgetting to Update Your Estate Plan
Your estate plan is a living mechanism. And things change in life. Divorces happen. Falling outs happen. Loved ones pass away. New kids are born, and so on. These major life events could affect the sturdiness of your estate plan. So you need to go back in there and make the necessary changes to make sure the estate plan still adheres to your wishes.
Forgetting to Manage Beneficiaries
Designated beneficiaries overpower what’s in a will or trust. So you need to make sure you still have the right beneficiaries listed on accounts like retirement plans.
You may have listed your spouse as the designated beneficiary to your individual retirement account (IRA), and recently went through a divorce. In this case, you may want to update the beneficiary designation.
Or, perhaps, a designated beneficiary has passed away. With that said, many experts recommend you name more than one beneficiary.
And to keep everything in line, here’s a list of common accounts that take beneficiary listings:
- insurance policies
- 401(k)
- Roth 401(k)
- IRA
- Roth IRA
- brokerage accounts
- savings accounts
In addition, it’s always important to pay close attention to how the beneficiary themselves could affect your estate plan.
Designating a Minor as a Beneficiary
You want your children to be financially taken care of after you pass away. So naming them as beneficiaries to something like your retirement savings can seem like a no brainer.
But that can open you up to some pitfalls. Minors can’t manage large amounts of assets. In most cases, a court will have to appoint a conservator to manage the assets. And this individual may not be the person you would want to have managed your child’s inheritance. In addition, the minor would take full control of the assets once they reach the age of majority (18 or 21, depending on the state). At this point, your child may or may not be capable of handling the money responsibly.
You could bypass these issues by creating a trust and naming your child as the beneficiary. A trustee of your choice would manage the assets. And you can choose when the funds may be distributed. This could hinge on specific circumstances like once your child graduates college or holds a steady job.
Improperly Funding a Trust
A trust is an essential part of any estate plan. Not only does it allow your assets to bypass probate but it also ensures assets are properly distributed as you wish. It’s a legal entity that holds and manages these assets.
But unless it’s properly funded, it’s nothing more than an empty vessel. To avoid this, you need to start by drafting your legal trust document. And you need to list all your assets by type and value. For example, you can have real estate, vehicles, bank accounts, and brokerage accounts. You also need to gather all the paperwork that proves your ownership to these assets such as financial documents, deeds, and titles. Next, open an official trust account through a financial institution. You then fund your trust by making title changes and naming the trust as the beneficiary on applicable accounts.
By Javier Simon
