10 mistakes people make in estate planning

January 30, 2012 — 1 Comment

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Estate Planning– people don’t like to think about it, but eventually we all need to take care of it. All too often in our estate planning practice we see people who haven’t planned at, all, or haven’t implemented their plans fully. Truthfully, other then estate lawyers, no one likes to even talk about it.

But put another way, if you don’t take care of it, someone else will, and that someone else may not get it done the quickest, least expensive, or even the most desired way, you would. Ultimately, estate planning is about YOUR hopes, dreams, and directions. When the worst happens, if you’ve prepared the right documents ahead of time, it can save time, energy, money, and allows you to retain control of making your own decisions.

Simply put, a good plan can ensure that your money stays in your family and doesn’t wind up in the pocket of your least favorite uncle (Sam).

These 10 simple tips can protect your family and your assets later.

1. Where there’s a WILL, there’s a way…..

Over fifty percent of adults in the US don’t have one. Big mistake. While your assets are probably leas then Warren Buffets, someone will need to handle your financial affairs after you die, and it’ll be easier if there’s a document spelling things out. This is especially important if you have children; the will should name a guardian for anyone under 18. You’ll also want to name a trusted person as executor of your estate. If you have young children, ask an attorney about creating a minor’s trust — assets you leave them will be held in the trust until they reach your state’s “age of majority” (18 in most states). We typically advise against leaving large sums of cash to young children, for obvious reasons.

A simple will might cost $300 to $500, and may be a good option if you don’t have a lot of assets, kids, or need tax planning. But if you do, you shouldn’t go it alone. In our office we see more homedrawn wills get challenged then accepted. It’s easy to screw up your own will, and most forms aren’t designed for complex plans. Execution of wills is highly structured, and typically requires a specific protocol, a specific type and number of witness, and should also contain a self proving affidavit or attestation clause. Fill in the blank documents will vary based on where they were obtained, how they were drafted, and whether they are appropriate for your circumstances. All wills require probate to administer legally. Probate fees will vary by jurisdiction, but typically will be far more then the drafting costs on your will.

Good wills are based on a snapshot of where you are when they are drafted. But over time, your snapshot will change. Review your will every two to three years, or whenever there’s a life event, such as a birth, death, marriage or divorce.

2. In TRUSTS, we trust

If you establish a living trust, your estate can bypass probate and its associated costs and hassles. It’s pretty easy to compute the cost advantage of a trust vs a will. Take the total amounts of assets subject to administration, and multiply that number by the cost to administer the estate/trust. Then compare that number to the cost to draft and implement a trust vs a will.

In most cases, the costs of administration for a will, will be less then the added drafting and implementation costs for a trust, where assets being administered are less then $250,000. If your assets exceed $250,000, the added costs are quickly eclipsed by the cost savings of trust administration. These fees can vary greatly, by state.

Trusts are great planning vehicles, if,
1) You have minor children and don’t want to leave property directly to them.
2) You have adult children and aren’t confident they can responsibly manage their inheritance.
3) You want to protect your assets from ending up with a creditor or a child’s ex-spouse.

3. Power up.

A power of attorney authorizes someone to handle matters if you’re unable to act on your own behalf. There are two types: financial power of attorney, which lets someone take care of things such as writing checks; and medical power of attorney, which allows someone to make decisions about your health care. Without this form, your loved ones might have to go to court to handle simple estate matters if you were incapacitated. These are important and very inexpensive documents.

Decide whether you want a standard durable power of attorney, or a “springing” power of attorney that requires a doctor declare you incompetent or incapable before it’s active. Update this document about every five years even if it’s correct, since officials sometimes are hesitant about accepting an older form.

4. Set up an advance directive

Basically, this document lays out your end-of-life preferences, such as whether you’d want a feeding tube or to be placed on a respirator, if necessary. It can incorporate related requests such as a living will (explaining when you’d want to be allowed to die), medical power of attorney and Do Not Resuscitate orders. Creating one doesn’t require an attorney; find the advance directive permitted in your state at caringinfo.org. Some states require you to have this document witnessed, so make sure you follow the rules to make it official.

5. Don’t sell your family short– carry enough life insurance

If you have children dependent on you financially, you need life insurance to cover lost income after you die. Generally, term life is your best bet; Accuquote.com can give you premium quotes. (A good rule of thumb: have enough life insurance to equal 10 times your annual salary.) If you’re interested in permanent life insurance (such as variable or universal) with a built-in savings component, speak with your financial planner to find the right coverage.

6. Update and keep current beneficiary designations.

You may not realize it, but beneficiaries on your 401(k), insurance policies, retirement accounts and investments trump your will. So even though you’ve left everything to your children in your will, if your ex-wife is still listed as your IRA beneficiary, the stash goes to her.

People get divorced or they have additional children, and you can run into some big problems with the wrong beneficiary.” Review your designations about every two years or upon life events, such as the birth of a child. And make sure to choose a contingent beneficiary. Otherwise, if your primary beneficiary dies before you do, your funds will go to your estate, which can create tax and legal issues. It’s not unheard of for people to leave seriously outdated beneficiaries — when you enrolled in your first 401(k) at age 24, did you casually name your boyfriend as next in line? You might want to change that.

7. Organize

Do you know where your tax returns, insurance policies, brokerage and 401(k) statements, and mortgage paperwork are? If you’re not sure, you can bet your loved ones won’t be able to find them when they need to, plunging them into estate-settling hell. Put everything together in one place and then tell your spouse or closest family member where that is. Aside from the documents mentioned above, also include: your Social Security and health insurance/Medicare cards, plus contact information for your doctors, lawyers and accountants.

8. Deposit copies securely, not safely.

Never keep your original will in your safe-deposit box. Some states seal the box when someone dies until the estate has been settled. (And of course, settling the estate is easier with the original will in hand.) You can keep a copy of your will in the safe-deposit box, but the original belongs with your lawyer or in a fireproof box at home or in your office. You may even want to scan all your important financial paperwork and keep a virtual copy with a Web site like vitalesafe.com (it’s free for up to 100MB of space), or Google Docs (also free). We maintain original wills and other estate planning documents for our clients, at no charge.

9. Review and make known

A good plan, is no plan if no one can locate it. Review your expectations and documents with the people you’ve named–particularly guardians. Surprises aren’t appreciated in estate planning. If you’ve retained copies or originals of your documents, advise where they are stored. If the attorney holds the original, get lots of business cards, and give them to your named agents.

10. Relax

A good plan, well implemented will reduce your anxiety over what will or may happen to your assets.
Jeffrey D. Katz Esq. is the founding partner in the law firm JDKatz, P.C. Formerly with KPMG’s Mid Atlantic tax practice, Mr. Katz’s practice focuses on tax, estate planning and real estate matters. Mr. Katz is admitted to practice in the State of Maryland, US Tax Court, US District Courts for Maryland and the District of Columbia, and before the United States Fourth Circuit. Mr. Katz routinely lectures on estate and corporate law issues in Washington, DC and suburban Maryland. Mr. Katz lives in Montgomery County, Maryland. He may be reached at 301-913-2948.

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