Estate planning is only as sound as the estate documents you create now. These documents express your wishes about who will inherit your assets, but if improperly prepared, they also can have long-reaching unintended consequences regarding taxes and family relationships. Below are the four most common mistakes your experienced estate attorney can help you avoid.
Naming a beneficiary for your retirement accounts and insurance policies seems like a straightforward matter, but this is an area where hiring an estate planning attorney will help you avoid a serious mistake. There are two aspects to this.
- Naming a contingent beneficiary is important because if the beneficiary has already passed away at the time of your death with no contingent named, your estate is likely to receive the inheritance. Your estate may be subject to probate administration and creditors which will diminish the inheritance to the eventual recipient(s). Naming a contingent also clarifies the chain of inheritance, which can be complicated by second marriages.
- Periodic review of beneficiaries ensures that the named beneficiary and contingent reflect your wishes as life circumstances change. Let us look at the case in which a woman named her only child as the beneficiary, but she did not name a contingent. The adult child predeceases her. The woman may have assumed the inheritance would automatically go to her grandchildren, but the adult child had a second wife who was not related to his children. The inheritance may go to the spouse. In any case, a costly legal battle is likely to ensue.
- Undervalued sales
Many people think it’s a good idea to sell a valuable property for $1 to a child or other person who would be inheriting the property after your death. This is legal and it does remove the property from your estate, but it has two unintended consequences:
- A property sold for less than market value will be considered a gift by the IRS, and will be subject to tax rules regarding gifts;
- If your heir takes the property he or she bought for $1 and sells it at market value, the heir will owe tax on the gain, which could be quite significant.
- Specific investments
It is a mistake to name a specific investment in your will, and here is why. When you pass away, perhaps many years later, you may not still own that investment. The estate would be obligated to go out and purchase that specific investment to give to the specified heir. That specific investment may have increased considerably in value. Because specific bequests are handled before all others, the cost of this purchase could directly impact how much is left to go to other beneficiaries of your will. A will’s lawyer will guide you on the right way to ensure your investments go to your desired beneficiaries.
- Expect the unexpected
Always plan for the unexpected. Consider the woman mentioned above who named her adult child as the beneficiary but did not name a contingent. She did not expect the child to predecease her, but it does happen. If she had planned for this unexpected event, she would have named her grandchildren as the contingent beneficiaries, circumventing a possible legal battle. An experienced estate attorney will ask you to consider a variety of possible outcomes to ensure that your estate plan reflects your wishes far into the future.