The biggest mistake people make with estate planning is to fail do any planning at all. Often, this is the result of people mistakenly thinking that there’s no need for estate planning if their estate is smaller than the estate tax exclusion amount ($5.43 million in 2015).
What this line of thinking overlooks is that there’s a lot more to estate planning than just estate taxes. For example, the following are just a few important estate-planning considerations that have nothing to do with estate taxes.
Do you have a will, and is it up to date? There are many different ways that you might want to divvy up your assets, and there’s a good chance that your goals don’t line up precisely with your state’s intestacy laws (i.e., the laws that determine who gets what when somebody dies without a will). For example, you may want to leave a smaller portion of your assets to a particular heir because you gave him/her more financial assistance during your life. Wills are also important if you want specific people to receive specific items.
Are all of the beneficiary designations on your retirement accounts and insurance policies up to date? You do not want, for example, to have an ex-spouse accidentally listed as the beneficiary of your IRA, given that the beneficiary designation overrides what is written in the will.
Does the person you have chosen as executor know where to find all of your account-related documents? It’s not entirely rare for heirs to fail to find an account if the related documents are not kept with other similar documents.
During your retirement, should you be spending first from your retirement accounts or from your taxable accounts? If you are very confident that you will not outlive your assets, and you have assets in taxable accounts with large unrealized capital gains, it often makes sense to refrain from selling them, so that your heirs can inherit them with a stepped-up cost basis, thereby completely avoiding taxation on the gain.
And when it comes to retirement accounts, should you be spending first from tax-deferred accounts or Roth accounts? If you’re confident you will not outlive your assets, the higher your marginal tax rate relative to the marginal tax rate of your heir(s), the more advantageous it is to spend from a Roth rather than a tax-deferred account.
Does it make sense for you to have a trust? For example, a trust can sometimes be a cost-saving technique if it helps a significant amount of assets avoid having to go through a costly probate process. (Some assets, such as IRAs with designated beneficiaries, avoid probate anyway.) Alternatively, a trust can be helpful if one of your heirs is somebody who cannot make financial decisions on his/her own.