5 Estate Planning Mistakes to Avoid

Estate planning is complex and full of legal and financial nuance. Even with the best intentions, mistakes can be common and make your plan fall short when it matters most, especially if you’re not working with an expert and try to take it on yourself. While a lack of planning is alone a big mistake, many typical errors often stem from problems with execution or building the plan.

Here are five estate planning mistakes to keep in mind and how you can avoid them:

1. Not Updating Beneficiary Designations

Ensuring your assets go to the right people after you pass away is a central part of estate planning. This involves naming beneficiaries, such as a spouse, child, grandchild, friend, or sibling, who you want to receive your belongings or investments. For instance, if you had a 401(k), you could name one or more people to receive its funds if you pass away before withdrawing them.

However, a common and damaging misstep is failing to update the beneficiaries listed in your documents and financial accounts. “It is crucial for individuals to regularly update beneficiary designations, especially after significant life events such as marriage, divorce, having children, or even the unfortunate passing of an heir,” explains Howard Enders, COO of The Estate Registry, a digital estate management provider.

What can happen if you leave your beneficiaries unchecked? “Out-of-date beneficiary designations can lead to assets going to family members and people they were not intended to go to, even if your overall plan says otherwise,” Enders warns. If a beneficiary passes away or falls out of favor, that gap in your plan can lead to potential disputes or spawn an outcome that goes against your wishes.

To avoid this, regularly review your documents and accounts—including your will, trusts, IRAs, Roth IRAs, 401(k)s, etc.—on your own or with the help of a professional. It’s also smart to ensure the “legal names” of beneficiaries “are spelled out accurately on official estate documents” because “a misspelling can delay payouts or probate matters,” says Jillian Hishaw, Esq., owner of Hishaw Law LLC, licensed attorney in Wyoming and North Carolina.

2. Overlooking Power of Attorney (POA) Documents

Estate planning isn’t necessarily always about planning for what comes after your death. Another side of it involves figuring out what happens if you become incapacitated and can’t make decisions for yourself. In this case, a power of attorney (POA) document allows a trusted individual to speak and act on your behalf. Not having a POA plan in place can make you vulnerable if an emergency or unanticipated medical event occurs.

“If an individual does not have a valid financial or healthcare power of attorney, the court may then need to step in and appoint a guardian,” Enders explains. “This can become costly and time-consuming, increasing the overall stress and burden placed upon loved ones and family members.”

Without a POA in place, no one holds legal authorization to handle your business or medical needs unless a court appoints someone to do so. However, there’s no guarantee that the person the court chooses will be prepared to bear the responsibility of making the challenging medical or financial choices that come with acting on someone’s behalf. And, as Enders points out, it can be expensive and might not be quick for the court to settle on someone.

Beyond the risk of someone making decisions for you whom you either don’t know or haven’t selected, missing a POA can spur a series of negative financial consequences. It’s possible that “your bills will remain unpaid, investments will go unmanaged, and foreclosure of your home and repossession of your car could ensue,” cautions Hishaw.

POA documents are an essential part of a complete estate plan. They help ensure you have the right people making decisions for you and that while you can’t speak for yourself, your financial affairs are well taken care of.  You never know when something could happen, so it’s smart to “choose and set up these designations in advance so your wishes are honored and a court does not have to step in on your behalf,” emphasizes Enders.

3. Choosing the Wrong Executor

An executor holds a key role in an estate. As a representative of the estate, they’ll tackle important tasks such as notifying government agencies and financial institutions of your death, paying debts, inventorying and selling belongings, and distributing assets to beneficiaries. Ideally, this should be someone you trust and capable of making decisions with care. Unfortunately, that’s not always the case, and it can be a fundamental error.

“Choosing the wrong executor can be catastrophic for an estate,” says Jennifer L. Zegel, Esq., Chief Product Officer of Eternal Me, a digital asset planning solution, and partner and leader of the Trusts and Estates Group at Kleinbard LLC. When you pick the wrong person, you run the risk of family disputes, more time spent in court, mismanagement of your estate, and even tax penalties.

People might pick incorrectly by basing choices on emotion or family hierarchy, like the oldest child or a close friend, without understanding whether the individual is equipped for the role. However, as noted, the person should be financially responsible and neutral. Avoid those who:

• Lack basic financial literacy.
• Are easily overwhelmed.
• Are estranged from other family members.
• Don’t have the time.
• Don’t make good decisions in other parts of their life.
• Are unlikely to ask for expert help when they need it.

During your selection process, Zegel recommends considering that estates “could take years to settle,” depending on their size and “complexity,” adding that you should ask yourself whether you think the executor can remain “impartial” throughout. “Just because they’re your firstborn child or best friend, that doesn’t necessarily mean they can fulfill their fiduciary duty to act in the best interests of the estate and beneficiaries. Choosing the right executor often means not choosing the most convenient one.”

Ultimately, the best choice to serve as executor in your estate is someone who can take care of the complexities of your estate and commit the time and effort it deserves. It can be someone you’re close to, but ensure they’ll stay fair and unbiased, communicate effectively, and be able to make tough decisions.

4. Making Your Plans Too Complex or Simple

The right estate plan structure for someone else might not be the one for you, or vice versa. Some people may have an over-engineered, multi-layered strategy that covers transferring different types of assets with trusts and complex legal arrangements. Others might have a simple one that only includes a vaguely written will. Both extremes can cause problems when your plan goes into action.

“A person’s estate plan should really mirror the complexity of their life, assets and goals for what they want to leave behind,” advises Zegel. “It’s detailed where it needs to be, but never at the expense of clarity.”

An overly complex plan might use various legal tools without a true need. For example, if you’re not a high-net-worth person, it might not make the most sense to have multiple complex trusts and asset protection tools in place. “Having too many holding companies and multiple trusts with overly restrictive provisions,” you “can cause complicated estate challenges,” says Hishaw.

At the same time, being too minimal can introduce needless risks. A plan that fails to recognize contingencies for your incapacitation, foresee family dynamics, or minimize taxes can leave loved ones in the dark or cause unnecessary strife.

“The ‘too simple’ estate plan we often hear is, ‘I want everything to go to my one kid, they’ll know what to do with it, I know they’ll be fair to their siblings,'” says Joseph Fresard, attorney at Simasko Law. “This is not a good idea and makes things very complicated for that child, even if they try to follow their parents’ wishes. It’s usually worse than having no plan at all.”

Your estate plan must match your personal and financial circumstances. If you have a significant investment portfolio, a business, or multiple beneficiaries with different needs, it may be worthwhile to consider more involved options with the help of a professional. But if your life isn’t too complicated, your estate plan should still be straightforward and complete enough to protect your wishes and plan for unforeseen situations.

“Tailoring each plan to each situation is key to balance,” says Enders. “Plans should be clear enough to execute with ease while also being thorough enough to address risks, needs, and every asset.”

5. Leaving Loved Ones Uninformed

It’s natural to want to avoid discussions surrounding death or money, but leaving your loved ones in the dark about what’s going to happen after you pass away or are incapacitated can be a serious misstep. Clear and direct conversations can help prevent conflict and confusion when you can no longer share your wishes.

“It’s unfortunately all too common for individuals to not communicate wishes or estate plans to heirs before they die,” says Zegel. “Everyone always thinks they have more time, but awkward conversations are often the first ones to get punted.”

So, how can you approach such an important topic? While you can start talks on your own, Zegel says a good way “to defuse the tension and navigate these conversations is to involve an advisor,” providing a knowledgeable, disconnected third-party resource. “The right advisor can bring a much-needed neutrality to help families communicate more effectively, especially in times of crisis and transition. This will help preserve wealth and, more importantly, prevent shock, resentment and disputes after death,” she says.

Clear and proactive communication, especially if you have adult children who have their own lives and needs, is essential to creating a legally sound and smooth estate plan. A financial advisor or estate planning attorney can help explain things clearly and break down how everything will take shape.

Another helpful way to communicate is to describe directions within your documents. According to Hishaw, “Additional written explanations in the estate document will put things in perspective regarding why the decisions were made.” However, she stresses to be careful not to overshare or “divulge too much information,” as this could lead to “resentment,” heirs “questioning your wishes” or even “potential destruction of estate planning documents” to reverse your choices.

Transparency is essential to avoid misunderstandings or conflict. Whether you do so through conversation with a professional, in your documentation, or both, it’s important not to overlook sharing your intent and wishes clearly with your loved ones and beneficiaries.

Key Takeaway: Stay Mindful and Proactive

Estate planning is just as much about having the right documents and structures in place as it is ensuring they fit into your life and reflect your wishes when you need them. Taking a proactive and mindful approach throughout the entire process can help you stay on top of critical mistakes and keep your plan in order.

Whether it’s updating beneficiaries, selecting an executor, or navigating difficult conversations, it’s a good idea to work with a professional, such as a financial advisor or qualified estate planning attorney. They’ll be able to share insight into your plan and identify opportunities to improve or align it with your goals and needs.

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