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Steer clear of these 5 common mistakes

Estate, Gift, & Trust Planning

Wealth management and estate planning go hand in hand. A well-designed estate plan can help ensure that you share your hard-earned wealth according to your wishes and protect it from creditors and tax liability. As you develop your plan, or review an existing one, be aware of these five 
common mistakes.

  1. Failing to fund your revocable trust

A revocable or “living” trust is the centerpiece of many estate plans. This type of trust can help you avoid probate and manage your assets in the event you’re incapacitated. For a revocable trust to do its job, however, you must “fund” it. That means transferring title to your assets to the trust. Your advisors may help you fund the trust at the time it’s created, but as you acquire new assets, you need to transfer title to your trust. Otherwise, those assets may be subject to probate upon death.

  1.  Neglecting to review and update your plan

It’s critical to review your plan periodically and update it to reflect any changes in your goals or financial circumstances. A review is particularly important after major life changes, such as marriage, birth of a child, divorce or death  of a loved one. 

These changes often require adjustments to your plan to ensure that it continues to meet your wishes. For example, if you neglect to update beneficiary designations, you may inadvertently leave assets to an ex-spouse or deceased person’s estate rather than to  your children, parents or siblings.

  1.  Not planning for incapactiy

Much of estate planning focuses on what happens when you die. But it’s equally important to have a plan for making financial and health care 
decisions should you become too ill or incapacitated to make them yourself. Execute a financial or property power of attorney as well as a health care power of attorney (sometimes referred to as a living will, advance directive or health care directive). These documents allow you to name someone you trust to manage your financial affairs and make health care decisions on your behalf in the event you’re unable to. They also provide guidance on making those decisions (including your preferences regarding life-sustaining medical treatment). 

Revisit your health care directives periodically and update them to reflect changing circumstances. It’s also a good idea to execute new ones every few years, even if nothing has changed, because financial institutions and health care providers sometimes are reluctant to honor older documents.

  1.  Holding assets jointly with a child or other family member

When you own real estate or other assets as “joint tenants with right of survivorship,” they pass to your co-owner automatically without 
probate or the need to set up a trust. But this strategy has some big disadvantages. For example, when you add someone to the title as joint owner, an asset is exposed to claims by that person’s creditors. What’s more, with certain assets, such as bank or brokerage accounts, your co-owner can sell or dispose of them without your consent. And you won’t be able to sell real estate or pledge it as collateral without your co-owner’s written authorization. This type of ownership can also trigger higher estate, gift and income taxes. 

  1.  Forgetting to make contingency plans for beneficiares

What happens if a beneficiary predeceases you? To avoid having state law dictate who receives your property, name contingent beneficiaries on retirement accounts and insurance policies. And be sure your will or trust is clear on what happens if an heir predeceases you. 

Suppose you’re splitting your  assets equally between your two children. If one of them dies,  what happens to his or her share? If your plan (or state law) provides for assets to be distributed per capita (“by the head”), they will  go to the surviving child, potentially disinheriting your grandchildren. In contrast, if assets are distributed per stirpes (“by the branch”),  then half will go to your surviving child and the other half will go to the deceased child’s family.

Choose Trustees With Care

A trust is only as effective as the trustee you appoint to make critical investment and financial decisions. Many people name a spouse or other family member as trustee, but there are several drawbacks to such choices. Unless the person is a financial professional, he or she may not be qualified to manage the trust assets. And a family member who’s also a beneficiary of  the trust may have a conflict of interest.

Another option is to name a disinterested third party, such as a CPA, attorney or Lenox Advisor or an institutional trustee, such as a trust company or bank trust department. These third parties are more likely to be  free of conflicts of interest, specialize in trust management, and have investment and tax expertise. For the best of both worlds, consider naming two co-trustees: a trusted family member and a professional or institutional trustee.

Avoid Pitfalls

These pitfalls are just a few of the many estate planning mistakes that can trip up even financially sophisticated individuals. To avoid errors, work 
with qualified advisors who will design and maintain a plan  that meets your financial goals as they evolve.