A number of well-known celebrities who were worth millions, including Princess Diana, Prince, Heath Ledger, Michael Jackson, and Kurt Cobain, have passed away in recent years without an up-to-date estate plan or without any estate plan at all. As a result, lengthy and stressful legal battles were fought over their assets and were decided by people they did not get to choose.
While most people don’t have the same amount of wealth as these celebrities, it doesn’t make estate planning any less important to be able to leave a legacy and pass down wealth to family members.
The No. 1 Estate Planning Mistake
When it comes to estate planning, the biggest mistake is to not establish an estate plan at all. Anyone – even wealthy individuals, like those listed above – might have a number of reasons why they fail to create or update their estate plan. The process involves continually contemplating one’s own death, a thought that many of us want to avoid. One might also have complex family dynamics at play that they are unsure of how to handle in regard to their estate plan. Some people may also feel hesitant to engage with a lawyer and financial advisor.
If the reason for not having an estate plan is to avoid interacting with family members where the dynamic is strained, that dynamic is exactly why one is needed. Otherwise, your assets might be controlled by those you don’t wish to control them after you have passed.
Life is filled with all kinds of changes, such as getting married (and divorced), having kids, moving, career changes, and receiving inheritances. For any of these events, you may want to reprioritize your goals and decide if you need to update your legal paperwork.
With each life change, ask yourself questions such as these:
- Who are your beneficiaries?
- Do you want them to receive your assets all at once or as part of a phased plan?
- What about charitable and philanthropic endeavors?
- Who will make important medical and financial decisions for you if you were to become incapacitated?
The answers to all of these questions will be prone to change every few years, if not more often.
Another thing to remember is that, while a lawyer can work with you to update your estate plan, it’s up to you to make sure the titling on your bank and investment accounts reflects your wishes. If not, someone who you know longer wish to be a beneficiary (such as a former spouse or relative with whom you no longer speak) will be given that part of your assets.
As the IRS does not treat all accounts equally, it’s important to be mindful of which assets are left to whom when it comes to accounts such as individual retirement accounts (IRAs), Roth IRAs, traditional brokerage accounts, and life insurance policies.
For example, you may want to mark qualified accounts for charitable organizations as they won’t have to pay taxes on the distributions.
You will also want to consider the financial status of your heirs.
Say you have 2 sons, and one makes over $750,000 annually, while the other earns about $80,000. If you had $500,000 in a traditional IRA and $350,000 in Roth IRA, it would make more sense to leave the Roth IRA to the higher earner instead of leaving each son $425,000 from each account. As he is in a higher tax bracket, he could actually end up with more money because those proceeds are tax-free.
Tending to an estate plan is a lot like caring for a garden: Unless you give it the attention it deserves, you can end up losing much of what you had put your time and energy into creating. It is important to tend to your estate plan with the same care and attention, because the stakes could be enormous for you and your loved ones.
For assistance creating or updating your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.