The following are 10 of the most common mistakes people make with respect to estate planning:
- Avoid the issue completely.
Many people find it uncomfortable to deal with their own estate plan because of the underlying issues of death and disability. Others simply assume that they do not need an estate plan until they reach retirement age. However, every adult should have some estate plan to cover not only the distribution of assets upon death, but also management of assets during incapacity. As we all know, death or incapacity can strike at any age. If you fail to plan for those possibilities, the expense, confusion, and additional stress upon your family or others that you leave behind can be tremendous.
- Rely upon advice from a friend or neighbor.
Our friends, family, and neighbors like to advise us on how we should arrange our affairs. However, an estate plan that may be appropriate for one person is seldom appropriate for another. We each have different assets, liabilities, personalities, and estate planning objectives. An estate plan should be developed and tailored to achieve your particular objectives.
- Hire an unqualified person to advise you regarding your estate planning matters.
Believe it or not, there are actually companies that sell estate planning services over the phone or door-to-door. Sometimes they send out a "paralegal" to meet with you and bring information back to the home office to develop pure form documents that are not tailored to your particular needs. Worse, their fees are often 2-3 times more expensive than the fees charged by an experienced and sophisticated estate planning attorney. These companies often give assurances that should a problem arise, they will cover the cost of probate or other necessary amendments to the documents in the future. However, these companies are often here today and gone tomorrow. You are more likely to be left with empty promises. Also, there are other individuals selling products that refer to themselves as providing "estate planning services. "These individuals are very rarely competent to draft wills, trusts, powers of attorney, designations of patient advocate, and other common estate planning documents. You should retain an attorney who has the requisite specialization and expertise to prepare the appropriate estate planning documents.
- Assume that a will governs the distribution of all of your assets upon death.
If you read a will, it certainly sounds as though it governs the distribution of all of your assets upon death. However, the will only governs the distribution of those assets that you own in your own name alone at the time of death (or death benefits that are payable to your "estate" rather than to named beneficiaries who survive you). The will does not govern the distribution of assets that you may own jointly with others who survive, death benefits such as life insurance or retirement plans that are payable to named beneficiaries who survive you, or assets that are titled in the name of a separate trust at the time of your death.
- Assume that a will avoids probate proceedings.
Many people assume that if they have a will, they avoid probate proceedings with respect to their assets upon their death. Actually, as explained above, the will only governs the distribution of those assets that you own in your name alone at your death or that are payable to your estate. These are the assets that must go through probate proceedings. Therefore, a will does not avoid probate; rather, it allows you to choose who will receive the assets that do go through probate. If you do not have a will, but you have assets titled in your name alone at death, those assets still go through probate but pass according to the laws of "intestate succession. "This generally results in your assets being distributed to your closest heirs under a scheme of distribution devised by the state legislature. That distribution may or may not be appropriate under your particular circumstances depending upon who you leave surviving you and what your wishes are with respect to your assets.
- Assume that a will protects you in the event that you become incapacitated.
A will, by its very nature, comes into effect only at the time of your death. The fact that you may have appointed a personal representative to handle the distribution of your assets upon your death in your will does not authorize that person to act for you during your lifetime or during any period of incapacity. In order to appoint someone to act for you if you become incapacitated, you should execute a Durable Power of Attorney to authorize them to act for you in your financial matters, and a Designation of Patient Advocate to authorize them to make medical decisions for you in the situation where you are not able to make them for yourself (usually these Designations include language that is typically referred to as a "living will"). Without a Durable Power of Attorney or a Designation of Patient Advocate, if you become incapacitated, a guardianship or conservatorship proceeding may be necessary to have people formally appointed by the court to make financial and medical decisions for you.
- Create a trust but fail to transfer your assets to the trust.
If you are a single person and choose to create a trust in order to avoid probate proceedings upon your death, you need to actually retitle your assets into the trust prior to your death in order to avoid probate. Simply creating the trust and leaving the assets in your own name will not avoid probate. It is often this second step of retitling assets that is left undone. In that event, you will have incurred the cost of creating a trust yet still fail to avoid the cost of probate proceedings at your death. You may also have to change the beneficiary designations on life insurance and retirement plans to make certain that those death benefits do not pass through probate. For married couples with one trust, it may be better from a liability exposure perspective to own many assets jointly as husband and wife (rather than in the trust). In short, you should obtain advice from an experienced estate planning attorney regarding how to own each asset under your particular circumstances.
- Own all assets jointly with a new spouse when you have children by a prior marriage.
In a second marriage, often the couple places all of their assets in joint name for simplicity and to avoid probate upon the first spouse's death. While this may be appropriate for some couples in a first marriage, the problem in a second marriage is that often the spouses assume that upon their death, their surviving spouse will leave some assets to their children by their first marriage. However, the surviving spouse may remarry and retitle everything jointly with his or her new spouse. As a result, simple joint ownership in a second marriage where there are children by a prior marriage can result in the unintentional disinheritance of your children by your first marriage. In those situations, it is usually better for each spouse to have a separate trust that provides for the surviving spouse and also provides for the children by the first marriage. Sometimes life insurance in this situation can assist in making certain that your children by your first marriage are amply provided for at your death.
- Own all assets jointly with your spouse when your total combined net worth exceeds $2,000,000.
For a married couple with a total net worth of $2,000,000 or more, special planning may be required to minimize the estate tax liability which will be imposed upon the last spouse's death. In those situations, joint ownership may be inappropriate and may result in more estate taxes being payable than necessary. Appropriate estate planning for a married couple with larger estates typically involves each spouse having a separate trust and making sure sufficient assets are titled in or will pass to each spouse's trust regardless of which spouse dies first. Through this planning, you can double the amount of assets that can be protected from estate tax. For example, a couple with a total combined estate of $4,000,000 in the year 2007 or 2008, by adopting separate tax planning trusts and appropriately funding those trusts, can save their children or other heirs approximately $900,000, or more, in estate taxes. Or, to put it another way, if the couple with a total estate of $4,000,000 fails to appropriately adopt such trusts, and simply owns everything jointly or leaves it all to their spouse upon the first spouse's death, then there is likely to be an additional $900,000 or more in estate taxes upon the last spouse's death.
- Fail to review and update estate plans.
Attorneys attempt to draft estate planning documents so that they anticipate circumstances that may arise such as the death of a beneficiary or a person appointed to serve as personal representative. As your circumstances change, you may not need to revise your estate planning documents. However, it is important to review your estate plan every few years in order to make certain that it still meets your objectives at that time. As we all know, our assets and liabilities, our estate planning objectives, and our family situations change throughout the years. It is important to make certain that your estate plan is appropriate in light of all of these changes. Many clients start out with a more simple estate plan and as their estate grows and their family circumstances change, they fail to revise their plans. This can result in people being appointed to handle an estate as a personal representative or handle a trust as a trustee who are not appropriate under the circumstances. Failing to revise an estate plan can also result in greater loss of assets to estate taxes and expenses than is necessary had the appropriate plan been in place.