Many individuals assume they don’t need an estate plan, but if you own assets, then you do. Estate plans are not just about preserving your wealth for your beneficiaries. They also help to plan end of life decisions as well as hospice and long term care.
Fewer and fewer Americans have an estate plan. In 1998, 61 percent of Americans 55 and older had a will or trust. In 2012, only about 54 percent did, says a study by Texas Tech University.
Failing to take action or making the wrong moves can be costly for you and your heirs. Here are a few costly estate planning mistakes to avoid.
Minefield No. 1: You think you’re too young for a will or don’t have enough assets to protect A good estate plan can save your heirs some money; it also protects you and your family while you are alive. If you don’t have a plan and you become incapacitated, someone will have to go to court to be named your guardian so that he can make medical and financial decisions for you. If other family members object, the process could drag out, which will cost more and could leave your bills unpaid or delay needed medical treatments.
If you die without a plan, you’ll also have no control over who becomes the guardian of your minor children or who gets your assets. Get a basic estate plan in place. You’ll need a will, which states who you want to inherit any property that does not have a designated beneficiary, and name a guardian to care for young children. You’ll also want to draw up a financial power of attorney, which will allow someone you name to make financial decisions for you when you no longer can. You may also want to consider a trust, which will hold some or all of your assets and pass them directly to your heirs at your death, avoiding probate.
Minefield No. 2: You ignite sibling rivalry When parents die, fights between siblings are often over things, not money. Jewelry, furniture, artwork—the legal term is “nontitled property”—and who gets what is often the biggest source of unhappiness among surviving family members.
Talk to your children to find out what they want and expect. Parents have to be skillful in setting the tone. If you are asking for honest answers, you have to be willing to hear them.
Of course, you’ll have to make the ultimate decisions. So if you want your jewelry or paintings to go to a particular child, put it in writing. Many states let you attach a codicil to your will indicating that you’ve made a separate list distributing your possessions. You can update the codicil without having to update your will when you do.
Minefield No. 3: You allow your legacy to be squandered You may wish to leave property to a beneficiary but worry that he won’t spend it wisely or that she might get into trouble with creditors. Even if you respect your heir’s ability to handle money, he still might be tempted to spend it quickly. In a 2012 study, Jay Zagorsky, a researcher at Ohio State University’s Center for Human Resource Research, found that the average baby boomer surveyed had spent, donated, or lost roughly half of his or her inheritance in the first 12 months.
If you are concerned, put the assets you want to pass on in a trust and include instructions on how and when it will be paid out. A spendthrift trust allows payments to the beneficiary on a regular basis (say, monthly), so it can’t be spent all at once. Because the beneficiary cannot access the trust principal, neither can his creditors.
You could also set up a trust that pays funds out over time—say, when a child reaches ages 25, 30, and 40. Or you can say what the funds can be used for, such as educational expenses, a new home, or retirement savings.