3 Mistakes That Can Affect Your Estate Plan

Table of Contents

- Leaving Assets Directly to Loved Ones

- Neglecting to Create a Lifetime Asset Protection Trust

- Forgetting to Update Beneficiary Designations

If you're considering using a do-it-yourself (DIY) estate planning service or have already an estate plan you're not entirely confident with, it's important to understand how three common mistakes can derail your estate plan and create a costly mess for your family.

Some people create an estate plan online or with an attorney who lacks experience in estate planning. These people believe they have found a quicker and cheaper solution, but once the plan is finalized, they often question whether this "affordable" plan will actually achieve their goals or leave their family with significant complications.

While it may seem simple enough to create a trust online or have a tax attorney draft your will, it is challenging to develop an effective estate plan that is tailored to your specific family needs without the proper training and experience. What may appear as minor details to an inexperienced individual can have significant consequences for the final outcome of your plan. We have seen numerous instances where a person thought they were saving money and doing the right thing using an online system to prepare their estate planning documents, only to find out those documents are not acceptable. Often by the time they find out, it’s too late (the signer died or became incapacitated). In the end, it will be your loved ones who bear the financial burden of resolving the defective documents after you're gone.

Let's explore the three most common mistakes that affect an estate plan:

1. Leaving Assets Directly to Loved Ones

One of the simplest yet detrimental mistakes in estate planning is distributing your assets directly to your beneficiaries upon your death. This approach is problematic for several reasons:

• The assets lack protection from your beneficiaries' creditors once they leave your estate. In other words, once someone inherits the money, they can lose it to a money judgment, divorce, or other creditors.

• The money can be easily wasted or misused by the beneficiary if they do not make good financial decisions.

• If the beneficiary is a minor, a court will determine who manages the assets and how they are utilized and then release it to them when they turn 18, when they have little experience managing money.

Instead of gifting your assets directly to your beneficiaries, it is advisable to distribute them into a trust for the benefit of the beneficiaries. By creating a trust, you can select a trusted individual to manage your assets on behalf of the beneficiaries while safeguarding those assets from their creditors and their own poor financial management skills.

Establishing a trust becomes particularly important when minor children are involved. Minors are unable to inherit money in their own right, which means they cannot directly receive any assets from you upon your death. Instead, a court will appoint a trustee or conservator to manage the assets left for your children. The person appointed by the court may not align with your preferred choice. Moreover, if the court appoints a professional trustee, your assets will be diminished due to expensive trust administration fees.

A court-appointed trustee will distribute the assets outright to your children once they turn 18, but this exposes the assets to unnecessary risk. Few young adults possess the maturity or financial knowledge required to responsibly manage a significant sum of money over time. Even if your adult child is responsible or has guidance from a trusted individual, those assets remain vulnerable to lawsuits, divorces, and unforeseen financial hardships they may encounter in the future.

Leaving assets directly to a minor or young adult can be replaced with the approach of leaving the assets in a trust established for the child's benefit. This allows you to choose the person who will manage the assets for their benefit, facilitate asset growth through careful financial management, and protect the assets from your child's lack of experience and potential future risks.

2. Neglecting to Create a Lifetime Asset Protection Trust

While creating a trust to hold your assets can provide long-term protection for your loved ones, this protection only exists as long as the assets remain in the trust. The second major mistake that people make involves trusts that direct assets to be removed from the trust's protection and transferred to your child or beneficiary at a specific age. Initially, you may not perceive any issues with this arrangement. However, even if your child or beneficiary is capable of managing a sum of money, once it is distributed outright to them, this approach exposes those assets to future legal and financial risks.

Instead, it is advisable for everyone to consider establishing a lifetime asset protection trust that holds the beneficiaries' assets during their lifetime. This grants lifelong protection to the assets while providing financial support to your beneficiaries.

Unfortunately, most attorneys lack an understanding of how to use trusts to establish this kind of protection for the inheritance you intend to leave behind. Some may even discourage the use of trusts unless you possess a substantial estate. However, regardless of the size of your estate, safeguarding and nurturing these assets can have a significant impact on the future well-being of your loved ones.

3. Forgetting to Update Beneficiary Designations

The final mistake, though simple, is often overlooked when creating a DIY plan or working with an inexperienced estate planner: neglecting to update beneficiary designations on insurance policies and retirement accounts to align with your estate plan. While your will and trust are essential components of your estate plan, it is crucial to update your insurance policies and investment accounts so that they pay out to your trust rather than directly to your beneficiaries.

Leaving your beneficiaries' names on insurance and investment accounts instead of designating your trust as the recipient means that your most substantial assets won't be integrated into the plan you just established. Instead, these assets will be distributed directly to the beneficiaries listed on the account, allowing them to utilize the funds as they wish, even if you had other intentions for protecting those funds under your trust. We have encountered cases where the beneficiaries named on a life insurance or retirement account are the client’s parents, who are deceased, when the client could have named their spouse and children.

To ensure the effectiveness of your estate plan, it is crucial to review and account for all your assets. This includes considering that your account’s beneficiary designations reflect the name of your trust or the chosen estate planning method.

If you are considering using a DIY estate planning service or have had an estate plan created by an attorney who lacks experience in estate planning, it is vital to examine your plan for these three significant yet simple mistakes. Otherwise, your estate plan may end up causing more problems than it resolves, potentially leading to legal battles and family conflicts.

At the Law Offices of Leslie Sultan, we offer a review of your current estate plan. This review provides an opportunity to address your concerns, assess the effectiveness of your current plan, and if you lack confidence in your existing estate plan, we can create a comprehensive new plan tailored to meet your family's long-term needs.

Don't allow a minor estate planning mistake to derail your family's future plans. Trust us, it's worth the investment to protect all those hard-earned assets for your loved one!

About the Author

Leslie has been practicing law since 2009 and is the host of the estate planning podcast 'Legacy Purse'. She has a long history of representing family members struggling to inherit property and/or wealth from deceased family members through the Probate Courts. Knowing how time-consuming and expensive the probate process is, Leslie takes great pride in helping her clients learn how to plan and protect their families during their lives so they can avoid the probate court process and save their loved ones that additional grief (and expense).