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Everyone in America has a will, even if they've never paid for one. That's because every state has laws dictating how the value of your house, your bank accounts, cars, furniture and other possessions will be divided if you die without a document that spells out your wishes.
Die without a plan, and you leave your heirs a nightmare. And your alma mater and all those charities you meant to help will get nothing. Luckily, you can avoid this if you don't make these common estate-planning mistakes:
1. Procrastinating. Over 40 percent of Americans age 45 or older have not drawn up a will, a 2003 AARP survey found; that figure rises to 57 percent among all adult Americans, according to the FindLaw legal website. The excuses are as creative as the ones kids use with their teachers.
Ed Slott, a CPA and author of "The Retirement Savings Time Bomb … and How to Defuse It" (Penguin, 2003), says this is the number one excuse he hears: "If I do an estate plan, I will die." His response: "That's true, but if you don't complete an estate plan you will also die, but with a big fat mess."
At the very least, you should have a plan that directs where your property will go. You can do that in many ways—in, for example, a will, insurance policies or trusts for minor children, special bequests or by naming beneficiaries or joint owners. Which tools you use depend on what you have and where you want it to go.
2. Winding up in probate court. Many Americans overlook simple steps to ensure that their estate—or at least a big chunk of it—avoids being processed through probate court, says Mary Randolph, senior legal editor at Nolo, a California publisher of consumer legal books and software. Probate proceedings can drag on for months or even years and can eat up to 5 percent or more of an estate's value.
As part of your estate plan, you can fill out a payable-on-death form for your bank, credit union and savings and loan accounts. Upon your death, the money immediately goes to the person or persons you named on those accounts.
In every state but Louisiana, New York, North Carolina and Texas you can fill out a similar transfer-on-death document for stocks, bonds and mutual funds that are not in retirement accounts.
3. Keeping poor records. "The biggest mistake people make is not regularly updating their estate plans," says Michael Foster, an estate planning attorney with Reish Luftman Reicher & Cohen in Los Angeles. "Every two or three years, blow the dust off your estate plan and go through it."
When estate plans are old, children are more likely to argue about what dad or mom really intended, which can cause horrible fights. Another problem with outdated documents can arise if the executor you named years ago now cannot oversee your estate. You can avoid this by naming an alternate executor and revising your will from time to time.
4. Failing to update beneficiary forms. Most people never look at these forms, which declare who gets the money in your IRA or other retirement accounts, after mailing them to financial institutions where they've established the accounts.
"That's always a killer mistake for an IRA," Ed Slott warns, especially for people who get divorced. Suppose that a man never bothers to take his ex-wife's name off his IRA beneficiary form. When he dies, his widow obviously expects to receive the money, but the former wife pockets it instead. Remember, too, to keep copies of IRA and other beneficiary forms with your estate documents.
5. Being disorganized. Keep your estate documents, a list of your assets and account numbers and your safety deposit key in one place. Tell the person who will be handling your estate where to find this information. When files are in a shambles, relatives can spend weeks or months tracking down assets.
A friend of lawyer Michael Foster spent two years searching for money he suspected his late mother had hidden between book pages and in other odd places. One of Foster's clients kept a large amount of money in his freezer until the attorney convinced him to thaw out the cash. Leaving a disorganized estate can also dramatically inflate legal bills after a death, regardless of the size of the estate.
6. Failing to hire a qualified attorney. Don't be tempted to write your own will and leave it in the cookie jar. Before choosing an attorney, it's best to meet first to make sure it's a good fit. If the attorney seems arrogant or unfriendly, look elsewhere. Most estate attorneys will not charge for a get-acquainted session.
Keep in mind that what you're paying for isn't a piece of paper, it's for advice on all your options in making estate plans.
7. Fixating on estate taxes. Few Americans will ever pay estate taxes, but they still obsess about avoiding them. Mary Randolph says people are always asking Nolo for software for complicated estate tax-avoidance strategies, even though "it's safe to say that only a very small number of people will have to worry about estate taxes."
That number declined even further for 2004 when the basic exclusion from federal estate taxes jumped to $1.5 million for an individual. The estate tax is scheduled to disappear entirely in 2010 but will return the next year, with the exclusion set at $1 million, unless Congress makes the tax's repeal permanent.
8. Not consulting future heirs. Talk to family members about their inheritance before it's too late, advises Robert Whitman, a law professor at the University of Connecticut School of Law. You may assume you know what's best for your children, but making decisions in secrecy can later lead to bitter feelings.
"Talking to the kids is everything. This is nothing to keep secret," says Whitman, who has seen the results when parents remain mum.
One wealthy couple, for instance, privately decided to leave their extensive real estate holdings in Maine to a son who had struggled all his life. They concluded that they didn't need to bequeath anything to their other son, who had a flourishing medical practice. By the time the second parent died, however, the physician's practice had dwindled considerably, and the black sheep had become wealthy.
"Unfortunately," Whitman says, "things like that happen all the time."
Lynn O'Shaughnessy is a freelance writer in California.
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