You’ve spent your whole lifetime working hard and building up a diverse portfolio of assets.…
People design estate plans for many different reasons. An estate plan protects your physical and financial well-being by ensuring documents are in place which designates trusted loved ones to handle your affairs should suffer incapacitating injury or illness. An estate plan also protects your family’s business (if one exists) by providing the framework required to draft a robust family business succession plan. Lastly, an estate plan acts to protect your assets and ensure they end up in the right hands when you die. However, all of this is only true if your plan is well-drafted and forward-looking. After all, there are many pitfalls on the road to organizing your affairs that, if not avoided, can end up costing heirs in the long run. The list is long and, so as not to skimp on details, we present the most common among these in a two-part article series. The first set of common errors is described below.
The (First) Five Common and Costly Estate Planning Mistakes
1. Mishandling Real Estate
It is not uncommon for parents, while still living, to either transfer real estate to children or place children’s names on the deed. There are limited circumstances wherein this is a wise financial or estate planning move but more often than not the resultant tax burden and vulnerability to creditors outweigh the benefit. Gifting real estate opens the receiver up to having to pay capital gains tax while placing a child’s name on your home’s deed means theirs and their spouse’s creditors may come after the property. Alternatively, when a property is passed on through a will, capital gains tax may be avoided; likewise, if creditors are a concern, a range of estate planning tools allow you to circumvent this danger.
2. Failing to Update Beneficiary Designations
All aspects of your estate plan require periodic updates but this is especially true of beneficiary designations. As relationships grow and change, it is important that this be reflected in your planning. Further, it is wise to institute backup plans that anticipate the potential consequences of an unforeseen tragedy. If your spouse were to die, for instance, you would be glad to have set up a trust as an alternate beneficiary of your estate such that no guardianship need be established to manage a minor child’s inheritance.
3. Overlooking Advance Directives
As signaled at the start of this article, estate planning is about much more than protecting assets. It is also about protecting yourself and where this point is concerned, advance directives are crucial. Medical and financial power of attorney documents are an important part of any robust estate plan as these documents ensure a trusted loved one will be able to step in to manage your medical and financial affairs should you suffer incapacitation.
4. Forgetting to Rebalance or Reallocate Investments
As you age, the level of risk you are able to absorb through invested income changes. At age thirty it makes sense to pursue a growth portfolio as you have plenty of time to recoup losses from a volatile market. At age sixty-five, this is no longer true. Accordingly, it is important to periodically revise your investment strategy and reign in exposure to risk in consideration of evolving priorities. What is more, as you update the percentage of stocks, bonds, and other commodities you are comfortable carrying, you also want to periodically rebalance to ensure these percentages are maintained as your investments grow.
5. Failing to Plan for Long Term Care
The U.S. Department of Health and Human Services reports that 70% of adults aged 65 and over will one day require long-term care and 35% will, at some point, require nursing home care. On average, a private room in a nursing home costs $8,820 per month. Most families would struggle to pay this amount out-of-pocket making planning crucial. After all, it would be a tragedy to invest time and money organizing your estate only to see your assets eaten up by care costs in your final years.
Stay tuned for the second installment of this article to learn about the many other common estate planning mistakes or, if you prefer, simply pick up the phone and call the Law Firm of Christopher W. Dumm at 417-623-2062 for immediate answers to your questions. And as always, you can contact us using the contact form below for any non-urgent questions.
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