Most people would probably prefer to put off planning for their death. But if you own anything of value—and most people do—then you’ll want to add estate planning to your to-do list soon. An estate plan establishes what will happen to your assets, dependents, medical care and general private affairs if you become incapacitated or die. It’s a document you put together while you’re still healthy, and if executed correctly, it has authority over what any other party says, including a judge.

But estate planning isn’t as simple as it sounds. There are several mistakes to avoid, including these:

1. Leaving money to young beneficiaries. Think twice about how to leave a nest egg to your young beneficiary, who might be prone to making reckless financial decisions. Consider establishing a trust for them, managed by a trusted family member, until the beneficiary gets to be a bit older.

2. Not planning for the estate tax. Under current law, nine months after your death, estate taxes are due. The federal rate is 40% on estates valued at $5.45 million or more. Many states also have their own taxes with lower thresholds. Spouses and charitable organizations are exempt from estate taxes, but anyone else you leave part of your estate to will have to pay up. If you’re on the edge, it might be a good idea to donate a portion of your estate to push it below the threshold.

3. Forgetting about life insurance. Life insurance pay-outs are subject to estate tax, unless they’re owned by an insurance trust. If your estate is large enough, you may want to set one of these up to avoid estate and other taxes on your life insurance.

4. Not making annual gifts. One way to minimize your tax exposure—and that of your beneficiaries—is to make annual tax-free gifts to them. The current allowance is $14,000 per recipient.

5. Creating it and forgetting it. An estate plan is not one and done. Until your death or incapacitation, it’s a living document that can evolve over time. To make sure it remains timely, review your estate plan with your attorney every three to five years.

6. Handing out power of attorney. It’s a shame, but the truth is a lot of elder financial abuse comes at the hands of close family members, relatives and friends. Don’t grant a power of attorney until you have to and make sure you only appoint someone you know well and absolutely trust. If no one comes to mind, consider establishing a revocable living trust, which will be managed by a trustee when the time comes.

7. Exposing yourself. If privacy is important to you, then you’ll want to weigh the options of a will versus a revocable trust. Both do the same thing, but one of them—the will— becomes a part of public record.

Creating an estate plan should be a collaborative process between you, your attorney and financial planner. Don’t delay this important step in preserving your wealth for generations to come.


The FMB Advisors Blog

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