When it comes to checking tasks off your financial to-do list, estate planning is probably the last item you'll get to — if you get around to it at all.
We don't necessarily blame you. After all, it can be morbid to think about preparing for death, and people often don't know where to start, so they simply don't get started.
Case in point: According to legal services site Rocket Lawyer, 64 percent of Americans don't have a basic will.
But estate planning shouldn't fall to the wayside. Because, although it's nice to think that you can trust everyone to do the right thing, the truth is that if you don't have your wishes formalized, there may be a debate over what the "right thing" actually is.
"It's always difficult to predict which families will get along and which will end up in court fighting over mother's heirloom china," says Tim White, an attorney with Smith Haughey Rice & Roegge. "Leaving an estate plan with clear instructions is your best defense against family discord."
Of course, there's also no shortage of ways in which people can stumble when it comes to making their after-death arrangements. That's why we rounded up some classic estate planning mistakes that people tend to make, so you'll know what not to do when it comes to prepping your own estate plan.
Common mistake #1: Assuming estate plans are only meant for the wealthy
Somehow many of us have adopted the stereotype that estate planning is reserved for rich people. Truth is, it's for anyone who wants to know what's going to happen to their end-of-life medical care, assets, children, or general private affairs if they become incapacitated or die.
So in other words, that's pretty much all of us.
"Absolutely everyone, 18 and older, needs an estate plan, no matter his or her net worth," says Wendy Witt, director of WealthCounsel's Advisors Forum, a community of estate planning attorneys. "If you want to have control over your life — and drastically reduce the burden on your loved ones — you need a written, legally documented estate plan."
In addition to determining what will happen to your money or property after you die, estate planning also includes tasks like setting up a living will, deciding on a guardian for your minor children, or preplanning funeral arrangements. If you're not clearly stating your directives in these areas, you may be leaving too much power in the hands of the courts or the state, warns Witt.
In some states, for example, a widower may only get enough money from his deceased wife's estate for one year of living needs if she passes away without a will. In year two, the assets would be divided among all of her heirs, including her spouse and children, says Dawn Humphrey, First Vice President and Regional Financial Planner at SunTrust Private Wealth Management.
"In this scenario, the amount of money the husband receives is significantly less than he expected and could have a drastic impact on his lifestyle," Humphrey explains.
Common mistake #2: Thinking your finances are too simple for an estate plan
Many people may assume that their financial or family situation is so straightforward that they don't need to draft formal documents, like a last will and testament or a living will. Or they may assume that establishing joint tenancy (sharing ownership in personal property, such as a home) or joint ownership over financial accounts is enough to protect their assets.
The reality is that no one's life is as simple as it seems — and even if it is, you should still consider putting protections in place to help ensure that your wishes are known.
Lorni Sharrow, an estate and trusts attorney with Moye White, gives the example of a single mother who may have an adult daughter as a joint account holder, so that both of them have the authority to sign checks in order to pay bills.
"At the mother's death, the assets in the bank account will pass directly to her daughter, but her other children would not inherit anything," Sharrow says. "Or the doting daughter may actually have financial woes. If she is a joint owner on her mother's account or on her home, these [assets] would be available to pay off her daughter's debts." And that may not be the mom's original intention.
And if you have young kids, you should decide who will be the conservator of the money they inherit should you pass away sooner than expected, adds Sharrow. Neither of these situations typically involves complicated finances — it's simply about being clear about how you want your assets handled.
Common mistake #3: Putting off estate planning for too long
According to the Rocket Lawyer poll, 57 percent of Americans say their excuse for not having a will is that they "just haven't gotten around to making one." Unfortunately, the term "better late than never" doesn't apply to estate planning. So for your own peace of mind, consider starting the process as soon as possible.
At the very least, think of estate planning as a way to reduce familial stress when you're no longer in a position to make decisions. If, for instance, you become disabled and don't have powers of attorney in place appointing people to manage your financial affairs and health care decisions, your loved ones may need to engage in a court process to establish a guardian or conservator.
Instead of fighting a legal battle, they should be focusing on you, your health, and your future. For this reason, Sharrow suggests giving copies of your health care power of attorney, living will, and instructions on how to handle your remains to your primary care provider, in addition to key family members, so your wishes are known well in advance.
Common mistake #4: Neglecting your digital assets
Remember that your property isn't just confined to what you physically own. You've got a whole online life to think about too.
"Don't forget to tell your spouse, partner, or close family member about your digital assets," says Travis Freeman, president of Four Seasons Financial Education. This may include making arrangements to transfer passwords for cloud-based bank accounts, as well as any digital copies of important documents you may be storing on your computer or online. "Going green is a noble task, but don't let it put your estate plan at risk," he adds.
Then there's the matter of your social media accounts. Think about what you want to happen to your Facebook, Twitter, and LinkedIn accounts after you die. Do you want them deleted? Would you prefer to have them stay up in memoriam? Check out whether any social sites you belong to have policies on accounts for deceased people — Facebook, for example, can delete a deceased person's account or memorialize their timeline.
"Your [social media], emails and digital purchases are real assets, and in most states, the agent under your power of attorney, a trustee, or executor must have specific authority to manage those assets," Witt says. So make sure these are incorporated into your estate plan the same way a home or car might be.
Common mistake #5: Not preparing for "what if" scenarios
Take a lesson from the Boy Scout motto: Be prepared. While it would be nice to believe that marriages last forever, and everyone stays healthy into old age, we all know that, in reality, not every story has a happy ending.
"Marriages end in divorce, loved ones suffer addictions or are challenged by health problems, businesses fail or go bankrupt, children move away," Witt says. "Your estate plan can protect for life's contingencies — both good and bad."
Witt gives the example of second marriages. Oftentimes, disputes break out between second spouses and children from first marriages when there's no clear plan of who is entitled to which assets. "Your estate plan can protect your children if you die first, so your second spouse doesn't leave them with nothing," Witt says. "You can also protect your spouse and children from lawsuits and unscrupulous 'friends.' "
And in the case of addiction, you should take into account whether a relative with a history of drug or alcohol abuse can properly manage an inheritance, or whether you want resources to be set aside specifically for treatment. In difficult cases like these, consider involving an estate planning attorney — they've probably seen it all and can help provide guidance on special provisions.
These types of circumstances are also a good reminder that your will is a living, breathing document, which means you can't just set it and forget it. Deaths, births, divorce, changes in your financial situation, and changes in estate planning laws all may warrant rethinking your estate plan.
And while you're at it, update beneficiaries for all your life insurance policies and retirement accounts, too, because these are not administered through a will or trust. Whoever is on your beneficiary form will receive the money, so you want to make sure that the death benefit goes to the loved one you intended.
Common mistake #6: Forgetting about man's best friend
He was your best friend for many years — so how could you forget about Fido?
"I've personally seen many pets sitting pitifully in cages at shelters because their owners are too ill to care for them or have died and there's no one else," Witt says. "If you don't want your pet dumped at a shelter or euthanized, you must include your pet in your estate plan."
Legally, your pets are personal property, so you should take the time to spell out who will be responsible for them. Pet trusts can help you set aside money to outline how you'll pay for Fido's (or Fluffy's) care. When the time comes, your trustee can dole out money to the designated caretaker, along with detailed instructions on how you want your pet's medical or other needs to be handled.
Common mistake #7: Not putting enough thought into naming a trustee
Selecting the person who will be in charge of your affairs is no small decision. You don't want to choose someone for an arbitrary reason, like going with the oldest child simply because he is the first born.
"Name the person who is most likely to be up for the task," White says. "People also fail to consider professional or corporate trustees as a potential alternative or backup because they assume it will be too expensive, but they can provide a lot of value."
John Scroggin, an estate planning attorney with Scroggin & Company, recalls a family that chose an old friend as trustee for their daughter. When the 19-year-old called the trustee and asked for some distributions to provide for an overseas college program, the old family friend discussed "trading favors" for distributions.
Fortunately, the daughter had a record of the inappropriate behavior, so the trustee quickly resigned. The lesson learned: Not only did the parents chose the wrong trustee but they also didn't include a provision that would allow their daughter to remove the trustee if needed. "To operate as a check and balance, a replacement trustee may be required to be an institutional trustee," Scroggin notes.
Remember that the trustee will be managing your money, as well as your family's well-being. Make sure that you've discussed what this responsibility entails, that all parties are on board — and that you have contingencies in place if that person doesn't live up to the expectations.
This story was originally published on LearnVest. LearnVest is a program for your money. Read their stories and use their tools at LearnVest.com.
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