Navigating Your Legacy: 10 Common Estate Planning Pitfalls to Avoid

Estate planning is a cornerstone of a robust financial strategy, allowing you to thoughtfully determine the future of your accumulated wealth and possessions. While it’s a critical component, it’s also one that’s frequently overlooked. A 2024 survey by Caring.com revealed that fewer than one-third of Americans have a will, highlighting a significant gap in preparedness.

Many individuals postpone or avoid estate planning for various reasons: uncertainty about where to begin, perceptions of complexity, or the misconception that they don't possess enough assets to warrant such a plan. Regardless of your life stage—whether you're newly married, starting a family, or approaching retirement—estate planning is a vital consideration. At INPAC Wealth Advisors, we've guided numerous clients in establishing comprehensive legacy strategies for their families. We want to share our insights to help you steer clear of common missteps we've observed over the years.

Here are ten frequently encountered estate planning mistakes and how to avoid them:

1. Neglecting a Comprehensive Estate Plan Altogether

The most significant oversight in estate planning is the absence of any plan at all. A recent survey indicated that only 32% of Americans had a will in 2024, a 6% decrease from the previous year. Some explain this by simply "not getting around to it," while others erroneously believe estate planning is exclusively for the affluent.

Without a well-structured estate plan, your assets may not be distributed according to your intentions, potentially leading to family disputes during an already challenging time. The legacy you've meticulously built throughout your life may not be preserved and passed on as you envision.

Taking the first step towards managing these potential pitfalls often begins with a simple conversation. Many of our clients collaborate with a dedicated estate team, typically including an estate attorney and a Certified Public Accountant (CPA). A financial professional with a deep understanding of your personal financial strategy can be an invaluable addition to this team, providing crucial coordination and perspective.

2. Overlooking Essential Supplementary Documents

While a will is fundamental, it’s just one piece of the puzzle. A will clearly articulates your wishes after your passing, including naming an executor for your estate and designating guardians for minors or dependents with special needs. It also outlines the distribution of your property and other assets.

However, a comprehensive estate plan extends beyond a will to include documents such as a Financial Power of Attorney and an Advance Health Care Directive.

Financial Power of Attorney (POA): This legal document designates an individual to make financial decisions on your behalf should you become incapacitated or otherwise unable to do so. Without a Financial POA, your family could face significant legal hurdles and delays in managing your financial affairs if you become unable to manage them yourself.
Advance Health Care Directive (Living Will): This document empowers a designated person to make decisions regarding your medical treatment, including end-of-life care. It often specifies your preferences for care in various medical scenarios. Establishing an Advance Health Care Directive is an act of foresight and care, alleviating the burden of difficult decisions from your loved ones during emotional times.

3. Underestimating the Value of Trusts

Understanding the distinction between a will and a trust is crucial when determining the optimal strategy for your estate goals.

A will serves as a basic instruction manual for asset distribution upon death and can address critical decisions like guardianship for minor children. However, wills have limitations and are not the sole instrument to consider in estate management.

A trust is a fiduciary arrangement where a third party, known as the trustee, holds assets on behalf of beneficiaries. A significant advantage of trusts is their ability to bypass the often lengthy and public probate court process, facilitating a more rapid transfer of assets to your beneficiaries compared to a will.

Trusts can be tailored to be as simple or complex as your needs dictate, offering remarkable flexibility in fulfilling your specific wishes. Trusts may be particularly beneficial in situations such as:

Managing inheritances for multiple heirs.
Directing assets to grandchildren or future generations.
Attaching specific conditions to an inheritance.
Designating a portion of your wealth for charitable contributions.
Managing a large or complex estate with diverse considerations.

It is important to remember that establishing a trust involves intricate tax rules and regulations. Trusts offer distinct benefits but also have limitations. Therefore, we strongly advise clients and prospects to consult with experienced professionals who are well-versed in these rules and can provide expert guidance on trust strategies.

4. Ignoring the Sunset of the Tax Cuts and Jobs Act (TCJA)

The 2017 Tax Cuts and Jobs Act significantly increased the lifetime estate, gift, and generation-skipping transfer tax exemptions. For 2024, these federal exemption amounts are $13.61 million for individuals and $27.22 million for married couples. However, unless Congress takes action, this law is set to expire on December 31, 2025, at which point the exemption amounts will revert to their 2017 levels, adjusted for inflation.

As we approach what Forbes describes as "the Great Wealth Transfer"—with over $84 trillion projected to pass to younger generations in the coming decades—the urgency to develop an estate strategy that capitalizes on the current TCJA provisions is paramount.

Consider these two potential strategies to leverage the current law:

Spousal Lifetime Access Trusts (SLATs): A SLAT is an irrevocable trust established by one spouse for the benefit of the other. Through a SLAT, you can gift all or a portion of your lifetime estate tax exemption to your spouse, who will have access to these assets during their lifetime as the beneficiary. This strategy allows you to remove assets from your taxable estate by utilizing your federal estate tax exemption. For instance, funding a SLAT in 2024 could allow a contribution of up to $13.61 million, an amount that may be significantly reduced if you wait until 2026. Spouses may also consider establishing reciprocal SLATs to benefit each other. It’s important to note potential downsides of SLATs, particularly in the event of divorce or if your spouse predeceases you.
Dynasty Trusts: These irrevocable trusts are designed to endure for the lifetime of the trust creator's living descendants. They can effectively utilize the trust creator’s gift and generation-skipping transfer tax exemptions. Transferring property to a dynasty trust through a taxable gift and a subsequent sale to the trust can be a sophisticated approach to managing tax exemption amounts. While beneficial for long-term wealth preservation, consider that future generations may feel constrained by the terms of the trust.

As highlighted, the use of trusts involves complex tax regulations. We strongly recommend collaborating with a financial professional who thoroughly understands your unique circumstances before making any decisions related to trust strategies.

5. Overlooking Non-Financial Assets

Beyond financial portfolios, many homes contain deeply personal and sentimental items, such as family heirlooms, cherished artifacts, or specific collections. Those responsible for managing your estate after your passing may not be aware of your wishes for these non-financial assets. It’s crucial to document whether you intend for certain heirlooms to remain within the family, be sold, or be donated. A detailed "letter of instruction" can provide invaluable guidance regarding these sentimental possessions, ensuring your non-financial legacy is honored.

6. Forgetting Digital Assets and Access

In our increasingly digital world, most individuals have a significant footprint of digital assets, ranging from photographs stored in cloud services to social media profiles and online accounts. Your loved ones might not even be aware of the extent of your digital presence, or they may lack the necessary access. Your estate plan should specifically address access to your digital tools, accounts, and data, ensuring that your digital legacy is managed according to your wishes and that important memories or information are not lost.

7. Failing to Periodically Review Your Estate Plan

An estate plan is not a "set it and forget it" document. Regularly reviewing your estate strategy is crucial to prevent unintended consequences and potential legal complications. An outdated plan may no longer accurately reflect your current wishes, financial circumstances, or legal goals. Several significant life events should prompt you to review and potentially revise your estate strategy:

The birth or adoption of a child.
The death of a primary or secondary beneficiary.
The passing of your minor child's guardian.
Marriage or divorce.
The purchase or sale of significant property.
Starting or selling a business.
The death of your appointed estate executor.

Consider these life changes as "trigger events" that prompt a review of your plan. Even in the absence of such events, it's advisable to meet periodically with your estate team to discuss whether your estate strategy aligns with current best practices and evolving laws.

8. Prematurely Adding a Child's Name to Your Home's Deed

Parents sometimes add an adult child's name to their home's deed with the intention of facilitating property transfer. However, this can inadvertently lead to complications. Listing your child's name on the deed typically grants them legal ownership of a portion of your home. While you may have complete trust in your child, it's crucial to understand that they would become a co-owner, and unforeseen issues, such as their financial difficulties or legal judgments against them, could impact your property. Your estate team can help you explore alternative strategies for transferring property to your children that mitigate these risks.

9. Designating Only a Single Beneficiary

A sound long-term strategy involves naming more than one beneficiary for your assets. If a primary beneficiary predeceases you, having a designated contingent beneficiary can smoothly guide the estate process. It’s wise to list multiple contingent beneficiaries and be as specific as possible in your estate instructions to avoid ambiguity. This layered approach ensures that your assets are distributed as intended, even if unforeseen circumstances arise with your primary beneficiaries.

10. Neglecting Family Communication About Your Estate

Failing to communicate openly with your family about your estate decisions and intentions can foster misunderstandings and even lead to legal challenges. Without clear knowledge of your wishes, your family may not be fully prepared to manage the assets and responsibilities associated with inheriting your estate, potentially failing to preserve your legacy as you intended.

A 2023 study highlighted how emotions surrounding inheritances can unfortunately divide families. The study found that 30% of heirs whose parents had passed away felt their parents did not adequately discuss how their money would be handled. Among those cases, a staggering 56% reported that this lack of communication resulted in financial complications and issues after the parent’s death. Don't let this happen to your family.

Consider initiating an open and honest dialogue with your family about your estate strategy, involving them in the process where appropriate. While these conversations may feel challenging to begin, they are absolutely critical for all involved to ensure a smooth transition and uphold your legacy.

Seeking Professional Guidance

Attempting to develop and implement an estate strategy without professional assistance can lead to missed opportunities, inefficient asset transfers, and unintended tax consequences. This is precisely where assembling your estate team becomes invaluable. As financial professionals, we often serve as the "quarterback" of this team, coordinating the efforts of various specialists, ensuring everyone is aligned, and contributing our unique financial planning perspective.

The ideal time to begin thinking about your estate is now. Discussing what happens after you're gone is rarely easy, but most common estate mistakes can be effectively managed if addressed early in the planning process. By investing the time upfront, you can position your family to navigate future challenges with greater ease and clarity. At INPAC Wealth Advisors, we are committed to working collaboratively with you to develop a comprehensive estate strategy that is tailored to your unique needs and goals. The gift of preparedness you provide to your loved ones may be more profound than you realize.

Disclosures: This content is provided for informational purposes only and should not be construed as legal, tax, or investment advice. Always consult1 with a qualified attorney, tax professional, or financial advisor regarding your unique circumstances before making decisions related to estate planning.

INPAC Wealth Advisors is not a law firm and does not provide legal advice. The information provided herein is based on current laws and regulations as of the date of publication, which are subject to change.