by Jamie Catmull, Contributor at Forbes on November 7, 2024
in: Money > Personal Finance
Estate planning is essential for families who want to secure financial stability and build generational wealth. However, potential pitfalls can undermine even the best-laid plans. Experts such as John H. Nebeker, Patty Fitzsimmons, and Barbara Gitty emphasize the importance of thoughtful planning, organized financial records, and professional guidance in creating a lasting legacy. Here are the biggest estate planning mistakes to watch out for and tips to avoid them.
Not Having An Estate Plan At All
Barbara Ginty, CFP and host of the Future Rich Podcast, says the most significant mistake families make is not having an estate plan.
“The biggest mistake is not having an estate plan. If you want to create generational wealth, you need a comprehensive estate plan,” she says.
Gitty warns against DIY approaches or hiring general practitioners who lack estate planning expertise.
“Estate planning is a specialized type of law, and it is prudent to hire a qualified professional. The cheapest is not the best option here,” she advises.
Neglecting Proper Accounting And Record keeping
Patty Fitzsimmons, vice president of accounting at Aquilance, explains how failing to maintain financial records can create serious complications.
“Not creating or maintaining a solid accounting and record keeping system by a family is one of the biggest mistakes in the estate planning process. Simple family financial statements can be beneficial in guiding decisions toward creating a good structure and favorable outcome,” she says.
Accurate financial information provides clarity, helping families make informed decisions. Fitzsimmons highlights that a clear understanding of finances is key to avoiding costly mistakes.
“Making assumptions about the current state of a family’s situation is another big mistake we see. It is particularly important that the current reality is clearly understood. A statement of net worth and schedule of investments can provide advisors a starting point in evaluating potential structures based on liquidity, asset allocations, and outstanding debt.”
Fitzsimmons also underscores the importance of understanding cash flows and outstanding commitments.
“Information surrounding annual cash flows and historical spending can guide decisions on distributions and liquidity needs. Outstanding commitments and investment characteristics may help inform about suitability for placement in trusts, partnerships, or other entities,” she explains.
In essence, financial transparency aids in designing an estate plan that truly meets the family’s needs and goals.
Simply Leaving Money To Children
A huge mistake in estate planning is assuming that leaving a large inheritance to children will build generational wealth. John H. Nebeker, author of “The Family Bank,” notes that families who succeed in retaining wealth often take a different approach.
“Seventy percent of inherited wealth is depleted by the second generation and 90 percent by the third. Families who buck the trend do something different,” he writes. “These families replaced gifts with loans, and entitlements with opportunities. Instead of an inheritance, they created their own ‘Family Bank’ to retain certain assets for their benefit rather than the consumption of family members and others.”
Handing over large sums without structure can sometimes do more harm than good. Lump-sum inheritances can quickly dissipate, especially if beneficiaries lack the financial skills to manage these funds. William Vanderbilt II, who inherited substantial wealth, once shared a reflection on this impact:
“My life was never destined to be quite happy. It was laid out along lines which I did not foresee, almost from earliest childhood. It has left me with nothing to hope for, with nothing definite to seek or strive for. Inherited wealth is a real handicap to happiness.”
Vanderbilt’s words underscore that inherited wealth, without purpose or guidance, can be more of a burden than a benefit. Thoughtful planning, structure, and financial education can help prevent these issues.
Failing To Fund Trusts
Trusts are practical tools in estate planning, but they only work if funded correctly. Ginty points out that many families overlook this critical step.
“Another mistake I see is not funding a trust. If the trust is not funded, then it is just a very expensive piece of paper,” she explains.
Funding a trust involves transferring assets into it; without this, the trust cannot fulfill its intended purpose. Ginty notes that families often create trusts without transferring assets into them, rendering the trust ineffective.
“If you have a good attorney who specializes in estate planning, this is less likely to happen,” Ginty adds, emphasizing the need for professional guidance.
Relying On Assumptions Instead Of Facts
Estate planning requires an up-to-date, accurate understanding of a family’s financial position. Fitzsimmons stresses the danger of assumptions, noting they can lead to misaligned plans.
“Making assumptions about the current state of a family’s situation is another big mistake we see. It is particularly important that the current reality is clearly understood,” she says.
She recommends that families prepare a statement of net worth and an investment schedule, giving advisors a starting point to evaluate potential structures. Additional details, like cash flow and spending patterns, are also important in making decisions about liquidity and distribution needs.
“Outstanding commitments and investment characteristics may help inform about suitability for placement in trusts, partnerships, or other entities,” Fitzsimmons explains.
Failing To Maintain Financial Records After Implementing The Plan
Creating an estate plan is only the beginning; maintaining it is equally important to ensure long-term success. Fitzsimmons points out that as family circumstances change, robust financial records are essential for making necessary adjustments.
“Once the initial estate plan is implemented, the maintenance of financial accounting records is equally important in the process of maintaining generational wealth,” she says.
“Current financial information based on the estate plan allows for more robust operational oversight and financial analysis,” says Fitzsimmons.
Organized records allow advisors to make timely adjustments, especially when families experience changes.
“Organized financial records can also provide greater transparency and peace of mind to family members and beneficiaries,” she adds, underscoring the value of accurate documentation in fostering wealth stewardship across generations.
In conclusion, creating a successful estate plan requires more than drafting a will or setting up a trust. Experts Barbara Ginty, John H Nebeker, and Patty Fitzsimmons remind us that estate planning is a specialized field requiring attention to detail and expert guidance. By avoiding these common mistakes, families can ensure a lasting, positive impact for future generations.
To learn more about Aquilance or make an appointment to speak with us personally, please contact us.
