10 Ways to Destroy Your Estate Plan

This guide is intended to illustrate ten estate planning mistakes that can cost your loved ones dearly. From failing to properly title assets to attempting to do it yourself, these mistakes are repeated again and again and the consequences are always disastrous. Make a plan!

1. Failing to Understand How Your Assets Will Pass Upon Your Death

   Though most assets pass outside of Wills, many people still think their Wills control how their property will be divided. For example, any asset that is titled jointly with rights of survivorship will pass automatically to the surviving owner. These assets often include bank accounts, investment accounts, and savings accounts. Moreover, any asset that allows you to name a beneficiary (life insurance, annuities, IRAs, 401Ks, etc.) will not pass according to the terms of your Will. Only those assets that comprise your "probate estate" will pass pursuant to the provisions in your Will. By way of illustration, I recently had a client come into my office that had been named as the beneficiary of a life insurance policy for an ex son-in-law. He was being threatened with legal action by the deceased's sisters because the deceased's Will stated that everything was to be equally divided among the sisters. The sisters were under the mistaken assumption that life insurance proceeds would be distributed according to the terms of the Will. The good news for my client is that the terms of the Will had absolutely no bearing on how the insurance proceeds were paid out. At the end of the day, my client walked away with the $400,000 death benefit and the sisters were left without any legal recourse. The lesson here: MAKE SURE YOUR BENEFICIARY DESIGNATIONS ARE CORRECT!

2. Attempting to Plan Around Specific Assets

   It is generally a bad idea to attempt to plan around specific assets. Doing so increases the risk of accidentally disinheriting those you want to provide for. Think about the following simplified scenario: you have a bank account worth $100,000, a house worth $100,000, and a life insurance policy worth $100,000. Further, let's assume that you have three children, Child A, Child B, and Child C. You make the following designations: Child A is named as the transfer on death beneficiary of your bank account; Child B is added as joint owner on your home; and Child C is named as beneficiary of your life insurance policy. At the time you made these designations, all assets were equal in value. After making these designations, you sell your home and place the proceeds into your bank account. You subsequently let the life insurance policy lapse. The bank account will be payable on your death to Child A. The remaining children, B and C, will get nothing since the home has been sold and the life insurance policy is no longer in force. By planning around specific assets, you have effectively disinherited two of your children while one child, Child A, inherits everything that is left.

3. Failing to Minimize Taxes

   The current estate tax environment is constantly changing. In 2014, only a small fraction of estates will be subject to an estate tax. That is because Congress has allowed each individual to own $5.34 million worth of stuff before it is taxable for estate tax purposes. If you are married, your exemption is $10.68 million, or double, since the IRS does not tax transfers made between spouses. Further, the IRS currently allows "portability" between spouses. Portability allows a surviving spouse to use a deceased spouse's unused estate tax exclusion (up to $5.34 million in 2014). For a relatively small fee, all estate plans can inlcude optional tax planning provisions that will eliminate some, or all, of the estate tax that may be due on your death. While very few people are currently in a taxable situation, the danger we all face is Congress' inability to stick with a decision. If Congress decides that revenue from the estate tax system is too low, it can always lower the exemption amount to a level that will affect many more of us.

4. Failure to Avoid Probate

   Probate is the court proceeding that is used for proving a Will is legally valid, for paying the debts of the deceased, and for transferring the legal title of the assets of the dceased to his or her beneficiaries. The time frame for completing a probate can be anywhere from 6 months to 2 years or longer. The costs involved can quickly become astronomical with fees generally ranging anwhere from 2% to 5% of the estate value. Even a small estate that may have only one or two assets may still cost you $2,000.00 or more. Additionally, all probate filings are a matter of public record. IT IS EASIER TO GET A COPY OF A PROBATE FILE THAN IT IS TO GET A LIBRARY BOOK BECAUSE THE LIBRARY AT LEAST REQUIRES YOU TO HAVE A LIBRARY CARD! I can go to any courthouse, pull any probate file of any deceased person, and see exactly what his or her Will says, what assets are in the estate, who inherited which of those assets, and how much those assets are worth. Additionally, family members' names and address are often contained in the probate file. Will consests are also a very common occurrence. A disgruntled family member that writes a simple letter to a probate judge may tie up a probate proceeding for a year or more. Throughout this time, there will be multiple court hearings, lots of headaches and heartaches, and plenty of money spent. If you own property in multiple states (think vacation home), your family will have to open a probate proceeding in each state that the deceased owned property. If you have property in more than one state, you should consider creating a Revocable Living Trust during your lifetime that will hold the title to these properties and avoid the necessity of a probate administration period.

5. Relying on Joint Tenancy with Rights of Survivorship to Avoid Probate

   You may have heard that titling property as Joint Tenants with Rights of Survivorship (JTWROS) will remove the necessity of a probate proceeding. This statement is partially true but is very deceptive. Typically a husband and a wife will take title to property as JTWROS as a method to avoid probate. Upon the death of the first spouse, the property automatically transers to the survivor as a matter of law without the need for a probate proceeding. But what happens when the surviving spouse dies? At this point, the asset MUST be probated because there is no longer a surviving joint tenant to pass the property to. What about the common disaster scenario in which both spouses are killed simultaneously? In this instance, JTWROS is absolutely no help and TWO probate proceedings must be initiated. Half of the assets will be subject to the husband's probate, and half will be subject to the wife's probate. I often get asked the following question: "If my spouse dies, shouldn't I just name my children as joint tenants so that the property will automatically pass to them at my death?" While this strategy will work as a probate avoidance technique, this arrangement is fraught with dangers. In that scenario, a child that has creditor issues now has another asset that the creditors can go after. Worse yet, let's imaging that your child is involved in an automoble accident in which he or she is at fault. A court enters a judgment against the child for a large sum of money. Even though you are still living in your home, your home may be used to satisfy the judgment entered against the child. A Living Trust may be an appropriate solution to guard against the potential risks. You should speak with a qualified estate planning attorney in order to learn about all of your options.

6. Loss of Control by Adding Someone Else's Name to Your Account

   An example involving famous individuals perfectly illustrates the problem with adding additional parties to your accounts. In the early 1990s, Jill Goodacre, a famous model brom Boulder and who was engaged to Harry Connick, Jr., lost her checking account to her father's creditors. As reported in various newspapers here is what happened: She put her father on her checking account so he could pay her bills while she was traveling. He had several creditors, however, and one of them filed a lien on the account. The bank was forced to pay the creditor $80,000 of Jill's money. When he was added as a signer, he legally became a co-owner of the account. He had a legal right under Oregon law to withdraw the entire account, and the creditor "steps into the debtor's shoes." In addition, Jill was deemed to have made a taxable gift to her father at such time as the creditors withdrew the money from the account! You have to love our tax laws!! Interestingly, had Jill used a Power of Attorney or created a Living Trust, she could have had her father as attorney-in-fact or as a co-trustee with herself. This would have allowed him to pay her bills from the account, but prevented his creditors from attaching the account. He would have been only an agent or trustee and not an actual owner of the account.

7. Failure to Make Special Provisions for a Disabled Beneficiary

   If you have a disabled beneficiary, perhaps a handicapped child, you should leave them their inheritance in a specially-drafted trust to protect the disabled child and keep them eligible for public assistance. Failure to properly plan, will subject the children to loss of public assistance. The loss of these benefits means many such children will spend their entire inheritance within a few years on medical and other needs. If you leave an inheritance to them outright, they may be ineligible for public assistance until they spend the inheritance down to the statutory $2,000.00 limit. If you leave a disabled child's inheritance to another child with the understanding that that child will help the disabled child, that child may die, get a divorce, or be sued, and that intended inheritance may not be available to the intended beneficiary. Moreover, you are trusting that the other child will take care of the disabled beneficiary. A pile of money can cause a multitude of problems, even for the most loving of families. You should speak with a qualified estate planning attorney who can utilize special language in your estate plan that prevents this scenario from occurring. If a beneficiary is disabled, their portion of the inheritance is placed into a trust that covers the disabled beneficiary's "supplemental needs", i.e., those needs that are above and beyond what Medicaid or SSI will provide.

8. Failure to Make Special Provisions for the Spendthrift Child

   One of the most common scenarios I encounter are families with children that are either incapable of handling their finances or so foolish that the family is hesitant to leave them anything. Think about whether your beneficiaries will use their inheritance in a constructive manner. Or will they waste it foolishly? Do you want any inheritance for your children or grandchildren to be available for educational needs, or will it all be gone in just a few years. Most clients like the idea of holding an inheritance in trust until the beneficiary reaches a certain age, such as 30 years of age. This increases the likelihood that the child will be prepared to handle receiving a lump-sum of money. Before the child is 30, the money may used for the child's health, education, maintenace, or support needs. However, the child has no way of taking out a sum of money and going to Las Vegas or buying that new sports car. Other clients like the idea of the child receiving 1/3 of their inheritance at the age of 25, another 1/3 at the age of 30, and the remainder at the age of 35. Still other clients want their chilren to be drug or alcohol free for so many years before receiving an inheritance outright. Keep in mind, as long as an inheritance is being held in trust, it can be protected from the beneficary's spending habits, from creditors, and even from divorcing spouses. Also, you can control what happens with the money in the event of a premature death of the beneficiary. Most clients would prefer to see a deceased child's inheritance go their other chidren or grandchildren rather than their deceased child's spouse.

9. Trying to "Do It Yourself"

   In an effort to save money, many people are turning to the internet to gain access to "will kits" and "living trust kits" for their needs. THE VAST MAJORITY OF THESE DOCUMENTS ON THE INTERNET ARE INCORRECT AND PROVIDE UNINTENDED RESULTS. This is especially true where the individual attempts to add language to these will or trust kits to convey their wishes. For example: John and Jane want to modify the trust kit to meet their personal situation. They decide to change the language of the Family Trust which allowed distributions to the surviving spouse for his or her "health, education, maintenance, and support" by adding the words "comfort and welfare". Seems like a harmless enough addition and clearly conveys John and Jane's intent. However, IRS regultations make it very clear that the addition of "comfort and welfare" to the Family Trust makes the trust includable in the survivor's taxable estate, which was exactly what was trying to be avoided by utilizing the Family Trust. On a $10 million estate, that simple change could cost their children nearly $2 million in estate taxes. While the numbers used in the example above are large, any money paid to the IRS represents big bucks to your children and spouse. Use a competent estate planning attorney to make sure that your estate plan and any changes are correctly drafted.

10. Failing to Realize That Wills Can Always Be Changed By the Maker

    Second marriage situations in which the parties each have children from a previous marriage can cause major problems. For example, John and Jane have been married for over 25 years. Each of them had two children from a previous marriage. They each wanted to provide for each other first, and then leave the assets equally to all four children.Second marriage situations in which the parties each have children from a previous marriage can cause major problems. For example: John and Jane have been married for over 25 years. Each of them had two children from a previous marriage. They each wanted to provide for each other first, and then leave the assets equally to all four children. While both of their Wills stated this intention, the survivor of them could always change his or her Will to leave everything to his or her biological children. Or if the survivor's Will cannot be found (perhaps destroyed by one of the survivor's children), then all of the assets would pass to the survivor's children. Trusts can help protect children from a previous marriage. In addition, agreements can be drafted in which each sposue promises not to disinherit the children of the first to die. This agreement can actually give the children of the first to die legally enforceable rights to inherit from the surviving spouse.