The Estate Planning Mistakes That Cost Families the Most

There are several things that can cause families to suffer big losses, and nearly all of them could be avoided with a little advance planning. The problem is that none of them are obvious, and by the time they become clear, usually after someone has died, it’s already too late to fix them. The good news is that each one has a fairly simple solution, and most of them won’t cost you a penny.

Below are the four most common mistakes, the places where families tend to lose the most, along with the one thing you can do to avoid each one. What do these four have in common? They’re all free, and they all take less than five minutes. None of them need a large amount of money or a law degree. Just a minute of your time, before you’re unable to spend it.

When you fail to create a written plan, the state creates one for you

The biggest and most obvious mistake families make is failing to create a will or estate plan. If you die without a will, the state will automatically write a “will” for you, using a formula set under your state’s intestacy law. This decides who inherits your money and property, and how it gets distributed. In many cases, the result may surprise you. A long-term partner you’ve lived with for decades may get nothing. In others, the way your estate gets split may go against your clear wishes.

The financial damage shows up fast. Family members wait months in probate court while lawyers collect fees from your estate; a judge picks a guardian for any minors; and people who depended on you may get far less than you meant to provide. Or worse, they may not get it at all, or only after the debts and other costs from the delay are paid off.

To fix this, create a will that names who should inherit your property, who should carry out your wishes (your executor), and who should serve as guardian for any minors. Many families will find a basic will is enough for their needs, and can handle it at a reasonable cost with the help of a local estate attorney. By doing so, you make sure your family controls the decisions about your estate rather than someone outside your circle.

The forms that supplant your will

In addition to creating a will, many families also set up trusts and name beneficiaries on life insurance policies and retirement plans. While setting up a trust or naming a beneficiary on those accounts is certainly important, the fact remains that these designations override the terms of your will. So regardless of what you wrote in your will, the assets held inside these accounts will pass according to the terms on the forms. This means that if you failed to update your 401(k) beneficiary to match your current wishes (for example, remove an ex-spouse) after your divorce years earlier, the money from your 401(k) could end up going to that former spouse.

Fortunately, fixing this is relatively quick. Review every account that lets you name a beneficiary. Check whether the people listed still make sense today (say, an ex-spouse). Name an alternate beneficiary in case your primary beneficiary dies before you do. And confirm these updates are done before any later divorces, deaths, births, etc.

A trust only works if you fund it

While some families will set up trusts and complete all the paperwork, they often neglect to fund those trusts. A trust is a vehicle built to hold your assets and distribute them to your beneficiaries (usually your children) under the provisions in the trust agreement. In theory, using a trust, you keep probate out of the picture when distributing the assets inside it. But if your assets aren’t properly funded into your trust (in other words, they’re titled in your individual name), then they’ll be subject to probate. That cancels any benefit of setting up a trust in the first place. On top of that, not only did you waste hundreds or thousands of dollars in attorney fees to draft that trust agreement, you also subjected yourself to double the probate costs.

For example: if you were to pass away without having properly funded your trust (and so had to go through probate for your house), then your family would be responsible for paying probate costs tied to the trust (even though probate was unnecessary) AND separately paying probate costs tied to your home. To avoid this, pull out each of your major assets and check whether they’re properly titled in the name of your trust. Your attorney can help prepare new deeds and account documentation as needed. Keep a simple checklist of what’s in the trust and what isn’t, so nothing falls through the cracks.

Using joint ownership as an easy out can cost big time

When creating an estate plan feels overwhelming, some families go for what looks like an easier route, adding an adult child as co-owner on their checking or savings account, house deed, etc. That way, when they pass away, all that has to happen is the co-owner signs some paperwork, and voila, they instantly gain full control of whatever they jointly owned. Families see this as their only way to make sure their children inherit their assets. But this approach comes with several serious pitfalls.

If you add an adult child as co-owner of your bank account or house deed, then any creditor lawsuit against your child can potentially attach to the jointly owned asset too, exposing your money to your child’s creditors. Also, once an adult child is added to the deed or account title of your property, this triggers gift tax issues and can complicate the capital gains basis of that property at sale time, leaving your heirs facing higher taxes on the eventual sale.

Don’t confuse joint ownership with a real estate plan. Use joint ownership only when absolutely necessary, that’s, as a temporary measure or for a specific emergency, and only after talking with an experienced estate attorney. When it comes to passing assets at death, consider using either beneficiary designation forms OR transfer-on-death deed options, both of which offer similar benefits to joint ownership but with fewer risks that come with it.

Estate planning is about preparing for the years before death, not the day of it

Many families mistakenly see estate planning only as direction for when you pass away. While providing for how your estate gets distributed when you die is indeed a key part of estate planning, arguably the most overlooked area is protecting yourself while you’re still alive. Specifically, we mean situations where, due to illness or disability (like Alzheimer’s disease), you lose the ability to manage your own affairs. At that point someone needs to step in to help you make important financial decisions, and possibly health decisions too. Unfortunately, without the proper paperwork in place, nobody is legally allowed to help you make those critical decisions.

If this happens in your family, they’ll likely need to seek appointment from a judge (or multiple judges depending on the jurisdiction) for guardianship or conservatorship purposes. This process is lengthy and public. Also, the legal fees generated throughout this process can range up to thousands of dollars (depending on complexity). During this time, while everyone waits on a resolution, medical bills keep piling up and medical decisions stall until it’s resolved.

Two simple forms can protect you from losing control while you’re still alive:

• Create a durable power of attorney (DPOA), which authorizes an agent to handle financial affairs on your behalf if you can’t because of incapacitation.
• Create a healthcare directive (also known as a living will or healthcare proxy), which spells out your treatment preferences if you’re unable to communicate, including naming someone authorized to make medical decisions on your behalf.

Give copies of both forms to the agents named in each document so they can act promptly when needed.

Affordable documents that fail when you need them most

Once you have decided to get these documents prepared, it’s tempting to save money by going with low-cost alternatives. Websites offering FREE templates are everywhere; likewise, websites that let you create documents cheaply are plentiful too. Some affordable resources may be fine for uncomplicated estates. But be aware that estate laws vary a lot by state. So, if you create a document incorrectly (it lacks signatures, witnesses, or notarization/), it may be completely invalidated, and your state will revert back to its default intestacy laws when deciding how to distribute your estate.

Almost all states have rules requiring a signature or witnesses or notarization for certain types of documents (wills specifically). Failing to meet these requirements may render your do-it-yourself will ineffective. If your situation is relatively simple, a reputable online resource that generates customized documents based on your state-specific laws may be enough. On the other hand, if your estate includes complex elements such as a business, blended family dynamics, disabled dependents, property in multiple jurisdictions, or any combination of these, consult with an experienced estate attorney. Spending a few hundred dollars upfront will ultimately save you many times that in frustration, expense and heartache later on.

Conversing with relatives about your plan may avoid conflict down the line

You can do everything right and still end up with conflict among relatives, mostly because of silence around your final wishes. Since relatives have no idea what you wanted, they’ll assume the worst about each other, start to suspect each other, and sometimes file lawsuits against one another. Litigation between siblings can consume entire inheritances and destroy lifelong relationships.

Silence around final wishes can also create logistical confusion among relatives. They might spend years trying to track down accounts they didn’t even realize existed.

Take the time to walk those involved through exactly what your final plan entails, and why. Explain it especially if you choose to divide assets unequally among relatives, and tell your executor where they can find the documents you created as part of this plan. You don’t need to reveal specific dollar amounts to do this well. Having this conversation now avoids future conflict among relatives, and it saves them days, months, even years spent searching for answers or waiting on court decisions, and it’s one thing no attorney can do for you.

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