5 Estate Plan Oversights That Can Leave Your Heirs Destitute

Most of us treat home planning like a trip to the dentist: We know it’s necessary, but we’ll find an excuse to skip it.

Maybe you think you’re not rich enough to need a system, or maybe you’re convinced that a quick DIY from the Internet has you covered.

Here’s the cold, hard truth: Real estate isn’t just a yacht-club set. If you own a home, have a retirement account or care about who raises your children, you need a plan.

And you need to fix it. If you don’t, you’re leaving behind a legal nightmare.

I have seen families torn apart over something as small as the kitchen table because the paperwork was unclear. Don’t let that be your issue. Here are the biggest home planning mistakes almost everyone makes – and how to avoid them.

1. Thinking a will is the end of the story

Many people believe that once they sign a will, they are done. It’s a “set it and forget it” deal, right? It’s wrong. A will is only one part of the puzzle, and it’s often the most ineffective one.

Wills usually have to go through probate, which is a court-supervised process for distributing your assets. It’s slow, public and can be incredibly expensive.

In some states, probate fees can eat up 3% to 7% of the total value of your estate before your heirs see a dime.

If you want to keep the courts out of your business, consider a living trust. It allows your assets to pass directly to your beneficiaries without the hassle of probate. Also, it stays private, so the neighbors don’t know exactly what you left behind.

2. Ignoring the designation of beneficiaries

Your will does not control everything. Accounts with named beneficiaries — such as 401(k), IRA and life insurance policies — go directly to anyone listed on those forms.

If your will says everything goes to your current spouse, but your 401(k) still lists your ex from 20 years ago, guess who gets the money? Your ex. The financial institution is legally bound to follow the form, not your will.

You should review these signs annually. It takes five minutes, and prevents your hard-earned savings from ending up in the wrong hands. Don’t make these common beneficiary mistakes.

3. Failure to repay your trust

Creating a trust but failing to fund it is like buying a high-end safe and leaving your jewelry on the kitchen counter. A trust is just a piece of paper until you transfer your assets to it.

This means you have to re-register your house, your brokerage accounts and your bank accounts in the name of the trust. If you don’t, those assets are still yours in the eyes of the law, and will go directly to probate when you pass away.

I’ve talked to many people whose parents paid thousands of dollars to a lawyer to set up a trust but never bothered to change the title to the house. So their children ended up in court anyway. Don’t be that person.

4. Forgetting is a living part of the system

Estate planning isn’t just about what happens when you’re gone. It’s about what happens when you’re still there but you can’t make your own decisions. A stroke, car accident or sudden illness can leave you paralyzed in an instant.

If you don’t have a strong power of attorney and a health care representative — someone who can make medical decisions for you — your family may have to go to court just to pay your bills or talk to your doctors. It’s a layer of stress they don’t need in times of crisis.

You need to name the person you trust to manage your finances and the person who will make medical decisions for you. It’s not fun to think about, but it’s the most loving thing you can do for your family. Here’s a guide to essential estate planning documents you shouldn’t skip.

5. Avoiding state taxes

You may have heard that the federal estate tax exemption is huge – $15 million per person currently. Because of that, you might think you’re in the clear. But don’t celebrate just yet.

While you may avoid Uncle Sam, your condition may require surgery. Many states have their own estate or inheritance taxes with very low thresholds. In some places, the tax man starts hitting estates worth around $1 million.

Check the specific laws of your state. If you’re in a high-tax situation, you may need more advanced strategies to keep your money and your heirs, where it belongs.