Estate planning involves a lot of moving parts. So you’d be forgiven for overlooking or forgetting about certain issues when making decisions about transferring wealth in the most tax-effective manner after you die. An experienced estate planner can help ensure you dot all the “i’s” and cross all the “t’s.” But if you’ve done some of your own estate planning or worked with different advisors over the years, a few things may have fallen through the cracks.
Here are five common pitfalls and how you can address them.
1. You’ve Overlooked Your Digital Assets.
It’s not enough to only cover tangible personal property in your estate plan, you also need to address digital assets. These could include everything from online bank and investment accounts to photos and videos, social media accounts — and even intellectual property.
Collect the information your family will need, such as URLs, usernames and passwords. Because you’re periodically required to change passwords for security purposes, update this list when you change passwords or close accounts. If your mobile device is protected by a passcode, be sure to include that as well.
Next, make sure you assign authority to manage the assets of financial accounts in your will and trust documents and possible sale of IP (if applicable). Also determine who’ll be the beneficiaries of digitally stored photographs, videos, music and other items of sentimental (and possibly commercial) value. You don’t want to have your kids fighting over these when you’re gone.
2. You Haven’t Updated Your Estate Plan Since Moving to Another State.
Laws governing wills, as well as most other estate planning documents, vary from state to state. Although your will is still generally valid if you move, you may need to take extra steps to ensure complete enforcement. For example, depending on your situation, you might consider appointing a different executor. And, in extreme cases, some estate planning documents may be called into question.
Furthermore, state laws for estate planning are constantly changing. This could adversely affect the implementation of your will, trusts, powers of attorney and medical directives. You may no longer be able to achieve the intended results or you might have to forfeit certain tax benefits. In a worst-case scenario, your documents could be rendered obsolete. Also, consider the state tax impact on pensions and other retirement plan accounts.
The optimal approach is to review your estate plan with your estate planning advisor before relocating to determine if any changes will be needed. But if you’ve already moved, address this issue as soon as possible.
3. You Haven’t Reviewed Your Life Insurance Needs Recently.
It’s critical to review your life insurance coverage regularly in light of changing personal circumstances. For example, reevaluate your coverage if you’re:
- Getting married,
- Getting divorced,
- Having children,
- Approaching retirement, or
- Facing health issues.
The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you die. As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.
On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement account withdrawals and Social Security payments. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.
Many factors affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically and when you experience life events.
4. You Haven’t Made Funeral Arrangements.
Family members usually are distressed in the immediate aftermath of a loved one’s death. You don’t want to burden yours with planning a funeral. This can be particularly difficult if family and friends are scattered around the country.
To make it easier on them, designate one person (perhaps your executor) to assume responsibilities regarding your funeral and related issues. Doing so can provide some assurance that your wishes will be carried out. Just be sure to formally designate the person in your will or in a letter of instruction that will be included with your will. Failure to do so could delay the funeral and lead to additional costs. For example, your family may have to absorb unexpected expenses in transporting remains. Bottom line: Don’t leave funeral arrangements to chance.
5. You haven’t thoroughly considered the tax implications of your plan.
It’s common for people to overlook significant tax considerations when planning their estate. This can result in unnecessary taxes and penalties for your heirs. Collaborating with a tax professional and an estate planning attorney can provide valuable insights into tax considerations specific to your situation. They can help you identify potential tax liabilities and develop strategies to minimize them.
Taking the time to address tax implications now can provide peace of mind and ensure that your wishes are carried out as efficiently as possible with the least tax burden possible on your heirs after you are gone.
The professionals at Sol Schwartz & Associates have been assisting high-net-worth families since our founding in 1980 on issues ranging from complex trust taxation, generation skipping trusts, and questions related to wealth transfer and estate taxes. If you’d like to discuss your situation with us, just leave us your contact information below, and we will get back to you promptly.