Don't make a mistake that can't be corrected

Common Estate Planning Mistakes and How to Avoid Them

by Gary Foreman

Some things need to be done right the first time. Your estate plan is one of them. If your heirs find you made a mistake, it could be too late to fix it. We wanted to find out about some common estate planning mistakes. To help us identify mistakes and how to avoid them in your estate plan, we contacted Kay Allen, CFP® of Aspen Wealth Management of Colleyville, TX.

Q: Leaving your executor enough cash on hand for immediate expenses is important. What's the best way to accomplish that?

Ms. Allen: It is wise to anticipate the needs of your estate should something unexpectedly happen to you. Will there be enough cash to pay off any debts, taxes, and expenses that your estate may owe? If there is insufficient cash on hand to carry these costs as the estate unwinds, it is a good idea to provide a life insurance policy for that purpose.

Q: Many people have life insurance policies with named beneficiaries. Is it advisable to make them payable to your estate or leave the beneficiaries in place?

Ms. Allen: Often people like to have named beneficiaries on life insurance policies because the money passes outside of probate and directly to their beneficiaries in a reasonable amount of time. It is possible to have the estate be the beneficiary of a life insurance policy, but doing so will increase the value of the estate by the amount of the death benefit. This is not a good idea for someone whose estate is close to the estate and gift tax exemption level, which is currently $5.45 million. However, it is possible to create an Irrevocable Life Insurance Trust to avoid this problem.

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Q: Choosing the right executor is important. What qualities should a good executor have?

Ms. Allen: The role of an executor is to help sort out the estate of the deceased, so the decision of the best person for this role is an important one. The executor will be responsible for paying debts and taxes owed by the estate as well as distributing the proceeds of the estate. This person should understand your wishes, be honest, responsible, and should have the best interests of the beneficiaries of the estate in mind. It might be a good idea to avoid potential conflicts, such as appointing an executor who is also a beneficiary or someone with whom you have business interests. If the estate is complex, it may be wise to use independent third party, such as bank trust department to serve with a family member

Expert Interview: How to Choose an Executor for Your Estate

Q: What can you do to make sure that your executor has the proper information to carry out their job and your wishes? What about online documents and accounts? Should you talk with the executor in advance? And, if so, what should you tell them?

Ms. Allen: Being an executor can be a time-consuming job. It is very important to ask the person in advance if he or she would be willing to act in this role. The executor will need to pay estate debts and taxes and possibly file an inventory of assets with the court. Consequently, the executor should be familiar with your wishes and have a list of the professionals you rely on, such as your financial planner, your attorney, CPA, and insurance agent. It is important that you leave information about where your will is, what assets you have, and how to access any online financial documents.

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Q: What's the most common mistake that people make in their estate plan? And, how can they avoid it?

Ms. Allen: Honestly, the most common mistake people make is not having a plan. It is surprising the number of people that don't have a will in place and have substantial assets that need to be protected. The singer, songwriter Prince is a great example. Once you've decided to get an estate plan in place, a financial planner and attorney can help make sure that all the pieces work together. For example, you should know that no matter what a will says, the beneficiary designation on a qualified plan or insurance policy determines where the proceeds will go. We have seen stranded 401k plans with ex-spouses listed as beneficiaries go to those the ex-spouse when it was clear the deceased would not have wanted that to happen.

Reviewed November 2017

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Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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