Common Estate Planning Mistakes to Avoid

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Estate planning is a vital process that offers you peace of mind, knowing that your family will be taken care of and your assets will be distributed according to your wishes after you’re gone. 

Whether you’re just beginning to consider the possibilities and actively thinking about how to structure your plan, or you’ve already started putting your wishes into documents, it’s crucial to proceed carefully. 

There are several common mistakes that can significantly jeopardise the effectiveness of your estate plan. 

Avoiding these pitfalls ensures that your intentions are honoured and your loved ones are protected without unnecessary legal complications or disputes.

Not Creating an Estate Plan at All

Many adults procrastinate or entirely avoid creating an estate plan, often due to the discomfort of thinking about death or the belief that it’s only necessary for the wealthy. 

In reality, everyone can benefit from having an estate plan, regardless of the size of their assets.

Without an estate plan, the distribution of your assets will be handled according to the Irish laws of intestacy, which may not reflect your personal wishes. 

This can lead to significant emotional and financial strain on your family, who might have to endure a lengthy and costly probate process.

Understand Estate Planning

It’s important to understand that estate planning involves much more than just the distribution of assets; it encompasses a broader view of your overall situation and family needs. 

This includes implementing protection policies, starting or enhancing a retirement plan, devising a succession plan for any business interests, and managing mortgage responsibilities

By considering all these elements, you can develop a strategic plan that ensures your family’s financial security and continuity in your absence. 

Failing to Communicate Your Estate Plan to Your Family

Keeping your estate plan a secret can lead to shocks and disputes among your family members after your death. 

Transparent communication about your intentions helps prevent misunderstandings and conflicts among those you care about. 

It’s advisable to discuss your decisions with your family to prepare them and potentially resolve any issues ahead of time.

Not Naming Contingent Beneficiaries

Primary beneficiaries are those who first receive your assets, but what happens if they predecease you? 

Not naming contingent beneficiaries can lead to your assets being distributed according to default laws rather than your specific wishes. 

For example, Michael and Sarah are a married couple with no children. They have a simple estate plan where each names the other as the sole beneficiary. Unexpectedly, they both pass away in an accident. 

Without naming contingent beneficiaries and having no children, their assets are likely to be distributed according to general inheritance laws. 

This could result in their estates being passed on to distant relatives or even being claimed by the state, rather than being allocated to close friends or charities that were important to them.

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Overlooking Minor Children

It’s something that parents may not always consider, but nominating guardians for your children in a will is critically important. 

You can choose multiple guardians to safeguard your children’s future security, ensuring there is a plan in place should your primary or secondary choices become unavailable for any reason. 

Single Parents

For single parents, naming a guardian in your will is a safeguard to ensure your child is taken care of by someone you trust, should something happen to you. 

Without a designated guardian, the responsibility for your child could default to the courts, who may appoint someone you would not have chosen. 

This decision is one of the most important aspects of estate planning for single parents, as it provides certainty and stability for your child’s future in your absence.

Married Couples with Children

Married parents typically share equal guardianship rights and responsibilities towards their children. However, it’s crucial to prepare for unlikely scenarios where both parents might pass away simultaneously. 

By naming a guardian in your will, you ensure that your children will be cared for in a manner that aligns with your values and wishes, preventing a potentially distressing guardianship battle and providing continuity in their upbringing.

Cohabiting Couples with Children

Guardianship plans might be more complicated for children born to unmarried couples.

While the mother automatically receives guardianship rights, the same is not true for the father, even if his name is on the birth certificate. 

This absence of automatic guardianship makes it essential for cohabiting couples to legally establish who should care for their children if one or both parents pass away. 

Given that the number of cohabiting couples with children increased to 85,262 in 2022, reflecting a 12% rise since 2016, it is increasingly important for these couples to address guardianship in their estate plans to protect their children’s welfare and legal rights.

Ignoring Tax Implications

Estate taxes can significantly diminish the value of the assets passed on to your beneficiaries if not properly managed. In Ireland, understanding liability for Capital Acquisitions Tax (CAT) is crucial. 

The tax applies to gifts and inheritances if they exceed certain thresholds, which vary depending on the relationship between the giver and the recipient. 

Estate planning offers several strategies to reduce the tax liabilities faced by your beneficiaries. These methods include making gifts during your lifetime, setting up trusts, and taking advantage of tax reliefs that apply to specific assets or business interests (for example, Business Relief). 

By implementing these approaches, you can significantly lighten the tax burden on those who inherit your assets.

Tax-Free Thresholds

Under current legislation (as of April 2024), parents are allowed to give their children gifts or inheritances valued up to €335,000 tax-free, under the Group A threshold. 

It’s important to note that this threshold is cumulative, meaning it includes all gifts and inheritances received since 5 December 1991. 

When the total value of these gifts and inheritances exceeds the threshold, any additional amounts are subject to the standard Capital Acquisitions Tax (CAT) rate of 33%.

Small Gift Exemption

Transferring assets early through gifting is a straightforward and tax-efficient method that is often underutilised during one’s lifetime. 

One of the benefits of the small gift exemption is that these gifts do not count towards the tax-free threshold. 

This means that giving small gifts does not affect the tax liability of the rest of the estate when it comes to inheritance. In other words, you can give small, tax-exempt gifts without impacting how much tax will be due on the remaining estate.

Each person has the opportunity to gift up to €3,000 annually to another person without incurring any taxes. 

This approach provides a simple way to begin distributing parts of an estate ahead of time. Additionally, this method offers the advantage of personal control over the assets and transfers, eliminating the need to depend on an executor for these actions.

Learn more about inheritance tax by reading our articles:

 

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Forgetting Digital Assets

Digital assets include everything from online bank accounts to social media profiles and digital photo libraries. Failing to include these in your estate plan can lead to complications and losses. 

For instance, valuable cryptocurrencies could be inaccessible, or social media accounts could remain active after your death. It’s important to include instructions on who should access these digital assets and how.

Consider organising and securely storing login details and passwords for your pension provider app so your family can easily access information about your retirement accounts, savings plans or investments.

Additionally, explore our article to learn what happens to your pension plan when you die, whether it happens before or after your retirement.

Failing to Update Your Will

Life is full of changes, and your estate plan should reflect this dynamic. Failing to update your will after major life events such as a marriage, divorce, or the birth of a child can lead to outdated dispositions that no longer align with your intentions. 

For example, an ex-spouse might still be listed as a beneficiary, or new children might not be included. 

Regular reviews and updates ensure that your estate plan accurately represents your current circumstances and wishes.

Start or Review Your Estate Plan with True Wealth

Whether you’re considering starting your estate plan or looking to update an existing one, True Wealth is here to assist you. 

Navigating the complexities of taxes, legislation, and the most efficient strategies can be overwhelming, but our team is dedicated to ensuring you don’t miss any crucial information. 

At True Wealth, we provide expert guidance tailored to your unique situation, helping you secure your legacy and achieve peace of mind. 

Let us help you make informed decisions that align with your long-term objectives.

We are also experts in personal and business protection, savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth management and extraction.

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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.

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