From unfunded trusts to poorly coordinated beneficiaries, there are some common planning landmines to avoid
by Harry S. MargolisMr. Margolis is long-time estate, special needs and elder law practitioner in Boston, Massachusetts, as well as the founder of ElderLawAnswers.com and the Academy of Special Needs Planners. Most recently, he has been answering consumer estate planning questions at AskHarry.info is the author of Get Your Ducks in a Row: The Baby Boomers Guide to Estate Planning.
It is surprising, and unfortunate, that a lot of people make mistakes with their estate planning, mistakes that can often cause themselves and their families considerable trouble, cost and angst. Fortunately, these common mistakes are usually not too difficult to avoid.
In our practice, we recognize eight eight mistakes that occur regularly:
Failure to Plan
Most American adults don’t have estate plans
The older you are, the bigger risk you run by not planning. If you’re 40 years old today, you have a 98% chance of making it to 50 if you’re a woman and a 97% chance if you’re a man. While those odds are great, if you have minor children it’s still important to plan given the 2 or 3% chance that you won’t be there for them in 10 years.
The odds get much worse as you get older. If you’re 60 and a woman, you still have a 90% chance of making it to 70 and the odds for men are 85% that they’ll make it that far. These odds then get much worse. If you’ve made it to 70 almost a third of men and just over a quarter of women won’t make it to 80. Of course, your own health and family history may alter these odds favorably or unfavorably.
What’s the point of these morbid statistics? Without an estate plan, the state has one for you, which may or may not be what you would want. The so-called “intestacy” rules give your estate to your nearest living relatives, including your spouse and children, then grandchildren, and, if none, to your brothers, sisters, aunts, uncles and cousins. This may work if you are part of an Ozzie and Harriet nuclear family, but not if you or your loved ones don’t fit the standard model: relationships without marriage, remarriage to someone who is not the parent of all your children, or you have children with disabilities, drug habits or problems managing money.
As important as naming who will receive what you have, is appointing a personal representative or “executor” to be in charge. Otherwise, your legacy may be a conflict over who will have this role and the power it entails.
Failure to Update
Many parents take the responsible step of executing an estate plan when they first have children, but don’t update it. Decades later, the people named to be personal representative no longer make sense. Issues develop within families that need to be accounted for as part of the plan. While given the odds described above, usually this doesn’t ultimately cause a problem, once you hit age 60 the odds of becoming ill or passing away begin to increase dramatically. It’s time to review your plan. A lot may have changed since your children (if any) were young.
Confusion About Planning for Death and Planning for Life
Illness and accidents are as much a fact of life as death. While we think of estate planning as determining what will happen to our stuff after we die, planning for someone else to step in for us if we become incapacitated, whether due to illness, accident or dementia, is at least as important. If you do nothing else, make sure you have a durable power of attorney and a health care proxy or power of attorney (depending on your state) in place. Then the people you choose, rather than the people who choose for you, will make your financial, legal and health care decisions when and if you cannot do so for yourself.
Missing or Out-of-Date Beneficiary Designations
While wills are very important for naming the personal representative of your estate, they have become less and less important in determining who gets what when you die. Your retirement accounts go to your designated beneficiaries. Joint accounts go to the other joint owner or owners. Property in trust passes to the named beneficiaries under the terms of the trust documents. Life insurance passes to the beneficiary. Most investment houses now permit you to the name beneficiaries to your investment accounts.
These are all methods of avoiding probate and simplifying how property is passed at death. Unfortunately, people often lose track of who they have named. A former spouse or lover may still be on a life insurance policy. A beneficiary may be someone with a drug problem who shouldn’t get access to money. The financial institution itself may lose track of the beneficiary designation. It’s important to review your beneficiary designations for all assets periodically to make sure they are still what you want.
Lack of Coordination
We often see clients who have beneficiary designations on their accounts that are inconsistent with the terms of their wills or trusts. The will may give everything to nieces and nephews equally, but an investment account may name a favorite niece, or at least one who was the favorite when the account was created. This can create confusion and conflict when the client dies. The favorite niece may pocket the money in the account while her siblings and cousins feel that her being named was simply an oversight or a matter of the client’s confusion.
Further, it’s not unusual to see trusts that aren’t funded, losing benefit of the probate avoidance, tax planning or asset protection for which the trust was designed. As a lawyer-accountant I was speaking with the other day, lawyers often think only in big picture terms and accountants only at the nitty-gritty, with no one connecting the two. Of course, this is a gross generalization, but it’s not unusual for a client to come to see us with beautifully drafted documents, but assets titled in a way that the documents won’t work. We have found that financial planners can be crucial to making the whole plan work.
Lack of Transparency and Communication
How often have we seen politicians and corporations get in trouble for the cover up, rather than for what they were trying to cover up? Similarly, we’ve often seen family conflict flair up when family members are less than transparent. Children may have unrealizable expectations. In one case we had, the husband in a second marriage died suddenly and his children thought his wife had pocketed his money, since they thought he had a lot more money that was actually the case.
Siblings may feel that the sister exercising a power of attorney is helping herself out at the same time she’s helping her parents. In another, a daughter spent a lot of her parents’ money fixing up their house, perhaps not wisely, but one of her brothers is suing because he thinks she took the money herself. And, of course, she’s resentful because she did so much work for her parents that was not appreciated.
We have found that more rather than less openness and communication can avoid these misunderstandings and suspicions.
While not necessary in all cases, written instructions can be very useful. It can help your heirs considerably if you designate who will receive which items of personal property, such as artwork, furniture, china and silverware. This doesn’t have to be listed in your will; you can make a list and give it to your personal representative.
If you leave your assets in trust for your children or grandchildren, is your trustee supposed to use her judgment in determining when to make distributions? Should she pay the downpayment on a house, or the full purchase price? What about the “educational” trip around the world? A letter from you about your values and how you would like the trust used can help guide the trustee. This can be especially important if one or more of the beneficiaries has special needs. The trustee needs real guidance about the beneficiary’s abilities and your vision for his future.
Not Consulting a Lawyer
Okay, this is rather self-serving and not necessary in all cases. LegalZoom, Willing.com, RocketLawyer, among other on-line do-it-yourself programs produce excellent documents. As with the rules of intestacy described above, if your situation is relatively straightforward – one spouse, if any, 2.5 perfect children, no tax complications – by all means use one of these programs. And if the alternative for you is no estate plan at all, use one of these programs.
But if your situation is more complicated – a partner to whom you’re not married, children from prior relationships, more than one marriage, a child with special needs, a taxable estate (over $1 million in Massachusetts), a concern about long-term care costs or asset protection – you’re better off consulting with an attorney who can answer you questions and work with you to develop a plan that matches your family and your goals. ◊