Most estate planning mistakes tend to be fall into one of several categories. Every estate plan has unique features, but the same problems and mistakes recur. Many mistakes don’t vary with the value of an estate and other factors. Each of the classic mistakes is avoidable. All that’s needed is knowledge of what to beware of and a little time working with your planner.
Not understanding the plan. Many people, even the sophisticated and wealthy, become passive in the presence of an estate planner. They rely on the planner to make sure everything in the plan is what they need and is done properly. It’s not unusual for a person to sign the documents and say to the attorney, “I don’t really know what I just signed.” A few years back a survey of estate planning attorneys reported that the attorneys said they believed a high percentage of the plans they prepared weren’t fully implemented, and that the major reason for failure to implement is the clients didn’t understand the plans or what they needed to do after leaving the office.
Part of the estate planner’s job is to be sure you understand the basics of how the plan works, what you need to do to implement or maintain the plan, and how it works for you and your beneficiaries. It’s also part of your job to understand those things. You don’t need to know all the legal angles and why certain language is used, but you do need to understand the fundamentals.
Sometimes that means insisting the planner spend time walking you through the plan and the documents. Another good step is to take notes at each stage of the planning process. Often people make decisions after a discussion with the estate planner. At the time, they fully understand the decisions and the reasons for them, because they’ve been hashing them out with the planner. But days, weeks, or months later, the details are hazy. Take notes about the key decisions and why you made them, so you can refer to them in the future.
Outdated beneficiary designations. There are numerous cases and rulings involving this one, and it seems every estate planner has at least one horror story. Remember what your will says doesn’t affect who inherits certain assets. These assets have separate beneficiary designation forms, and that determines who inherits. These assets include retirement accounts, annuities, and life insurance.
Failure to update beneficiary designations means an asset might go to your parents or siblings, because that’s what you put on the form years ago when you first opened the account. Sometimes the asset goes to an ex-spouse, the estate of a deceased person, or other unintended beneficiaries. Other times someone is inadvertently excluded, because they were born or married into the family after you completed the form.
Review your beneficiary designations every couple of years and after every major life change in your family.
Not updating asset ownership. You might own some assets in your own name and others in joint title with your spouse, an adult child, or someone else. Some assets might be in trusts, limited partnerships, or other vehicles.
Like the beneficiary designations, these need to be reviewed. Does the arrangement still meet your needs? Has something changed in your situation, the law, or something else that makes different ownership better? The Tax Cuts and Jobs Act made significant changes in income and estate taxes. Many people should review their plans to see if their current plans are obsolete or add unnecessary costs and complexity.
Failure to fund revocable trusts. Many estates include a revocable trust, also known as a living trust. Assets owned by the trusts avoid probate and help with disability planning and some other issues. They generally aren’t created to save taxes.
The problem in many estates is the owners skip a step. The trust is created after the attorney prepares the trust agreement and all the interested parties sign it. After that, the trust has to be funded. That means legal title to assets has to be transferred to the trust.
For some assets that’s easy. Household and personal effects are transferred to the trust with simple language in the trust or a schedule of assets attached to the trust agreement. But other assets require more. For real estate, the deed has to be changed to reflect that the trust now is the owner. Automobile registrations have to be changed. For financial accounts, you have to change the name of record with the custodian. That might mean applying to open a new account and transferring the old account assets to the new account.
None of these steps is difficult or expensive, but many people neglect to do them. The result is they wasted money paying for the trust documents. Their assets won’t avoid probate, and they won’t reap the other expected benefits of the trusts. Be sure you are clear with your planner about any actions you need to take to ensure the plan is fully implemented and maintained.
Not coordinating trusts and retirement plans. Many people routinely designate their living trusts or other trusts as beneficiaries of their retirement plans. There can be good reasons to name a trust as an IRA or other retirement plan beneficiary. But there also are potential problems. Because of IRS regulations, naming the wrong type of trust as an IRA beneficiary can accelerate taxes.
To retain the tax deferral of a retirement account, a trust that is beneficiary of the account needs to have certain language that qualifies it as a see-through trust. Be sure any trusts you named as beneficiaries qualify and meet your goals. Otherwise, name individuals as beneficiaries instead of a trust.
Not updating powers of attorney. Every estate plan should include powers of attorney. You need at least two, one for financial matters and one for medical care (often called an advance medical directive). You’re more likely to become disabled and need these documents before you need a will and the rest of your estate plan.
Unfortunately, many people don’t have either of these documents and others haven’t kept them up to date or given the details much thought. Be sure you have these documents and that they have been reviewed recently.
Not updating the plan. I’ve highlighted some parts of the plan that routinely become obsolete for many people. But there are other parts of the plan that might need to be changed from time to time. You should be in touch with your estate planner any time there’s a major life change in your family, such as a birth, death, divorce, or marriage. Changes in your net worth, the composition of your estate, job status, residence, and many other factors also should trigger a review of your plan. Of course, a change in your goals or in the law also means a meeting with your planner is in order.