Estate Planning: 10 Common Mistakes

Here are some common mistakes people make when planning their estates.

In an ideal world, we would live long, healthy lives with just enough warning of our impending demise to get our affairs in order. In reality, many of us won’t get that chance. We could die unexpectedly, or an illness or disability could rob us of the ability to make decisions for ourselves. We might procrastinate a little too long and leave our loved ones without the information they need during a stressful and difficult time.

Estate planning is a difficult task to tackle, but one that shouldn’t be rushed. Watch for these common mistakes.

Mistake 1: Not having a plan

Think estate planning is for someone older or richer than you are? Experts warn we all need an estate plan regardless of our age, marital status or financial status. No matter how much we have, it’s our chance to have a say in how our assets are divvied up when we’re no longer around. Clearly stating your wishes can save your family a lot of confusion and disagreement.

What happens if you die without a will? (A status known as “intestate”.) The law gets to decide how much of your assets go to which parties — namely spouses and blood relatives. The defaults may not work for you, especially if you have a blended family. Things get even stickier if your heirs don’t live in the same province you do.

Mistake 2: Thinking all you need is a will

A will is important, but it doesn’t cover things such as accounts to which you designate a beneficiary, jointly owned properties or businesses, and joint bank accounts. Wills don’t tell you how much in capital gains tax your loved ones may pay — or how this tax will be paid.

Experts say we need to look at the “big picture” and tend to other aspects of our finances. For example, we should designate beneficiaries for things like our RRSPs and pension benefits (if applicable), and make sure we have adequate life insurance. Beware that naming your estate as a beneficiary rather than a person can keep your money tied up for longer.

Don’t forget to name a power of attorney — chances are you’ll need one before you need an executor.

Mistake 3: Automatically leaving everything to your spouse

For many people, it makes sense to leave their entire estate to their spouse so he or she is provided for. The assumption is said spouse will then pass on all of the assets to their children, who eventually pass on the assets to the grandchildren. However, it doesn’t always happen that way. A spouse could remarry and the assets might go to their new partner, for example.

Experts say it’s worth considering whether this strategy is the best choice for you. You may want to set up a small trust for your grandchildren’s education, for example, or give cash gifts while you’re still alive in lieu of an inheritance (especially if you live in a country with estate taxes).

Mistake 4: Choosing the wrong executor

Many people choose someone who is close to them to handle the matter of settling their estate — despite the fact that most people have no experience in this area. However, experts suggest a different tactic: treat it as a job.

What should we look for in a good executor? Not only does this person need to be healthier than we are and likely to outlive us, experts say to look for someone with the knowledge and the time. Being good with numbers and good communications skills are assets. You can pay a third party such as a lawyer or accountant to handle the task, but many people avoid these fees by appointing a friend or family member.

If you’re naming more than one executor, make sure they can work well together.

Mistake 5: Assuming lawyers are always right

We turn to lawyers because they have expertise we don’t — but that doesn’t mean we shouldn’t be informed decision makers. Experts advise to read through drafts of any documents and check for errors. Don’t be baffled by “legalese” — if there’s something you don’t understand, ask for an explanation or clarification.

Mistake 6: Steering clear of lawyers altogether

Unless you happen to be a lawyer, chances are you’re going to need some help beyond a notary. A lawyer can explain your options, make sure you’ve covered every aspect of the planning and help get the paperwork in order. Laws and policies may differ depending on where we live, so general self-help advice doesn’t always apply.

If your estate is simple and straightforward, there are DIY books and kits that can help you save on legal fees. Even if you do most of the planning yourself, experts suggest having someone with the right expertise look over the documents.

Mistake 7: Not having a medical or advanced directive

You’ve got your finances in order, but what about your health? How far should doctors go with life-saving measures, and who should make decisions about your care if you aren’t able to? Experts warn the time to think about a power of attorney, healthcare proxy and a living will is while you are still able to make these decisions yourself. These steps help ensure your wishes are followed, and they can ease the decision-making burden placed on your loved ones.

In Canada, the legislation surrounding such directives is handled at the provincial level. The End of Life Project at Dalhousie University has a good list of resources for more information.

Mistake 8: Tying up all your cash

Capital gains tax isn’t the only expense your heirs may face. Cash from investments, properties and insurance policies doesn’t become available immediately upon your death. Experts advise to keep some assets liquid to cover those “final expenses” such as a funeral and disposal of your remains.

Mistake 9: Not reviewing your plan

Circumstances change, and so should our estate plans. Experts recommend revisiting your plan every few years — especially when there is a major life event such as marriage, divorce, the death of a spouse or family member, or a new child. You might want to change your will to include your blended family or change the beneficiary on your accounts from your parents to your adult children when they reach a certain age.

Of course, change isn’t just about you and your family — experts also warn that changes to legislation and tax laws should prompt a review as well.

Mistake 10: Being disorganized

You’ve got a plan and it’s up to date — now what? Experts say good organization can make a big difference when someone has to step in and handle your finances or estate. Consider: Do your heirs know which lawyer or accountant you work with? Can they find a copy of your will?  Do they know how to find information about your insurance policies, investments and bank accounts?

You don’t have to give away this information right now. A good filing system and a net worth statement outlining your assets, debts and expenses can go a long way to help. If you don’t already have one, a safe deposit box at your bank can keep your crucial documents safe in the event of a fire or break in.

There’s no one right way for everyone to plan their estate, but experts do agree on one thing: we should make the decisions while we are able to do so.  We know it isn’t an easy thing to do, but it’s better for everyone to have a plan in place.

Sources: Advisor.ca, Canadian Bar Association, EstatePlanning.ca, Forbes.com, The Globe and Mail, Investopedia, Self-Counsel.com