Simply stated, an Estate Plan is your plan for how your most important assets will be protected (your home, children and other assets). A good Estate Plan should answer the following:
- How do you protect your assets?
- How do you protect yourself from the unexpected?
- How should your assets be distributed?
Regardless of whether you have something in writing or not, everyone has an Estate Plan. Those without a written plan have, by default, decided to let the law determine their Estate Plan.
The below ten common mistakes made in Estate Planning are not listed in any particular order, but are generally the areas that cause the most arguments, bitterness, delays and resentment.
- No Written Plan –Benjamin Franklin said: “In this world nothing is certain but death and taxes.” By creating a written Estate Plan, you decide how your estate will be divided upon your death. Without a written Estate Plan, the Court imposes the plan established by the Legislature as to how your assets will be distributed upon your death. The court rules are based on a common distribution schedule. Court plans require court supervision and dictate the amount of fees paid. When an Estate Plan goes through the court it is called probate. Probate fees generally cost more than creating a written plan. Furthermore, the court plan does not allow you to decide who you want to receive your assets, but most importantly does not allow you to choose when they will receive the assets. Therefore, the first common mistake is not having a written plan.
- Trustee Selection –A good Estate Plan will include the use of a trust, will and power of attorneys for financial and health matters, and names a trustee to administer the plan. This person will have the most power and control in fulfilling the Estate Plan. This is a major decision; often made without properly addressing the issues. Consideration should be given to using co-trustees or a professional trustee. When a trustee is selected based on perceived convenience, it often results in children fighting amongst themselves and even splits in the family over how the trust is administered by the Trustee. Thus, careful consideration needs to be made in selecting the Trustee.
- Funding and Record Keeping –In order for a trust to work properly, the assets must be placed in the trust. Many people who have a trust think all is well. However without proper funding and record keeping many of the assets are not in the trust. Or assets may have increased or changed since the Estate Plan was created. When assets are not titled correctly in a trust, an Estate Plan can end up in the court system. Thus, lack of funding and record keeping is a common mistake that negates an Estate Plan.
- Large IRAs –An important part of any Estate Plan is minimizing taxes. When a person has a large IRA, additional tax issues must be considered with the goal of minimizing the taxes paid. There are ways to limit the income tax paid on large IRAs and provide prolonged benefits to your beneficiaries. A good Estate Plan should consider creating a unique trust for a large IRA because this is a specific and unique issue. Thus, a good Estate Plan will take into consideration large IRAs and make the appropriate provisions.
- Planning for Heirs and Not Yourself –A good Estate Plan needs to be designed for you in addition to your heirs or beneficiaries. A good Estate Plan provides protection to you during your lifetime for unexpected events, such as incapacity. The trust needs to specifically address how incapacity is defined and explain how assets are to be used during your lifetime. The plan should also include direction for medical decisions for you. Many Estate Plans do not include these provisions or lack the detail necessary to protect you during your lifetime. An Estate Plan is your plan and should protect you as much as it is concerned with planning for your heirs.
- Lack of Proper Administration –While a trust is designed to prevent the court’s involvement in the distribution of the assets, certain things must be done to administer a trust upon death. This administration needs to be done on the death of the first person to die as well as upon the death of the last person for joint trusts. Lack of proper administration can result in higher taxes, loss of protection for heirs and noncompliance with the law. Therefore, an Estate Plan requires proper administration upon the death of the person who created a trust.
- Keeping it Secret –Have you seen commercials where the family is meeting around an attorney to see who receives what? The commercials portray the Estate Plan as a big surprise and everyone is happy with the surprise. In real life, Estate Plans with surprises do not lead to happy endings. The Estate Plan should be your direction as to how you want things done. Therefore, it should not be a surprise, but a plan your heirs and beneficiaries know about. There are cases where an heir is being disinherited which dictates the Estate Plan remain secret to some. These situations need to be carefully analyzed to reduce the potential problems that can result when the Estate Plan is made known.
- Not having a Unique Trust –We’re all different and have different needs and goals. An Estate should not be a “one size fits all.” It should be designed for your unique situation. Without a unique plan major problems can arise for families who have a person receiving needs-based government aid, families with minor children or couples who have been married before, just to name a few of the unique situations we all have. Your unique situations need to be carefully reviewed and planned for. Without a unique plan, your Estate Plan can result in unwanted consequences.
- Surviving Spouse and Remarriage Protection –An Estate Plan that does not protect a surviving spouse upon the death of the first spouse in the event of remarriage by the surviving spouse is a plan just asking for problems. In today’s world these issues are commonplace and need to be addressed. A good Estate Plan should direct how the trust will be administered upon the first death and detail remarriage provisions. These provisions not only protect the surviving spouse, but protect the heirs and beneficiaries as well.
- Not using an Attorney – An Estate Plan should not be seen as just some documents; it should be so much more. A good Estate Plan should be created by an attorney who specializes in implementing unique estate plans because you are paying for the advice and service and not the paperwork. An Estate Plan is not a commodity like groceries or a car; it’s something that is designed to protect you and your heirs. Are your plans for your children, heirs and beneficiaries a commodity? A big mistake is treating your Estate Plan as a document and not as a service.