Estate Planning Tips: How to Avoid Common Pitfalls

Jeff Vistica
CFP®, ChSNC®, AIF®
May 30, 2024

Estate planning is a crucial aspect of financial managementthat ensures your assets are distributed according to your wishes after youpass away. However, even the most well-intEstate planning is a crucial aspect of financial management that ensures your assets are distributed according to your wishes after you pass away. However, even the most well-intentioned plans can go awry if not carefully crafted and regularly updated.

According to Rachel Feder, an estate planning attorney in San Diego, California, “The biggest pitfall is people delay completing their estate planning. However, there are so many benefits to having a solid plan in place. It allows people control over their decisions surrounding death and incapacity, avoids the lengthy court probate process, and provides a seamless transition at death or incapacity.”

Here are some of the pitfalls she identified.

Outdated Estate Plans

One of the most common mistakes in estate planning is failing to update your plan regularly. Life events such as marriage, divorce, the birth of a child, or the death of a beneficiary can significantly impact your estate plan. An outdated plan might not reflect your current wishes or legal requirements.

Review your estate plan at least every three to five years or after any significant life event. This ensures that all aspects of your plan are current and aligned with your present circumstances.

Incorrect  Beneficiary Designations

Beneficiary designations on assets like retirement accounts and life insurance policies supersede the instructions in your will or trust. It’s easy to overlook updating these designations, leading to unintended beneficiaries receiving assets.

Review and update beneficiary designations regularly to match your overall estate planning objectives. This step is crucial after significant life changes.

Failure to Plan for Incapacity

Don’t focus solely on what happens after your death and neglect to plan for potential incapacity. Without proper documents in place, your family might face legal hurdles to managing your affairs if you become incapacitated.

Incorporate documents like a durable power of attorney, healthcare power of attorney, and living will into your estate plan. These documents appoint trusted individuals to make financial and medical decisions on your behalf if you cannot do so.

Estate Taxes

Estate taxes can significantly reduce the value of your estate, leaving less for your beneficiaries. Many individuals underestimate the impact of these taxes or assume their estate will not be subject to them.

The amount that can pass free of federal estate, gift, and generation-skipping taxes increased in 2024 from $12.92 million to $13.61 million per person.  Unmarried individuals may exempt $13.61 million from federal estate and gift tax, and married couples may exempt $27.22 million.

Consult with an estate planning attorney or financial advisor to understand your potential estate tax liability. The federal estate tax exemption is set to decrease in 2026 to $5 million per person (adjusted for inflation), so it is important to start planning now if your estate will be subjected to estate tax when the exemption decreases.  Strategies like gifting, trusts, and charitable donations can help minimize the tax burden on your estate.

Consult with an estate planning attorney or financial advisor to understand your potential estate tax liability. Strategies like gifting, trusts, and charitable donations can help minimize the tax burden on your estate.

Ignoring Digital Assets

In today's digital age, many have valuable digital assets, including online accounts, cryptocurrencies, and digital media. Failing to account for these assets can result in their loss or misuse.

Create a digital estate plan with a list of your digital assets and instructions for accessing and managing them. Appoint a knowledgeable digital executor to handle digital assets.

Evidence-Based Strategies for Effective Estate Planning

To avoid these pitfalls, adopt an evidence-based approach to estate planning. This involves leveraging proven strategies and regularly updating your plan to reflect changes in laws and personal circumstances.

Establish Trusts

Trusts are versatile tools in estate planning that can help manage and protect assets, avoid the court probate process, reduce taxes, and ensure your wishes are carried out. There are various types of trusts, each serving different purposes:

Revocable Living Trusts: These trusts allow you to retain control of your assets during your lifetime and provide a seamless transfer to your beneficiaries upon death.

Irrevocable Trusts: Once established, these trusts cannot be altered. They offer significant tax advantages, including protection from creditors.

Special Needs Trusts: Designed for beneficiaries with disabilities, these trusts ensure that the beneficiary receives financial support without jeopardizing eligibility for government benefits.

Properly using trusts can reduce estate taxes and probate costs, making them an effective tool for estate planning.

Gifting Strategies

Gifting assets during your lifetime can reduce the size of your taxable estate and provide immediate support to your beneficiaries. The IRS allows annual gift exclusions and lifetime gift exemptions, enabling strategic gifting without incurring taxes.

For 2024, you can make gifts of up to $18,000 per year to an unlimited number of individuals with no federal gift or estate tax consequences.

Utilizing gifting strategies can help manage estate taxes and ensure that more of your assets are transferred to your beneficiaries.

Charitable Contributions

Incorporating charitable giving into your estate plan can provide tax benefits and support causes you care about. Charitable remainder trusts and donor-advised funds are popular options for integrating philanthropy into estate planning.

Charitable contributions can reduce estate taxes while fulfilling philanthropic goals, benefiting both the donor and charitable organizations.

Professional Guidance

Estate planning is complex and requires specialized knowledge. Working with an experienced estate planning attorney, financial advisor, and tax professional can help avoid common pitfalls.

Regular Review and Updates

Estate planning isn’t a one-time event. Regular reviews and updates are essential to keep your plan relevant and effective.

Major life events such as marriage, divorce, birth, death, or significant changes in financial status necessitate a review of your estate plan. These events can affect your beneficiaries, asset distribution, and overall estate planning goals.

Tax laws and estate planning regulations are subject to change. Keeping your estate plan up-to-date with the latest legal requirements is crucial to avoid unintended consequences.

Regularly updating your asset inventory ensures that all your assets are accounted for and appropriately titled. This includes real estate, investments, retirement accounts, life insurance policies, and digital assets.

Final Thoughts

Avoiding common pitfalls in estate planning requires a proactive and evidence-based approach. By regularly reviewing and updating your estate plan, leveraging trusts and gifting strategies, incorporating digital assets, and seeking professional guidance, you can create a robust plan that protects your legacy and ensures your wishes are fulfilled.

Jeff Vistica is the managing principal of Vistica Wealth Advisors based in Carlsbad, CA.  He is a CERTIFIED FINANCIAL PLANNER™, a Chartered Special Needs Consultant® a Chartered Financial Consultant® and an Accredited Investment Fiduciary®. He’s currently pursuing a masters degree in taxation, and he earned an Executive Financial Planner Advanced Certificate from San Diego State University and his bachelor’s degree from Loyola Marymount University.  

Vistica Wealth Advisors is an SEC registered investment advisory firm. Information was compiled from third-party sources believed to be reliable, however Vistica Wealth Advisors cannot guarantee the accuracy of that information.  Hyperlinks to this third-party informational content and websites are provided solely for reader convenience. Information provided is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Prior to implementing any strategy, everyone is advised to consult with the appropriately licensed professionals to assess your individual situations and needs.

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