Common Estate Planning Mistakes
Estate planning mistakes can be expensive and happen to even the most thorough of people. This is a list of common estate planning mistakes we have either seen or gathered from sources.
Not having an estate plan. What would be a list of planning mistakes if we did not start with the most obvious and common mistake. That is, not having a will or trust estate plan. If you don’t have a plan, Colorado has a default plan for you, and you may not like that plan.
Forgetting to update beneficiary designations. This is a common mistake made by the recently divorced or broken up. Your will or trust does not supersede beneficiary designations. Examples of beneficiary designations include a payable on death designations on a bank account, retirement plan, and life insurance contract. Those beneficiary designations must be updated to remove the previous beneficiary.
Not reviewing and updating your estate plan. Much like forgetting to update beneficiary designations, a will or trust plan should be periodically reviewed and updated when life events occur. A life event includes coming into significant wealth, losing significant wealth, marriage, divorce, breakup, birth of a child, and significant changes to the estate tax code.
Listing your significant other as a spouse on a tax return, life insurance policy, or medical/employer benefits package when they are not your spouse. As people scramble to find affordable health insurance, this has become a bigger issue with unintended consequences. By listing that person as a spouse, you may now be married under the Colorado common law or subject to their creditors under something called the family purpose doctrine. Combined with no estate plan, this can equal disaster for your intended beneficiaries.
Naming your estate the beneficiary of a retirement account. While there are no absolutes when discussing what is/is not a mistake in estate planning, I cannot think of any situation where I would recommend naming your estate the beneficiary of a tax deferred retirement account. Naming your estate the beneficiary of a retirement account makes those funds available to pay creditors. The funds could be tied up in probate for years. Recognition of the deferred income tax usually occurs further reducing the value of the retirement account.
Naming your estate the beneficiary of life insurance. See above. In general, naming your estate the beneficiary of just about anything is usually not a good idea. If you must funnel the funds through the estate, it is typically better to name a trust or trustee created pursuant to the will; so not technically part of the probate estate and not readily available to probate estate creditors.
Not funding your revocable “living” trust. If you are going to pay for a revocable trust estate plan, then fund the plan by transferring your property to the plan. However, not all property should be transferred to a trust. Your estate planner can advise you about which assets should be transferred to the trust.
