Five common estate planning mistakes to watch out for
September 12, 2013
This January, as part of the ""fiscal cliff" tax compromise, Congress brought stability to the ever-shifting estate tax landscape by enacting a permanent set of tax rates and exemptions. As a result, the vast majority of Americans no longer need to worry about federal estate taxes when they leave assets to their loved ones.
But no matter how large or small your assets, an estate plan can make sure your wishes are carried out and help ensure your legacy.
So now that you're thinking about it, here are five common—and potentially costly—mistakes to watch out for.
Not updating your estate plan
Experts recommend that you review your estate plan every three to five years to make sure it reflects changes in your family and financial circumstances, as well as changes in the law.
"A lot of people think that after they go to a lawyer and prepare a will and power of attorney, they sign it and they're done," said Alisa Shin, a senior wealth planner in Asset Management Services™. "That is not quite correct."
Look over your will and other estate-related documents after each birth, death, marriage, or divorce in the family. Any substantial change in your finances—whether because of a stock market decline, a job change, or retirement—should prompt a checkup. Beneficiary designations in retirement plans, for example, don't automatically transfer when you roll over your 401(k), open an IRA, or switch from a traditional IRA to a Roth IRA.
It's also important for your estate plan to take into consideration potential future changes to estate laws. The potential decline in federal estate tax exemptions from $5 million this year to $1 million next year could affect your tax liability and may influence how and when you distribute your assets.
Ignoring conflicts between your estate plan and other beneficiary designations
If your will states that your home and retirement account go to your current husband, but your ex-husband's name is on the deed and your 401(k) plan, there's a problem. The deed and the beneficiary designation will likely trump what's in your will.
Unless your property titles—for both real estate and other kinds of assets—and beneficiary designations are consistent with your trust or will, they may not be subject to those expressed wishes.
Not specifying who inherits your estate and how
Say, for example, you planned on dividing your assets equally among your three children. But your son predeceases you. Unless your will states that each child's branch of the family gets an equal share, or that your son's share of your assets should be distributed to his own children, your two daughters will inherit everything when you are gone.
Even if your will makes clear that your son's children should inherit, you may not want them to receive the assets outright if they are minors. Should their shares be placed in a trust? You may want to discuss this with your family or lawyer.
Writing an inflexible estate plan
A rigid estate plan cannot adapt to changes in the law or family circumstances. If your plan was designed to take advantage of certain tax criteria, and those laws change, you want to make sure your heirs can amend it.
"Make sure there is some room for flexibility in your documents," said Ms. Shin. "Circumstances change, and many want their families to be able to adapt and manage the family assets in the most optimal way at any given point in time."
Letting emotions guide your choice of an executor
If your beloved eldest son, a high-powered lawyer, doesn't get along with his five siblings and vehemently disagrees with your end-of-life directives, he may not be the best person to choose as executor or surrogate health care decision-maker.
"Your fiduciaries don't need to be experts in tax law," said Ms. Shin. "They just need to be smart enough to know when to go get help and where to go to get help."
- The information provided here is for educational purposes only and isn't intended to be construed as legal or tax advice. We recommend that you consult a tax or financial advisor about your individual situation.
- Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.