Common Estate Planning Mistakes

Common Estate Planning Mistakes to Avoid

Estate planning ensures that your assets are distributed according to your wishes after your passing. Whether your plan is simple or complex, overlooked details can undermine its effectiveness.
Here are 10 common estate planning mistakes to watch for:

1. Titling property jointly with children instead of using a will

Transferring ownership to children may seem like a simple solution, but it can create complications:

  • The transfer is irrevocable, meaning you cannot change the arrangement if circumstances shift.

  • If the property is sold before your death, you may lose part of the capital gains exclusion.

2. Not planning for children’s divorce or creditor issues

Outright gifts to children can be at risk if they go through a divorce or face creditor claims. A court could award an ex-spouse a share of the asset, or creditors could seize it. Using trusts or business entities like an LLC can help protect these assets.

3. Overlooking assets with designated beneficiaries

Some assets, like life insurance, IRAs, and brokerage accounts, pass to beneficiaries outside of a will.

  • A will cannot override beneficiary designations.

  • Review all beneficiary designations alongside your will to ensure they align with your estate plan.

  • Tip: Keep a list of all accounts and named beneficiaries when consulting an estate planning attorney.

4. Underestimating estate value for tax purposes

Many people forget that life insurance proceeds are included in their taxable estate if they own the policy. This can push an estate above the federal exemption threshold, which in 2020 was $11.58 million per person (doubled for married couples and adjusted annually for inflation).

5. Ignoring state death taxes

Many states have “decoupled” their death tax from federal estate tax, meaning you could owe state taxes even if no federal estate tax applies. Reviewing state tax laws for any property you own can help you avoid unexpected liabilities.

6. Failing to stay updated on estate tax laws

Legislation frequently changes:

  • In 2013, the American Taxpayer Relief Act (ATRA) set a 40% tax rate and a $5.34 million exemption per person.

  • In 2020, the Tax Cuts and Jobs Act nearly doubled the exemption amount.

  • You can gift up to $15,000 per year per person ($30,000 for married couples) without affecting your lifetime exemption.

7. Missing out on the tax benefits of a step-up in basis

Gifting low-basis, high-value assets during your lifetime may lead to a larger tax burden for heirs. If the asset is inherited instead, the cost basis is adjusted to its fair market value, reducing capital gains taxes.

8. Not outlining funeral arrangements

Failing to document funeral preferences can place additional stress on your loved ones. Prearranging your funeral can ease their burden and ensure your wishes are followed.

9. Not planning for disability

If you become disabled without the proper medical directives, powers of attorney, or trust arrangements, a court may need to appoint a guardian to make decisions on your behalf. This process can be costly and time-consuming.

10. Not reviewing your estate plan regularly

Estate plans should be reviewed periodically to account for:

  • Changes in tax laws

  • Financial updates

  • Family changes (births, deaths, divorces)

At NEST Financial, we guide individuals and families through comprehensive estate planning to help them avoid these common mistakes, meet their financial goals, and leave a meaningful legacy.

Disclosure:
This information is not intended as legal or tax advice. Please consult a qualified tax advisor or attorney before making any changes to your estate plan.

Previous
Previous

Capital Gains for the 2020 Season Could be Huge

Next
Next

Did COVID-19 Force You to Wrongly Rebalance?