Whether you have an estate plan, or are just getting started with your plan, there are some common and preventable mistakes you should avoid. Making one of these errors can have devastating consequences on your plan, taxes, and family.
1. Not Having an Estate Plan
Preparing for the future is crucial in life. This is particularly true when it comes to preparing an estate plan. This is because most estate planning documents must be signed long before they are actually needed. Despite their importance, most Americans do not have an estate plan. Not having a plan can make matters far worse for both you and your family. It is wise to work with an estate planning professional who can ascertain your specific needs and make recommendations based on your wishes and family dynamics.
2. Not Updating Your Estate Plan
Once you have a plan, keeping your plan up-to-date is crucial. Trouble can occur when your plan is not updated for major life events such as having children, getting married, or getting divorced. Or, financial events such as purchasing a new vacation home or starting a business. All of these events should cause you to revisit your estate plan. Failing to update your plan can have tremendous consequences, particularly in the case of divorce or a second marriage. Keeping your plan current includes updating the beneficiaries on your retirement accounts and life insurance.
3. Failure to Plan for Blended Families
Blended families offer a unique set of concerns that need to be addressed. Most stem from the simple fact that the children of the marriage are not heirs of both spouses. Without planning, the death of one spouse can lead to the accidental disinheritance of his or her own separate child.
Why? Because Michigan has a set of rules that determine who receives your property when you pass away without an estate plan. These rules are called the rules of intestate succession. Under these rules, the majority of most estates goes to the surviving spouse. Often leaving a separate child with nothing. Making things worse, the separate child is also not an heir of the surviving spouse, meaning the child will not receive anything upon their death either.
4. Writing on Your Estate Planning Documents
No matter how small the change, Do not write on your estate planning documents. Handwritten additions or changes to an estate plan inevitably cause more harm than good. First, there is the issue of whether or not the handwritten changes are even considered a valid change to the documents. This is because most estate planning documents have very stringent execution requirements. Not following these requirements will lead your family to a courtroom where a judge has to decide whether or not the changes are valid.
Similarly, the handwritten changes can cast doubt on the intention of the documents. Take, for example, a last will where the percentage of the estate given to a particular person is crossed out and a new percentage put in its place. There is no way to determine what the intent of this writing was when it was done. Was the percentage change meant to be the authors final decision? Or, was the author merely making notes about possible changes in the future? Here again, the ambiguities caused by the writing can only be resolved by a judge.
5. Not Funding your Trust
A trust is an incredible estate planning tool. It can help avoid probate, hold money for minor children, and help with tax planning. However, the trust cannot accomplish any of these goals if the trust is not funded. In the world of trusts, “funding” refers to the process of moving the intended assets into the trust. This can include real property, accounts, personal property. Less common assets include, retirement accounts and life insurance.
Simply executing the trust is not enough. Neither is listing the assets on a ledger somewhere in the trust documents. Affirmative steps must be taken to move each desired asset to the trust. For example, with a house, a deed should be prepared which transfers ownership of the house to the trust. Investment and bank accounts should be re-registered or re-titled into the name of the trust.
In most cases, attorneys will prepare a pour-over will that directs all of your assets to your trust. So, the trust will still provide some value. However, the pour-over will must go through probate. This is not ideal considering one of the primary reasons to use a trust is to avoid probate. Contact your trust attorney immediately if you are unsure whether or not your trust was funded.
6. Uncoordinated Beneficiaries
Many people go through the process of preparing a will or trust, but do not coordinate the beneficiaries of their life insurance or retirement accounts to mirror the desired distribution. For example, if John has a will naming his three children as equal beneficiaries, then in most cases John should also name the three children as equal beneficiaries on his retirement accounts or life insurance. This prevents the account or life insurance from going through probate and can have substantial tax consequences. Retirement accounts increasingly make up a substantial portion of a person’s estate. As a result, they need to be taken into consideration when preparing your estate plan.
7. Not planning for Minors
Planning for young children or grandchildren requires special attention. Minors are not legal adults. Therefore, they cannot legally own or manage assets. As a result, the role of managing the assets until the children reach adulthood must be delegated to someone else. Typically, this is done through a trust which holds the assets until the minors reach a predetermined age.
Without proper planning, the assets intended for a minor could end up in a custodial account where the minor has limited or no access to the funds. Worse, the funds could be placed into a conservatorship with the court and consumed by legal fees.
Preparing an estate plan also allows a parent to nominate a preferred guardian in the unfortunate event where the parent can no longer care for a child. This could be caused by either death or disability. The guardian chosen by the parent is given priority over other family members who may want to serve as guardian. Taking the time to nominate a guardian can prevent family quarreling and help make an already difficult process much easier.
8. Relying Solely on Beneficiary Designations
As mentioned above, naming beneficiaries on your accounts and life insurance can prevent these assets from going through probate. However, using beneficiary designations, alone, is not an adequate estate plan. A will should still be prepared to govern the distribution of personal property, name a personal representative, and serve as a back-up in the event the beneficiary designations fail for some unforeseen reason. Additionally, a proper estate plan includes other documents such as medical powers of attorney and financial powers of attorney. If you own a home, a lady bird deed might be appropriate and should be considered.
9. Not Understanding Your Estate Plan
Estate planning is a complicated subject. It has an expansive vocabulary of terms and many concepts that most of us do not use on a regular basis. Further, most people do not regularly review their wills or trusts. As a result, many people do not understand their own estate plan.
The notion that a last will and testament avoids probate is one very common misconception. This is not the case. A will, by its nature, does go through probate. It is frustrating when a grieving family learns they still have to go through probate even though they went through the effort of having a will prepared.
The role of a “power of attorney” or “executor” is another common place for confusions. The two are often used interchangeably. Further, many do not understand where the use of a power of attorney stops, and the role of the executor begins.
It is crucial that you understand your estate plan so that you know how it works. If you do not understand your estate plan, then you should contact your attorney immediately.