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Avoiding the Most Common Estate Planning Errors

by Jessica Doro, Attorney

The biggest, and most common, mistake related to estate planning is a failure to create any plan. A recent survey indicates that 55% of American adults do not have a will.* Even if you have a will, you still need to exercise caution and diligence to avoid other common estate planning mistakes.

1. Failing to Examine How Your Property is Titled

Your will only controls the disposition of property you own in your individual name or that which does not pass by beneficiary designation. It does not affect property you own jointly with others. Property you own in joint name with another individual automatically passes to the other joint owner upon your death. Also, property with a payable on death designation passes to the designated individual upon the owner's death. These types of ownership make sense in many circumstances; however, it is imperative to be aware of the title of your property to understand whether your will controls how that property passes.

2. Failing to Review and Update Beneficiary Designations

A will does not affect how certain types of property will pass at an individual's death. The most common of these types of assets are life insurance, 401(k) assets, IRAs and annuities. These assets pass pursuant to the beneficiary designation you provided on the account. It is therefore critical that you coordinate your beneficiary designations with your will to ensure they are consistent with your wishes and each other.

Another critical mistake many people make regarding beneficiary designations is naming minor children as the beneficiaries of life insurance proceeds, 401(k) assets, and IRAs. If funds are left outright to a minor, then, in most cases, a conservator will need to be appointed for the child. That conservator will need to provide information to a court regarding the management of the funds and also may be limited in the investment options. Another disadvantage is that a child will receive a lump sum at age 18 and the child may lack the maturity to properly manage the funds at that early age.

A better alternative is to create a trust under your will and to name a trustee to manage such assets for the benefit of your minor children. You can then designate the age or ages when you feel it is appropriate for your children to access his or her share of the assets. The trust should then be named as the beneficiary of your life insurance policies and retirement accounts.

3. Failing to Plan for Disability

Many individuals incorrectly believe they have completed their estate plan once they have signed a will. A will, however, only governs your property after your death. It has no impact on your property if you become disabled and cannot manage your assets, and it also has no effect on your medical decisions.

It is critical to also execute powers of attorney for financial purposes and for health care purposes. The financial power of attorney gives another individual or entity the ability to manage your assets on your behalf. It can take effect immediately or only upon your incapacity. Without a power of attorney it may be necessary to have a court appoint a conservator to manage your assets during your disability, which can be time-consuming and expensive.

A medical power of attorney designates an individual to make health care decisions on your behalf when you are unable to make your own health care decisions. This document is extremely important and can help prevent disagreements among family members.

4. Failing to Consider Family Circumstances

Another common error is ignoring unique family circumstances when creating an estate plan. It is important to review your family circumstances to determine at what age you want beneficiaries to receive assets. If specific assets should go to one family member, such as a closely held business or the family farm, it is important to consider the effect on the other children who are not involved in the business or the farm. Additionally, you should consider remarriage, step-relatives, and disabled relatives when determining how your property should be divided and also whether you and your family may have charitable intentions that you want reflected in your documents.

5. Failing to Review Your Documents on a Regular Basis

Once you have signed your documents it is important to review them on a regular basis, typically every three to five years. You should review your documents more frequently if significant changes occur in your family structure (birth, divorce, death) or if there are significant changes in your assets

Bradley & Riley has an experienced group of attorneys who can help you avoid these common errors. Contact us at 319-363-0101 (Cedar Rapids) or 319-466-1511 (Iowa City) if you have questions.