The 7 Deadly Sins: Common estate planning mistakes to avoid
They won’t make your clients feel wicked. Still, the seven deadly sins of estate planning may leave your clients vulnerable to several unintended consequences such as probate, loss of assets in a divorce, and avoidable estate tax liability.
Financial advisors can help their clients avoid the seven most common estate planning mistakes listed below.
Estate planning mistake #1: Not updating estate planning documents regularly
Some clients may think that creating an estate plan is a one-and-done proposition, but you should review and update your client’s estate plan with them when they experience any of the following:
Major life events: Your client’s estate planning documents should reflect significant milestones, such as having a child, getting divorced or married, and death in the family.
Notable changes in assets: An increase in assets without appropriate tax planning could result in significant estate taxes, which would leave less for the client’s beneficiaries.
Significant changes in the law: Changes in applicable state and federal laws can affect your clients. The IRS implemented substantial tax law changes in 2012 and 2017, which changed estate tax exemptions.
Change in fiduciaries or beneficiaries: Who oversees the estate and who benefits from it may change over time. It’s a good idea to check with your client occasionally to see if these names need updating.
Estate planning mistake #2: Failing to update beneficiary designations
Certain types of assets may only pass to beneficiaries after the client’s death by completing a beneficiary designation form, namely life insurance and retirement accounts. As a preliminary matter, your client must have proper beneficiary designations in place. Going forward, and in conjunction with any estate planning changes, your client should review their existing beneficiaries —who will receive the assets if something happens to the client—and update those designations in coordination with their overall estate plan.
Failure to update beneficiary designations could result in the following:
Wrong Beneficiaries: Assets such as retirement funds and life insurance payouts will go to the person (or people) listed as a beneficiary, not necessarily the person your client wants to receive them. For example, your client’s children would not receive the benefits if an ex-spouse was still listed as a beneficiary, no matter how long their divorce has been.
Probate: If your client has assets that can only pass via a beneficiary designation but has not named beneficiaries for those assets, the only way to transfer those assets to beneficiaries is through the probate process.
Estate planning mistake #3: Not planning for multiple post-death distribution scenarios
Life and death don’t always happen in a neat order: Children sometimes die before their parents. Entire families can perish in unexpected accidents. While it’s difficult to discuss, you should talk with your client and help them plan for the following scenarios:
What should happen if a beneficiary predeceases the client? In case this occurs, the client needs to plan where their assets should go, write in contingencies, or change or name backup beneficiaries.
Should the beneficiary have full control of the assets? What should happen to your client’s assets when the beneficiary dies? Your client can document that decision in advance, or they can give the estate to the beneficiary and let them decide what happens to it after they’re gone.
What if there is a common accident? What should happen to the estate if your client and their beneficiaries are involved in an accident together? Advise your client to name a residuary beneficiary (someone who receives the remainder of the estate after paying debts) and/or a contingent remainder beneficiary (someone or a charity who gets the remainder of the estate when the primary beneficiaries are gone).
Estate planning mistake #4: Requiring mandatory distributions to beneficiaries
Mandatory distributions of principal to beneficiaries at certain ages, such as 18, 25, or 30, are standard in many estate plans. These age-based distribution practices are an estate planning mistake for the following reasons:
Creditors: Age-based distributions can leave assets subject to creditors, or the assets could become marital/community property, with half lost in the case of a divorce.
Estate tax exemptions: If your client has significant assets, make sure the estate planning documents account for applicable tax planning and provide maximum flexibility for more than one generation.
Estate planning mistake #5: Failing to consider creditor protection
Divorce is the primary creditor for most people. The U.S. divorce rate has dropped to a 40-year low, but the divorce rate among people 55-65-years old has more than doubled. This rate change means that Americans heading into retirement are more likely to get divorced than ever before.
Help your clients avoid the common mistake of failing to consider how they will protect their estate from creditors. There are many different estate planning techniques that can aid in asset protection for both your client and their beneficiaries.
Estate planning mistake #6: Naming the wrong trustee
Not just anyone in your client’s life is qualified to be a trustee—the person who will manage the trust. Choosing the wrong trustee is a decision that can have disastrous impact on your clients plan and is a mistake that is easily avoidable.
Factors to consider when reviewing your client’s trustee appointments:
Is the selection current? If not, your client should remove or replace the trustee’s name in the estate planning documents. Outdated trustees may find it more difficult to execute your client’s wishes or may no longer be the best person for the role.
Will the person represent the best interest of your client’s family? You want to ensure that your client has chosen a trustee who understands their wishes and will carry them out with the utmost integrity. Ensure that your client has chosen well by asking them to describe the trustee and their relationship. Discuss with your client any concerns you have about the trustee.
Does the person have the necessary skills to be an effective trustee? Although the trustee doesn’t need to be a professional, they need to be organized, responsible, and dependable.
Will the person be alive when your client needs a trustee? Some of the most trusted people in your client’s life may be significantly older than the client. Encourage your client to consider whether their chosen individual will be around to enact their wishes. Don’t forget to inquire about declines in the trustee’s mental or physical health.
Is the person a U.S. citizen? If your client’s trustee is not a U.S. citizen, the trust may become a “foreign trust.” A foreign trust is subject to laws outside of the United States, even if a U.S. citizen created the original trust.
Estate planning mistake #7: Not planning for retirement assets
Retirement accounts are often one of a client’s most valuable assets. The average 401(k) balance in the United States was at least $100,000 in 2019. Without your advice, your client risks failing to plan for their retirement assets and their distribution.
Failing to plan for retirement beneficiaries in an estate plan means that your client may not designate the assets properly, or the right beneficiaries may not receive the full benefits. For example, suppose a client’s spouse is the primary beneficiary of a retirement plan. In that case, it’s within the spouse’s control to designate beneficiaries after the client’s passing unless the client included retirement assets as part of their overall estate planning.
Be sure to review your clients retirement accounts in conjunction with their estate plans so that money is not lost or overly taxed.
Avoid these estate planning mistakes
Financial advisors can help their clients protect their assets, now and in the future, by being aware of and discussing the seven deadly sins of estate planning with them. While the estate planning mistakes in this post are common, they are avoidable through awareness, advice, and planning. Reference these critical estate planning mistakes, and use Vanilla’s simple, intuitive estate planning platform to advise your clients about estate planning.
Vanilla is the Estate Advisory Platform, purpose-built to enable financial advisors to build deeper relationships with their clients and empower clients to build and protect their legacy. From robust and easy-to-understand visualizations of complex estates, detailed diagrams of how assets transfer to future generations, to ongoing estate monitoring, Vanilla is reinventing the estate planning experience, end-to-end. Learn more about Vanilla at https://www.justvanilla.com/.
Media inquiries: Please contact firstname.lastname@example.org
The information provided here does not, and is not intended to, constitute legal advice or tax advice; it is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with your financial advisor or estate attorney who can advise as to whether the information contained herein is applicable or appropriate to your particular situation.
Ready to get started?
Deliver a whole new client conversation experience
Talk to our sales team today.