Estate Planning Mistakes to Avoid
Estate planning involves many components and, for many Americans, taking care of this important task is often put to the wayside.
However, it’s worthwhile to give estate planning serious consideration before it’s too late. Planning isn’t just for the wealthy. Every adult should have a basic estate plan in place which includes a will, trusts, power of attorney, healthcare directives, and beneficiary designations.
Even if you are young and/or don’t have many assets, you’ll want to at least create healthcare directives and power of attorney documents. Many people don’t even do the minimum for a variety of reasons, such as procrastination or thinking they don’t own enough assets, or that they have plenty of time.
Estate planning is overwhelming. Depending upon an individual’s circumstances, it also might be complex. Understanding the steps involved is helpful to demystify the process so that costly mistakes can be avoided. Unfortunately, the unexpected can happen at any given time. You want to be ready.
When assembling your plans, be sure to avoid the following five estate planning mistakes.
1. Procrastination
Not doing any estate planning is costly, yet many people put off this important task. Procrastination is probably the number one mistake in estate planning people tend to make.
According to a Caring.com survey, only 32% of Americans had an estate plan in 2024, a 6% decline from 2023. Furthermore, 40% of U.S. adults do not think they own enough assets to create a will.
The consequences of procrastinating on this essential task are many.
● Putting your estate at risk if an unexpected accident or death occurs
● Losing out on compound interest if accounts aren’t established
● Leaving your family vulnerable to creditors and predators
Procrastinating estate planning can also leave your family in chaos, having to deal with the legal fallout, arguments over assets, and the costs associated with settling your estate.
2. Forgetting to Designate Power of Attorney
Power of attorney documents (POAs) are vital documents for adults 18 and older to ensure that in the event of incapacitation, a person’s wishes are carried out to their preferences. How it works is that the individual designates one or more people to make their decisions for them in the event they cannot.
Two primary types of POAs are medical power of attorney and financial power of attorney:
● A medical POA names the person you want to serve as your healthcare proxy to make your decisions, along with outlining any advanced directives you have for medical care, long-term care, or end-of-life decisions.
● A financial POA designates who you want to carry out any financial affairs decision-making in the event you cannot do so yourself.
POAs can be intricate, depending on your individual circumstances, and it’s important to learn the difference between durable and non-durable POAs.
3. Missing Key Documents
● Last will and testament: A legal document outlining how you want to distribute your assets and any other provisions (e.g. who will care for your minor children or special needs adult child).
● Trust documents: These are legal documents that allow you to transfer your documents to an account, either before or after your death, depending upon your preferences.
● Beneficiary designations: The individuals who will receive your assets upon your death.● Powers of attorney(s): Legal documents outlining who will take charge of your medical and financial decisions in the event you are unable.
Other key documents you want to include in your estate planning are life insurance policies, instructions for your funeral and burial, copies of your proof of identity documents, and the paperwork for any large assets you own, such as homes, boats, or bank accounts, to name a few.
You should also plan to include any other documents tailored to your specific situation (e.g. if you own rare artwork, valuable jewelry, or own a business). This way, you ensure your last wishes are properly carried out in the event of your death or decisions you want made in the event of your incapacitation are made in alignment with your wishes.
4. Not Sharing Details With Children or Other Beneficiaries
You’ve established and completed your estate planning. That’s great news! Finishing this task lifts a great weight off your mind. After the task is done, a big mistake people often make is to forget to share their estate planning details with their children or other beneficiaries.
This is an error you want to avoid making because many problems can emerge. You don’t want to leave your children and/or other beneficiaries guessing or having to deal with unnecessary stress about what to do during their time of grief. If you have instructions ready for them, this makes things easier for them.
Talking about mortality isn’t easy. No one wants to discuss the death of themselves or loved ones, but it’s a necessary conversation to have before it’s too late. Informing your beneficiaries of your plans and letting them know where to find a copy of your estate plan makes things much easier for them and avoids potential conflicts.
5. Not Updating Information
Estate planning documents aren’t a “set it and forget it” type of task. Your plans are essentially living documents that should be revisited from time to time. You don’t even have to do this every year, but you should do it when major life changes occur so they can be updated or simply be reviewed every so often to make certain something doesn’t need to be adjusted.
Generally speaking, you definitely want to revisit your estate plans in the event of marriage, divorce, birth of a child (or grandchild), adoption of a child (or grandchild), or the acquisition of new assets not outlined in your original plan.
Over time, many changes can occur. For instance, you may add or lose assets, your personal beliefs might evolve, your relationships change, or one or more of your beneficiaries predecease you.
A good rule of thumb to follow is to review your will and other estate planning documents every three to five years at a minimum. Doing so ensures nothing is inadvertently overlooked or forgotten.
6. Neglecting to Obtain an EIN
People often associate having a tax ID/employment identification number (EIN) with filing their federal and state taxes, but did you know an estate needs an EIN? In terms of taxes, an estate is treated much like a business. It separates your final tax return from your estate’s tax return.
Why is an EIN needed?
If an estate generates more than $600 of gross income for the year (e.g. account interest, revenue from rental property, etc.), any tax on revenue incurred will be owed. The individual in charge of handling an estate must file an income tax return for it. To do so, they will need to obtain an EIN.
You can make this task much easier and expedite the estate settlement process by applying for an EIN soon after the death of your loved one.
How to apply for an EIN
To file for an EIN for your estate, you’ll need to submit the SS-4 form called “Application for Employer Identification Number” online, via fax, or by USPS mail. This process can take a few weeks. You can also seek out the assistance of a professional on-line service and obtain an EIN the same day.
Information you’ll need includes the decedent’s first and last name that is an exact match in the IRS and Social Security Administration’s records, along with their Social Security number. Other details to include on the application include the first and last name of the estate’s executor (or administration/representative) and their social securitynumber with their full address. Keep in mind this must be a physical address as no PO boxes are permitted.
Once you obtain your EIN, it’ll be much easier for the estate’s executor to carry out their responsibilities for the estate and help to expedite the process.
Estate Planning Can Be Overwhelming
Many people feel the estate planning process is overwhelming and, as a result, tend to put off making any or all arrangements to plan for incapacitation or death. This is especially true when juggling the day-to-day responsibilities of their lives, such as work, driving kids to soccer practice and piano lessons, doing chores around the house, and having to take care of numerous other time-consuming activities.
Not to mention, the creation of and assembling of estate planning documents can be confusing. With so many legal terms to learn and then determining what documents or steps are necessary to make pertinent arrangements.
Thinking about death and incapacitation isn’t an easy thing to do, but it is an essential task to complete. By making sure you’ve avoided the above top mistakes, you help to ensure your last wishes are carried out in alignment with your preferences and that your children and other beneficiaries aren’t left with various legal hurdles and details to take care of, since you’ll have already had everything outlined for them.