Five Biggest Mistakes of Estate Planning: Fundamentals of Investing
In this Fundamentals of Investing video, CFA Brian Dress interviews VP of Investments Freddie Garcia to discuss the five most common estate‑planning mistakes and how to avoid them. They begin by stating that anyone who owns assets—home, retirement accounts, jewelry—needs an estate plan. The first mistake is failing to define clear goals; they recommend taking an inventory of assets and deciding who should receive each item and in what form, especially for minors. The second mistake is incorrect or outdated beneficiary designations; they warn about deceased or remarried beneficiaries, the need for per‑stirpes clauses, and introduce the “5 × 5 power” trust technique that limits a beneficiary’s access to 5 % or $5,000 annually. The third mistake is overlooking liabilities; they stress assessing debts, future expenses, and using insurance to cover obligations and tax liabilities. The fourth mistake is not updating the plan after major life events; they advise reviewing the plan at least annually and immediately after events such as divorce, birth, death, or changes in account balances. The final mistake is attempting to do it alone, which leads to procrastination, failure to notify relevant parties, and lack of oversight. They advocate working with professional advisors and, when selecting a trustee, favoring a corporate trustee or a combination of family and corporate trustees to avoid conflicts. The video concludes with a call to action for viewers to seek professional help before it’s too late.
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Hello and welcome again to our Fundamentals of Investing series. These videos are designed to help explain important concepts you need to know as you work to secure your retirement and build your personal wealth. I'm Brian Dress, Director of Research here at Left Brain, joined by one of our advisors and our resident expert in planning, our VP of Investments, Freddie Garcia. Freddie, thanks for joining us.
Brian, thanks for having me. And it's always a pleasure to get to talk to people about these important topics.
That's right, Freddie. In these videos, we want to answer the questions we hear from investors on a daily basis, both clients and others that we speak with. We often discuss stocks and bonds here at Left Brain, but sometimes the most important moves that investors can make to avoid costly mistakes are financial planning choices. So today we're going to cover the 5 most common mistakes we see with estate planning. So the first question, Freddie, is a general one. Who needs an estate plan?
Well, I would say anyone who owns something needs an estate plan because what an estate plan is, is just determining who gets what you have and what you've left, you know, what you've created. So if you own a home, if you have an account, if you have a 401(k), an IRA, all these things would be called estate planning because you have to determine who gets this stuff and how you want them to receive it. That's an estate plan.
Very much so, Freddie. We think everyone could probably benefit from having some sort of estate plan, whether it's a complicated situation or a simple one. We want to make sure we get what we have goes to who we want to and our wishes are followed. So the first mistake that we see is not defining our goals. So first question, Freddie, what's the— what is the danger of not defining your ultimate wishes in your estate plan?
Well, when you don't define your goals, ultimately someone else or some law is going to determine who gets to keep your, who gets your assets. And that's typically not what I want to happen with my assets. And I don't, there's no one who I've asked that, if I ask 'em, who would you like to get your home or who would you like to get your 401(k)? I've never heard anyone say to me, I don't care, it doesn't matter. Most people want to have a definitive way of how that gets distributed. And the danger of not setting how that happens is that it doesn't get done. Brian, you and I have been doing these meetings with clients and sometimes that question comes up. They haven't thought about it, but we'll ask them when we sit down with clients. That's one of the benefits of working with an advisor is that we're going to ask you those questions. We're going to ask you, what are your plans for your home? What are your plans for your 401(k)? How would you like these things distributed? And many times people will take the time to think about it and they think about it and they tell us that's their wishes. But if they don't have a specific plan in place, you've sat there with me when I've had to tell the client, well, that's not how it's going to happen if you don't actually make that happen. Those are the dangers of not defining your goals, is that someone else can get it, or if you haven't updated beneficiaries, or if you've gone through a family change, people that you may originally have not wanted to receive that, those assets, ultimately can end up being the beneficiaries of it.
Okay, Freddie, certainly agree that defining your goals is, is a crucial process, but sometimes people don't know exactly where to start with things like this. So can you talk about a process of defining goals in this context?
The process would be, first off, when we talk about it has to go back, who needs an estate plan? To determine if you need an estate plan, you have to decide, do I own anything? What do I have? That I want to leave behind. So you want to take an inventory of the things that you own, accounts that you have, possessions, and then you want to determine if I have an IRA, if I have a home, if I have an automobile, it could be as simple as that, or even jewelry. Who do I want to receive that and how do I want them to receive it? Because that's a key step in determining and defining those goals. It doesn't have to be one person gets it all. You may have a home that you want distributed a certain way. You may have a 401(k) or an IRA you want distributed another way. You can split assets too. Sometimes the assumption is that you have to leave, you know, you can't split an asset. You sure can. So determine how you get that. And it doesn't have to be equal amounts either. So those are all defining the goals. And the second part of that is how they receive that amount. Obviously, a home is something they receive, you know, in its entirety, but an asset or an account can be distributed over time. So that's the defining goal of saying, who do you want to get what and how do you want them to receive it? If it's a minor child, they can be listed down, but they may not be able to get the assets till later on. So that's all about defining your goals.
Okay, Freddie. And that's a good segue into our second mistake that people often make with estate plans, and that's not getting your beneficiaries right. So first thing, beneficiaries, it's a big word we throw around all the time. It just basically means who do you want to have get your stuff? A lot of times we see problems with people having incorrect beneficiaries down or not making the changes when some— a life change happens, a divorce or something along those lines. Freddie, can you talk about some of the horror stories you've seen with incorrect beneficiary designation?
Many times when, again, this benefit of working with an advisor is we sit down and review your beneficiaries, make sure they're up to date. A lot of times people have beneficiaries listed on there that people who have passed away, or they haven't updated beneficiaries. Perhaps they got remarried, perhaps, uh, children now have had children and they need to update that and put something called the per stirpes clause on there because now they want the assets to go not just to the child but the descendants of that child if something were to happen to them. So those are all things that are important to be listed on there, but many times we don't think about it. A lot of times it's the to have set it and forget it. The other part when determining beneficiaries is, is that the right beneficiary for you? When you determine a beneficiary, is that person going to distribute the assets the way you want? And to how you want them to receive it. One of the things I was talking to you about earlier, Brian, when it comes to beneficiaries, is when people want to set something aside for someone, they can use different techniques. One of them is called the 5x5 power in a trust, because when it comes to a beneficiary, you have to remember is you are in a sense giving them the asset. Once it's given to them, you've passed away, they can spend it any way they want it. And the average inheritance amount is spent in less than 2 years. So a simple procedure people can use if they don't want someone to spend it all right away is they can do something called the 5x5 power in a trust, where it means that the beneficiary of this is going to have to either spend 5%— they receive 5%— or $5,000, whichever is the greater of the two. So that's a great technique for someone who doesn't want the person to receive it all in one lump sum.
Yeah, it's a great technique, especially for younger folks and others that you're not so sure they're going to be able to hold on to that money when you pass it down. The other thing, Freddie, is you've got to come up with someone that's going to execute your trust or your will and your final wishes. How do you approach the subject with those people? It does certainly make sense to talk to them before something bad happens to you.
Yeah, you're absolutely right. So that's the other part of the horror story. Many times people assume my trust is set up, I've got beneficiaries, I have a trustee. Now, the assumption is that that trustee is competent and qualified or interested. And many times they may be one or not in all any of those categories, so they don't actually follow up with what they're supposed to be doing. So many times people appoint a relative, which is typically what we see the most, or they appoint the person who is both the trustee and the beneficiary. Well, if they're both the beneficiary and the trustee, they can pretty much do anything they want. So in the case of that 5 by 5 power, if you have someone who is the trustee and the beneficiary, they don't have to follow it. They want to take the account all out, they can end up doing that because is nobody is governing them or making sure they're doing it the way you want it to. So one of the things we encourage a lot of people to do is to go out and seek a corporate trustee. They can work with a family member, so you can still have a family member and a corporate trustee, but that corporate trustee's going to make sure taxes are done completely and money is distributed the way it needs to get done. Because without that, you can say and write down everything you want, but somebody still needs to follow that and somebody needs to make sure that that is being done appropriately. And that's the benefit of using a corporate trustee. And also I've seen too where if you appoint one member of the family as the trustee, it creates nothing but family disharmony because then they have to say no to relatives or they can become the bad guy in many situations when it comes to distributing the trust.
And certainly the last thing we want to leave behind is family disharmony. So that's a good point, Freddie. Let's move on to the third mistake. So the third mistake we often see is not considering our liabilities. So Freddie, if we have dependents, you've got kids, I've got kids. A number of crucial liabilities there. Children, sometimes spouses, depend on our incomes and also other contributions that we bring to the family. There's education expenses, other expenses. Those can really get pretty expensive over, over a number of years. Can you speak to us some of the key ways we can protect against those liabilities should something happen to us, protect our families, and what can go wrong as far as this goes?
Yeah, this is why it's so important to always update your estate plan, because one of the things I said earlier that was one of the first steps is is you have to take a measurement of your inventory of what you own and what you owe on and what liabilities you have. Example, you, you still have minor children. I have one minor child, but I have two that are still, well, three that are dependent on me. So we have to keep those in mind, decide how much portion needs to be left behind for them. And if I don't have the assets yet to cover that, then it still needs to come from another source. This is where an insurance plan might have an impact on you. So that's the benefit of estate planning is because you're doing the inventory to find out what you do have, and what you have to cover and still safeguard against. So doing that liability and finding out if there's an insurance need, or you may find out too that there's a tax obligation after you've done that inventory, and maybe you don't want that tax and obligation covered by the assets you left behind. So that's where a proper insurance need can come in. So it can cover things you owe, obligations you still have behind, or cover possible tax obligations to make it so your assets smoothly transfer to the people that you want.
Definitely, Freddie. So a lot of us have an insurance need. So if you don't have insurance, it's something you certainly want to consider and talk to somebody about. The fourth mistake, Freddie, the fourth mistake we see: not updating our estate plan over time. So Freddie, you kind of alluded to this in a couple of the previous segments. How often should we update our estate plan and then how should we do that?
That's the benefit again, and I've said this multiple times, of working with an advisor, because we try to meet with our clients at least once a year. So a simple answer would be once a year. But the correct answer is anytime an any major life event happens. Don't wait till your meeting with your advisor if you just got divorced. Don't wait to your meeting of your— with your advisor if one of your kids just had a kid and now you want to add that per stirpes clause on there. Don't wait to meet with your advisor if one of your beneficiaries has passed away and now you need to find a new beneficiary. So the correct answer is anytime any major life event happens, you need to update your estate plan. If a major life event has not happened, then when you do that review with, with your advisor on a yearly basis, it'd be a good time to discuss it because account balances change, So then it's a good thing to cover over. But the first step is once that life event happens, one of the first things you ought to do is update your estate plan. Okay.
And then that takes us to the last mistake, mistake number 5, and that's going it alone. So, Freddie, there are dozens of ways things can go wrong with your estate plan. And since we talk about putting a home in trust a lot of the times, but if the home is still— if you still own the home, you got to go in there and put the home in the trust. So there's two steps to that process. I mean, there are a lot of different details here that you got to make sure you do right. What can go wrong with people doing their own estate plan and what kind of mistakes have you seen?
So one of the biggest things that ever happens with any estate planning is procrastination. And what people have to remember is if you are working with a team of professionals, you are less likely to procrastinate because someone else is working with you to make sure things get done. If you are going alone, what do you think the chances are of procrastinating? Are, are they more or would they be less if you're working with, with a team?
Yeah, a lot more.
Yeah, a lot more. So honestly, that is the biggest mistake of when we see going it alone is that people procrastinate. And if they were to get it done, then it's kind of that leave it and forget it because there's no one there to remind them on that review to make sure that they need to update it. They can also make mistakes by doing it by again just assuming things will get done because they said it, but they don't notify anything. Because one of the things we do when we work with our clients is we tell them, okay, we've set all this stuff in place. Now you have to tell somebody, whether that be your advisor, whether it be that family members that are involved. So that's one of the many risks of not doing it alone is that you forget to notify other people. Not only do you procrastinate, but you don't tell anyone else. And remember, after the— this kicks in, you're not around to remind anyone anymore. So that's why it's important to, to make sure you have a team of professionals that you're working with to stop you from procrastinating. And people know and are aware of what your wishes are.
That's a good point, Freddie, is, is working with a professional. We can help you make sure you've got all your wishes down on paper. As you said, those thoughts go into the grave with you. So getting it all down on paper, making sure everything's in tip-top shape. And making those changes when you have major life events are kind of the key tenets of what you need to do in terms of an estate plan. It certainly does help to have someone on your side to make sure you're doing all those things. Freddie, appreciate you being with us. We laid out 5 of the common mistakes we see with, see with estate planning. Really, one of the most important things you can do with your financial plan is getting that estate plan in place and making sure everything that you've worked hard for can pass down to your, your family and future generations.
Definitely, Brian. I'll leave everyone with this. The only time that it's too late to start working on an estate plan is after it's too late, when you're either passed away or incapacitated. So if neither of those have happened to you, there is still time to take the steps and work on your estate plan.
Thank you, Freddie. Thanks for everybody for being with us. If you have needs for estate planning and if you want to talk to us and see if we can help you get all your wishes down on paper, definitely contact us. We'll put our information down below. And let us know. We're happy to talk. Thank you. And we will speak with you next time.
Thank you.
