Essential Estate Planning: Avoiding Common Mistakes

Key Takeaways

• Forgetting to update beneficiaries after major life events can exclude family members from inheritances.

• Naming minors as direct beneficiaries bypasses trust protections. Specify trust arrangements on beneficiary forms.

• Without careful estate planning coordination, blended families can unintentionally disinherit children from prior marriages.

  
  

Most people don’t enjoy planning for their own demise. However, it’s crucial to review your will, estate plan, and beneficiary designations periodically. If they’re not correct or up to date, they can override the instructions in your will. If you’re a Novi client, we will review your beneficiaries every year. We also check your will, powers of attorney, and other estate documents every three to five years. This is unless something significant occurs, such as a death in the family, divorce, or the addition of a new child. These events require a review to ensure everything is still aligned.

Here are four of the biggest oversights we see and how to correct them:

1. Your Will Does Not Control Your Entire Estate

One of the biggest misunderstandings about estate planning is that not everything goes by the direction of your will. Your home and brokerage account investments flow according to your will. However, retirement accounts, life insurance, and annuities pass directly to the named beneficiaries outside of the court-supervised probate process. It’s vital to ensure that your will, trust documents, and all beneficiary forms are consistent with each other.

2. Naming a Minor as a Direct Beneficiary

Let’s say a couple in their 40s has three young children. Their will states that each child will inherit one-third of their money if they both pass away unexpectedly. However, because the kids are so young, the money would go into a trust until they reach certain ages. When we looked at their $5 million life insurance policy, we found that the children were named as contingent beneficiaries outright. This means that if both parents pass away simultaneously, the kids would split the full $5 million death benefit immediately. This would bypass the trust intended to manage their inheritance responsibly.

The insurance policy doesn’t necessarily follow the instructions in the will. We would need to update the language on the life insurance policy to specify that the money would go into a trust for the kids. This ensures that the funds are managed until they are old enough to handle their windfall responsibly.

I would say 80% to 90% of clients have stipulations in their wills that stagger their heirs’ inheritances based on milestones. For example, one-third may be distributed at age 25, another third at age 30, and the remainder at age 35. Some clients tie distributions to significant life events, like getting married or having their first child. Others may feel confident that their child, even at 18, is responsible enough to receive their inheritance outright. Whichever route you choose is acceptable; we just need to ensure it aligns throughout your entire estate plan.

3. Unintentionally Disinheriting Children from a Prior Marriage

When couples remarry later in life, it’s common for one spouse to have significantly more assets than the other. Once the families blend, the children of the wealthier spouse may feel they’ve lost a portion of their inheritance. This can happen if the parents’ estate is now shared equally with their half-siblings.

For instance, a couple we work with is each on their second marriage. The mother has three college-age daughters with whom she has a strained relationship. The husband has a pre-teen daughter from his previous marriage. When they updated their estate plan, I advised them to be careful. They own joint assets together and need to ensure that everything flows as intended for all children when they pass away.

They may want certain accounts to go to the wife’s three daughters, despite their strained relationship, while other accounts go to the husband’s daughter, with whom they have a great relationship. This situation can be intricate, which is why we have them working with an estate attorney. It’s more complex than simply putting together a will on their own.

It’s worth mentioning that Novi advisors are skilled at initiating delicate estate planning conversations. However, we use outside estate attorneys to draft wills, trusts, and other estate planning documents after having detailed discussions with our clients. Once completed, the attorneys pass the documents to us. We ensure that all client instructions and wishes are followed and that all beneficiaries are current and accurate.

4. Naming Contingent Beneficiaries

I’ve seen younger couples who are extremely busy with their careers and raising young children forget to update their plans after a child is born. For example, I reviewed a plan for a couple with four young kids who forgot to update their plan when their fourth child was born. If they had died suddenly, and we hadn’t caught the mistake, the fourth child would have been left out of the will. This child wouldn’t have received any inheritance or their share of the life insurance policy.

If you don’t name primary and secondary beneficiaries, it can get messy. Your estate essentially becomes the beneficiary, which is far less efficient. This process goes to probate and can be contested. That’s another advantage of having your assets in IRAs and life insurance. They’re not subject to the probate process and can pass to your beneficiaries in weeks rather than years.

The Importance of Regular Reviews

Regularly reviewing your estate plan is essential. Life changes, such as marriage, divorce, or the birth of a child, can significantly impact your estate planning needs. It’s crucial to ensure that your documents reflect your current wishes.

Additionally, it’s wise to consult with a financial advisor or estate attorney regularly. They can help you navigate the complexities of estate planning and ensure that your wishes are honored.

Conclusion

In the grand scheme of things, having all your beneficiaries and designations in order is a wonderful gift to give your loved ones. It helps them navigate your estate while grieving. Don’t hesitate to reach out if you or someone close to you has concerns about your will, estate plan, or beneficiary designations. I’m happy to assist.

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BRENDEN LEESE,