Two common goals we see in estate planning are (1) ensuring assets pass to the intended beneficiaries; and (2) efficiently transferring assets to the intended recipients. While estate plans can be as unique as the individuals creating them, and there may be multiple ways to set up a plan to reach a client’s goal, estate planning is far from a fool-proof process. What may be the “easiest way” to transfer assets could lead to unintended consequences down the road. Through our experience helping clients create their estate plans and helping administer less than ideal estate plans, we’ve found these practices to be the top ten estate planning mistakes.
- Not Making a Plan. The key problem with not having an estate plan is that many individuals are not aware of how their assets are distributed when they haven’t made a will or trust. For instance, if a husband passes away, and is survived by his wife, his property will be divided with one half going to his wife and one half being split among his parents. While owning property jointly with a spouse and designating beneficiaries on accounts can help avoid this issues, not all assets can be set up to automatically transfer at death and need a will to ensure they go where they are intended.
- Failing to Update a Plan. While making an estate plan is the first important step, it often doesn’t stop there and many people need to update their plan throughout their life. One common issue we see is that a divorced spouse is left as the executor and power of attorney on plan documents.
- No Durable Power of Attorney. When a loved one experiences a medical emergency or shows signs of cognitive decline, one of the last challenges their family want to face is working to obtain a guardianship just so they can do things like pay bills. Setting up a durable power of attorney gives a clear message of who you want to handle your financial affairs and can save a large amount of time and money associated with going through a guardianship proceeding.
- Naming Children as Joint Owners on Accounts. One short cut individuals will take to avoid a power of attorney and will is to name one of their children as a joint owner on their account with the understanding that once the ownership passes on death, their child will distribute the account amongst their siblings. One risk with taking this approach can open the planner’s account to the creditors of their child, since both individuals will be treated as owner.
- Naming One Child on Life Insurance. Similar to the issues that come with naming a child as a joint account owner, naming them as the sole beneficiary of life insurance does not guarantee the child knows they are supposed to split the proceeds with their siblings.
- Naming Different Children as the Sole Beneficiary on Multiple Accounts. Another common issue we see with beneficiary designations is that when the client first sets up their beneficiary designations, they will choose one child as the beneficiary for each investment account because, at the time, all accounts are of equal, or approximately equal value, and it seems simpler to just have each child get their own account. The main issue with this is investment accounts grow at different rates and by the time the client passes, each child could get a significantly different amount than their siblings.
- Use of Shortcut Planning in a Bad Family Dynamic. In the estate planning world, short cut tools such as the Transfer on Death Deed can often save the time and money associated with an estate administration by transferring the property directly to children. However, when children or other beneficiaries have strained relationships, there is no intermediate process to work out the distribution, and the dissenting beneficiaries must now agree on how to handle day to day tasks such as maintenance and insurance as well as more complex decisions that come with selling property.
- Partially Funded Revocable Living Trust. Many clients are attracted to using a revocable living trust because it can help them avoid the probate process. However, when avoiding probate is a key goal for clients, forgetting to fund your assets into your trust means that on your passing, your assets will need to go through the probate process before they can be placed into your trust and administered.
- Disregarding the Complexity of Passing on a Business. When a client leaves their business to their family, it can often times be difficult for their family to know who they should try to sell it to, or even what a reasonable asking price is. Lifetime succession planning can help start an owner’s transition to an employee or put some parameters in place directing how the business should be sold.
- Failing to Discuss your Plan with your Children. When a client has a blended family or plans to leave more to some family members than others, we often encourage those clients to discuss their plan with their family if they’d think it would be helpful. An unexpected distribution pattern can lead to confusion and even contention among family members, so managing expectations can be a great way to help your family come to peace with your wishes.
Have you made any of these mistakes? If so, we’re here to help. Please give us a call at 765.423.7900 to discuss your estate planning goals.
