The most common estate planning mistakes to avoid

Financial advisors can help their clients avoid the most common estate planning mistakes listed below. Giving this important advice will help clients best plan for their futures, protect their assets, and save their loved ones from probate. Ending up in probate could keep a client’s family in court for years while assets are frozen, expenses mount, and 3-7% or more of the total estate is lost.

Not updating estate planning documents regularly

Some clients may think that creating an estate plan is a one-and-done proposition, but most attorneys recommend that clients update their estate plans when they experience major changes in life, notable changes in assets, significant changes in the law, and change in fiduciaries or beneficiaries.

• 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. Lowering the chances of your client having to pay unnecessary estate tax can help demonstrate instant value and give peace of mind.
• Significant changes in the law: Changes in applicable state and federal laws can affect your clients. As their trusted advisor it's important for you to help open up these conversations and stay aware of any changes that may impact your clients. 
• Change in fiduciaries or beneficiaries: Relationships change over time, 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 previously recorded on their documents need updating.

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 the 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 to coordinate their overall estate plans properly. If your client is aware of these designations, it will help ensure that your client’s assets go to the intended person.

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 his ex-wife 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.

Not thinking through 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. Work with their attorney to make sure that they have properly thought through contingent beneficiaries and they are properly represented in their estate plan.
• 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. Help your client understand the role that their beneficiaries play so that their beneficiaries know exactly what their responsibilities will be.
• 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). 

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. However, this age-based distribution scheme may have unintended consequences depending on your state of residence and individual circumstances.

• 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.

Financial advisors are in a unique position to help bring some of these issues to light and make sure clients are working with their attorney to tailor their estate plan accordingly. To protect your client’s assets, explain these potential estate planning mistakes related to payouts, and advise against mandatory distributions. 

Failing to consider creditor protection

Most people may not think of divorce as a creditor, despite the fact that it 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 of 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 several strategies your client may want to consult their attorney about, such as setting up an irrevocable trust to protect their assets from division in a divorce. By doing so, your client’s assets will remain protected in the trust until it’s time to distribute them to beneficiaries.

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. Being flippant about this designation is an estate planning mistake that you can help your client avoid by discussing the best attributes to look for in a trustee. 

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. The trustee(s) of your Trust will be responsible for managing the assets in your Trust after you die. It’s critical your trustee is effective in carrying out how you want your assets to be managed and the process aligns with your wishes.
• 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. 

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 won’t designate the assets properly, or the right beneficiaries won’t 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. 

Educating your client about the importance of retirement assets and coordinating with their attorney can help ensure that their family is able to receive the full benefit of their hard-earned assets.

Show your clients you care about more than their money — you care about their family.

This article originally appeared on Vanilla's Blog and is for educational purposes only and should not be considered legal advice.