5 Common Estate Planning Mistakes
Most people today realize the importance of properly planning their estate. Without some form of estate planning, you lose control of what happens to your property after your death. However, with a carefully prepared estate plan, you can save on taxes and administration costs, thereby leaving more assets to your heirs. You also have the peace of mind of knowing that things will be taken care of after you are gone. The following are a number of common mistakes people make regarding their estate planning. Avoiding these will help you better protect your assets and your family.
MISTAKE NO. 1: Thinking that your estate is too small for estate planning. Estate planning can benefit every situation, no matter the size of the estate. Under Florida law, a reasonable fee for the personal representative of a probate estate is 3%. The same goes for the attorney of the personal representative. If you have an estate consisting of your home and a few investments, it is not unusual for the total value to be in the area $300,000. While most would consider this a small estate, probate fees of 6% would carve $18,000 out of it. This is money that will not go to your heirs. Also, you should be aware that without any estate planning your estate is subject to the intestacy rules of the Florida Probate Code, a part of which reads like this: “ If there are surviving lineal descendants of the decedent, all of whom are also lineal descendants of the surviving spouse, the surviving spouse receives the first $60,000 of the intestate estate plus one-half of the balance of the intestate estate.” Is this what you had in mind? Probably not. Make sure to plan.
MISTAKE NO. 2: Not having a will. A will is a must for everyone. For families it is particularly important because a will is the place where you can name a guardian for minor children. Without one, the court won’t know your wishes and your children will be placed according to the thoughts of the judge. And as we saw in Mistake No. 1, you have no say in how your assets are distributed and who will administer them. The cost of setting up a will is far less than dying without one. It is also important to review your will on a regular basis. Changes in your circumstances as well as the laws may necessitate a change in your will.
MISTAKE NO. 3. Not having a durable power of attorney or advance health care directives. A will takes care of things after your death. But what if during your lifetime you become incompetent or incapacitated? A Durable Power of Attorney allows you to appoint someone of your choosing to act in your behalf and manage your property if you are unable to do so yourself. With a Designation of Health Care Surrogate, you designate someone to make health care decisions for you if you are not capable of making those decisions. Without these documents, it is likely that a guardian would have to be appointed for you. This would require a court proceeding in which you would be examined to determine whether you are competent and, if you are not, a guardian selected by the court would be appointed to control your financial and medical affairs. This is a long and expensive procedure that can be emotionally painful to your family. I’m sure you remember the Terri Schiavo case. This unwanted situation could be avoided by these two documents. A Living Will allows you to direct whether life prolonging procedures will be withheld or withdrawn if you are in a terminal condition, have an end stage condition or are in a persistent vegetative state.
MISTAKE NO. 4. Underestimating how much money your surviving spouse or family will need. When a person dies the surviving spouse and family usually lose all of the income generated by that person. In most cases this amount was never properly calculated before the death and the life insurance benefits, if any, were not great enough to produce an equal replacement income. Add to this the fact that there is a misconception that the widow’s or widower’s expenses will be substantially lower. Unless the surviving spouse plans to make a big change in lifestyle, that’s usually not true. The household expenses (mortgage/rent, utilities and homeowners insurance) generally remain the same. If there are children, these expenses usually do not drop. In fact, extra child care costs may result if the surviving spouse must work away from home. Without much of a decrease in expenses, the surviving spouse is left without the decedent’s income. Further, tapping into an IRA presents other issues. This money is not the same as money in a non-retirement account. Money withdrawn from IRAs and other retirement accounts is taxed as ordinary income, which means that the surviving spouse ends up with considerably less spendable income.
MISTAKE NO. 5. Not funding a revocable living trust. Many people use revocable living trusts to avoid probate and estate taxes. What some people don’t realize is that a trust will do you no good unless you have funded it with your assets during your lifetime. This means that title to your assets must be transferred to the trust. If title remains in your name, the asset is a part of your estate at your death and subject to probate and its costs and delays. Any assets properly funded to the trust during your lifetime remain in the trust, are not a part of your probate estate, and avoid the need for probate.
Avoiding these and other costly mistakes can help make sure that your estate passes to your heirs in the most efficient manner possible.