The word "estate" can conjure up images of wealth and a Great Gatsbyish lifestyle. Yet when it comes to planning for when you pass away, it simply refers to what you own: Financial accounts, real estate and possessions. For some people, this can equate to millions of dollars. For others, an estate might mean very little. Either way, planning for your assets after your death helps ensure that your wishes are carried out and that family squabbles don't evolve into destroyed relationships.
Here are 10 common mistakes to avoid – keeping in mind that laws vary from state to state — as you ponder how you want to handle your own situation.
If you have little in the way of assets, you might think you don't need one. Guess again. If you pass away without it – called dying intestate – the legal system in your state will decide who gets your assets, no matter how massive or meager. Worse, if a minor child is left parentless, guess who appoints a guardian? A judge.
Life changes. And as it does, so should your will. Couples split up, relationships change and new assets are acquired or disposed of. The person you named as your child's guardian might have developed an unsavory lifestyle or your executor might have passed away. Any time a major change occurs in your life, it's time to make sure your will reflects it. Otherwise, review it every few years.
People often mistakenly think that in their will, they can name who gets the money in retirement accounts, life insurance policies and the like. Wrong. The person listed as the beneficiary on an account will get the money even if your will says otherwise. So when life changes, remember to change the beneficiaries on those accounts.
Your loved ones can become not so loving when it comes to choosing who gets your sentimental or valuable possessions. If you have special items that, say, have been in the family for generations, specify who gets those things in your will. Otherwise, you're setting the stage for a potential blowup among your heirs. Relationships among family members can sour and never recover.
The person you name as executor will face what can be a daunting job. Things such as liquidating accounts, ensuring your assets go to the proper beneficiaries, paying any debts not discharged (i.e., taxes owed to the IRS), and even selling your home could be among the duties undertaken by the executor. Just because you've known your best friend since elementary school doesn't mean handling the challenge of being an executor is up their alley. Same goes for a trustee, if you set up a trust.
If you leave your money directly to young kids, the court will appoint what's called a property guardian. Keep in mind, though, that supervision doesn't last forever. Once legal adulthood arrives (18 or 21, depending on state of residence), Junior will have unfettered access to the money. If you want to avoid a young adult squandering it away, enlist the help of an attorney to set up a trust for those assets to manage how and when they get distributed.
This can get tricky, but assumptions made about what your will says versus how your home is titled can result in problems. For example, depending on the legalities attached to the type of deed on your home, adding a child to it can expose your share of the house to someone else's creditors. Or, if you give your house to your kids while you're still alive, you open them up to higher capital gains taxes upon its sale. In that scenario, gains would be based on the value when you bought it, not its value at your death.
Also known as a living will, this document outlines your wishes if you become incapacitated due to illness or injury. Say you are on life support. Instead of a loved one making the agonizing decision whether to end all life-saving measures, your wishes will be specified in a legal record.
If you become incapacitated, the people you grant powers of attorney will handle your medical and financial affairs if you cannot. Most often, the person who is given this responsibility when it comes to your health care is different from who you would name to handle your financial affairs. Make sure you choose carefully for both.
While it can be hard to imagine your own death, picture your family searching without you through drawers and filing cabinets in search of your original will, documents regarding your bank accounts and other assets, and maybe even your Social Security number. The best way to avoid forcing them to deal with that task on top of mourning is to leave an organized list of information that the will's executor will need to settle your estate.