Most Common Mistakes in Estate Planning
There are many issues to be discussed and decided when planning how your estate is going to pass to the next generation. These issues are manageable if you discuss them with a good attorney with relevant estate planning experience. A little planning goes a long way.
DOING NOTHINGPlanning your estate is an important task but one that is very easy to put off. Procrastination is the number one reason people die without a plan in place.
If you've done nothing, you are said to die "intestate". If this is the case, then the intestate laws and Probate Court control who settles your estate and to whom your assets are distributed. The Court chooses your personal representative.
Documents must be filed with the Court and bond may be required.
The process can take several months to several years.
There will be court costs and attorney's fees. These costs are greatly impacted by whether any disputes develop among those standing to inherit from your estate. The probate process is public, giving anyone access to your financial affairs including your neighbors, your family, your beneficiaries' creditors and people who take advantage of such situations (mostly with respect to real estate).
The Court controls all distributions to minors and chooses the conservator of such assets.
Spending the time and money now to create your plan can save your loved ones even more time and money in the future.
NOT KEEPING WHAT YOU HAVE UPDATEDOnce you've created your estate plan, you need to keep it updated. If your choice of representative changes or your gifts to your beneficiaries change, the documents need to be updated or they won't reflect your wishes.
If you've created a Trust, you need to make sure you've transferred your assets into the Trust. You also need to continue titling assets in the name of the Trust to keep it funded. If you don't, your personal representative will have to go through the probate process to transfer title of your assets which they could've avoided if assets were in the Trust. By doing the work yourself to transfer your assets into the Trust, you've done what it would take your loved ones several months to complete. Holding assets in a Trust with you as trustee doesn't affect your ownership rights, taxes or insurance. It makes for a smoother transition upon death and allows your Trustee to act upon your behalf if you become incapacited.
LEAVING YOUR EX-SPOUSE IN CONTROL OF ASPECTS OF YOUR ESTATEAlthough your ex-spouse loses rights to your estate after you divorce, there are still many pitfalls to avoid.
Often people set up a Trust-based estate plan rather than a Will-based plan to avoid probate, make sure someone can act on their behalf if they become incapacitated, or to protect assets for their descendants.
When Trusts for descendants who are still minors are established either in advance in a Trust or through testamentary trusts created by a Will, the legal guardian of a child is given rights to act on that child's behalf.
Most likely the child as beneficiary under the Trust has certain rights. These rights may include the right to remove and replace a Trustee or demand accountings. While you are unlikely to appoint your ex-spouse as the Trustee of your Trust, if your minor beneficiaries have the right to remove and/or appoint Trustee's under your Trust document, your ex-spouse as the legal guardian of the child-beneficiary is likely able to remove and replace the Trustee you put in place. Who would they choose? This is not something most people want to happen. The rights of minor beneficiaries under any estate plan needs to be closely examined.
NOT PROTECTING YOUR ASSETS FROM YOUR SPOUSES REMARRIAGEIf you die and your spouse gets remarried and puts everything in joint tenancy with new spouse your children may inherit nothing. Certain steps can be taken to ensure your hard earned assets go to your children after you die, regardless of the choices your surviving spouse makes. The transfer of assets can take place immediately after you die or after your spouse uses the income from your assets during their life. Or, your assets are available for your spouse and what your spouse doesn't use flows to your children. Careful consideration of these issues is important to prevent hard feelings between your children and your spouse in the future.
NOT PROTECTING YOUR CHILDREN'S INHERITANCE FROM THEIR DIVORCE,CREDITORS OR BAD SPENDING HABITSMaybe some of your loved ones aren't ready for a lump sum of money. Maybe one of your children is in a high liability profession and would greatly benefit from a trust that provides asset protection. Maybe your child is in an unstable relationship.
There are many ways to protect children or other beneficiaries. Outright distributions to your beneficiaries don't provide asset protection for them. You can create Trusts which give them the protections we all wish we could have for our own assets. These Trusts can be managed by an independent party, taking the responsibility and vulnerability away from your children. Trusts can allow beneficiaries access at certain ages or stages of life.
You can also create incentives for your children. Some beneficiaries would benefit from a distribution that matches their salary. Some children can be encouraged to pursue an education with a bonus upon completion. Some children would be best protected by leaving their distributions to an independent or professional person to manage. In designing your plan, you can be as creative as you want to accomplish your goals.
NOT PLANNING FOR INCAPACITYWhat if you or your spouse becomes incapacitated? Who can act on your behalf? To what extent can they act? What if your house needs to be sold? Or you've been putting a child through school?
If you become incapacitated nobody can transact certain business for you, not even your spouse. The Courts have a process by which a conservator is appointed. Designed to protect the interests of the incapacitated person, it can take several months and cost thousands of dollars. By creating a Trust and transferring your assets into the Trust, you can choose who will take care of your affairs if you become incapacitated (not the Court) and you can allow that person to continue making gifts, take care of you or others and to manage your affairs as you would.
CHOOSING THE WRONG PEOPLE TO MANAGE YOUR AFFAIRSWho will manage your affairs is a very important decision. The problem is, very few people like to think about dying much less spend the time and money planning out what will happen when they do.
By taking the time to develop a plan that accomplishes your goals and takes care of your loved ones, you ensure the nest egg you've built passes to whom you wish peacefully.
There are several roles to be filled. If you have a Will based plan, you will choose a personal representative to settle your estate when you die and an Agent under a Power of Attorney to act on your behalf if you become incapacitated.
If you have a Trust based plan, you will rely mostly on the Trustees you have chosen to act on your behalf if you become incapacitated and when you die with respect to all assets inside your trust. A Will and Power of Attorney operate with respect to assets outside your Trust. These are very big and important jobs and the right person should be selected, with replacements.
It's not just a matter of your financial matters. Choosing the best person to make your healthcare decisions is also very important. In this age of privacy concerns, doctors are much more limited in who they can speak to regarding your health and who can make healthcare decisions for you.
All of these jobs have great responsibilities and require deliberate care. Much thought should go into deciding who manages these aspects of your estate, whether its large or small. You'll want to choose people who are best suited to carry out the tasks. Often those who know you best, have lived with you, know your wishes and intentions, or share the same goals are best. If things get complicated, they should understand your priorities and what you would want to happen.
Quite often this is your spouse. Other good choices include family members, friends, independent trustees, private trustees or corporate trustees. An experienced estate planning professional can help you decide which type of person is best suited to help you with the task of executing your plan, depending on your goals, objectives and the legacy you want to create.
Regardless of whom you choose to act on your behalf, you should ensure they know your financial managers, attorneys, tax advisors, CPAs, and other advisors. By sharing as much information as possible, and being organized, you will greatly simplify the process.