1. Staying ignorant about the process
As with most things, but especially with estate planning, when you don't know what you're doing, mistakes practically make themselves. Lawyers are supposed to look out for your interests, but they're not always successful. "They bury their mistakes," says Ron Christner, an associate professor of finance at Loyola University. "In other words, you have a will made out when you're 40 and you die when you're 80, and they look at your will and say, 'Oh, this is all wrong.' Well, that's 40 years too late to discover that. But that's when you find out that somebody made a mistake."
2. Being clueless about the role of wills
"Where attorneys make money is in probating the will. They might do a simple will for you for $300, but if they probate the will when you die, they get approximately 2% of your assets, [3% in Florida] depending on state law," says Christner.
Many people think a will acts as a free pass around probate court -- a common misconception.
Instead of simply writing up a will, experts recommend putting assets into a living trust -- especially if you own real estate.
3. Putting your kid's name on the deed
Adding your kid's name to the title of your house is not a good way to pass the old homestead on to the next generation. Tax implications make it a clunky way to bequeath assets.
"When you inherit property, you get an incredible step up in basis on it," Orman says. "So if you inherit a house and the value of it is worth $500,000 on the day you inherit it, and you then turn around and sell it for that, you don't pay any tax because that's your new cost basis.
"If you get that property as a gift while a parent is alive, you take over your parent's cost basis," Orman says. If the property has appreciated since your parent bought it, you're on the hook for the gains, which will be taxed when you sell it.
4. Dawdling indefinitely
Procrastination may be forgivable for young singles with no dependents, but if you never get around to doing anything, the grief experienced by your survivors will be compounded.
Inaction all but guarantees that tensions will run high after you die.
5. Not trusting trusts
Going through probate, a necessity if you die intestate (without a will), will result in your estate paying too many fees. Though often discussed, federal estate taxes won't even touch most estates, but court costs definitely will if not planned for. Why fritter away as much as 10% of your assets built throughout a lifetime of hard work?
"The whole purpose of having a trust is to avoid probate, because that allows your estate to pass to your loved ones without having to employ an attorney or go to the court," Berkley says. "It just goes directly to your heirs and minimizes many of the expenses to your estate."
6. Leaving messy financial records
Pawing through someone else's disorganized records isn't anyone's idea of a good time. Add in grief and the stress of trying to unearth a will or some other evidence of planning, and it's downright chaos.
Keeping track of all of your information and organizing it in a recognizable way is vital, Christner says. "Social Security numbers, insurance policies, the name of the companies you do business with, your brokerage accounts and where they're held, and account numbers should all be included."
7. Giving your ex-spouse a [UNINTENDED] parting gift
Failing to occasionally update an estate plan or make changes to beneficiaries after divorce, marriage or other life changes spells trouble.
Major changes such as having children or buying and selling property warrant changes in your will or trust. Equally important are making changes to beneficiary designations on retirement accounts and insurance policies, as those forms trump a will.
"An insurance policy that has a beneficiary on it -- is not dictated by a will or a trust," Orman says. "A retirement account that has a designated beneficiary or a payable-on-death account at a bank -- those accounts aren't dictated by a will or a trust."
8. Letting others figure out what you want
"I had one situation that was so bad," he says. "The person died without leaving a will or any instructions, and she left three daughters. And there was such fighting between them over who would get what that it went to the court. The court decided that no one was going to get anything and appointed a public guardian to come in and take the entire inventory and sell everything and then write three checks to the daughters.
Besides easing the transition after death, leaving specific instructions about your medical care while alive -- specifically, in the form of a medical directive -- also comes in handy.
"We definitely recommend a health-care power of attorney if you are temporarily disabled, a financial power of attorney for someone to pay the electric bill and the gardener and the mortgage if you are disabled," Berkley says. "There's also a very important document known as a living will, which directs a physician. And that really came into prominence in the Terri Schiavo case. Had she had such a document, her family and her husband would not have been at odds fighting for what her wishes were."
This article was reported and written by Sheyna Steiner for Bankrate.com.
Published Jan. 8, 2008
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