5 estate plan pitfalls to avoid

Review your estate plan regularly to ensure it meets your needs.

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Key takeaways

  • Make sure your will, trusts, beneficiaries, executors, trustees, and health care documents are up to date.
  • Consider the impact of both state estate taxes and income taxes on your estate plan.
  • Weigh the impact of federal income and trust tax rates as well.
  • Schedule time with your family to discuss your intentions about the distribution of your assets.
 

Do you remember when you last reviewed your estate plan? Many of us complete an estate plan and then fail to revisit it for years. It is important, however, to review a plan every 3–5 years due to ever-changing tax laws and major life events, such as a birth, marriage, divorce, or death.

Below are 5 common pitfalls of an outdated estate plan. If any apply to you, take time to meet with your estate planning team to review and, perhaps, update your plan.

1. The wrong executor or trustee is named

Do you know who your fiduciaries are? A fiduciary is someone appointed to take legal control over assets for the benefit of another person (the beneficiary). It is a fiduciary's legal responsibility to act in the beneficiary's best interest. The two types of fiduciaries often seen in estate plans are executors and trustees.

Executors are typically appointed in a will and are given control of your assets until they are ultimately distributed to the beneficiaries. Executors are responsible for collecting all the assets of the deceased, paying final debts, paying expenses, and filing any estate tax returns.

Trustees control the assets held within trusts, which may have been set up during a person's life, or at death under the terms of a will. While an executor's role is typically for a finite period, a trustee's role may continue either forever or until the trust is terminated. A key role of the trustee is to make distributions to a beneficiary in accordance with the trust agreement.

Although fiduciaries are bound by certain standards of law, it is most important to name individuals you trust. Other important considerations are the age, maturity, and level of financial knowledge of the fiduciary. It is possible that the individuals who had fit most of these qualifications no longer do.

Tip: Check to see who you have named as fiduciaries in your estate planning documents to determine whether you need to revisit these choices.

2. Assets and beneficiaries change over time

When a child is young, a key estate planning decision parents often make is to determine a guardian. However if your child is now an adult, new considerations may come into play and you may feel differently about their ability to handle a large inheritance. Further, if the adult child is married, an inheritance can easily be commingled with the spouse's assets. An inheritance outside of the trust will also be subject to any existing or future creditor claims.

Tip: Periodically review the ways that assets will be left to your children and encourage them to have the appropriate estate planning documents in place. 

Read Viewpoints on Fidelity.com: 6 reasons you should consider a trust

3. Health care privacy rights are not understood

The Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996, in part to establish national standards for protecting the confidentiality of every individual's medical records. Generally, health care powers of attorney, living wills, and advance health care directives should contain provisions waiving an individual's health care privacy rights with respect to their health care representatives.

These stipulations allow physicians and other health care professionals to share a patient's medical information with their representatives, empowering them to make informed health care decisions. Without these HIPAA authorizations, doctors may be unwilling to share medical information, which may impede decision-making regarding a patient's care and any end-of-life wishes.

Tip: Take stock of your family's health care powers of attorney, living wills, and advanced health care directives, to ensure that health care representatives can make informed decisions regarding your family's care.

4. Your state residency changes

Where were you living when you drafted your most recent estate plan? Each state has its own estate and income tax laws, and it is important to plan appropriately.*

Some states are common law property states and others are community property states with significant differences when it comes to transferring assets. States also have different estate tax exemption amounts. And differences between state exemptions and the federal exclusion may mean certain estates are now subject to a state estate tax, even if they are exempt from the federal estate tax. And married couples may be surprised that some states levy estate taxes after the first spouse's death.

Tip: Review your estate plan with your attorney and tax professional, with an eye toward reducing federal and state estate taxes, and make sure to reevaluate and potentially update your plan if you establish residency in another state.

5. Changes in the federal tax laws impact estate taxes

Changes in the federal tax law make it increasingly important to focus on the income tax consequences of estate planning in addition to the estate tax consequences. For estates still subject to federal estate tax, the top federal estate tax rate is 40%. These rates must be compared with the top federal income tax rates of 37% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax.

Furthermore, trust income tax rates must be taken into consideration. Trust income over $12,751 is taxed at the top federal income tax bracket of 37%. Therefore, when transferring assets to a trust for estate planning purposes, consideration should be given to the potentially negative consequences of higher income taxes. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in potentially lower tax brackets.

Successful estate planning requires more than just having signed the initial documents: Your plan should evolve as your circumstances do.

Learn

If you are looking for help setting up an estate plan or updating your beneficiaries, connect with a Fidelity advisor. Take the time to read more about estate planning and managing your wealth.

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