Failure: Common Estate Planning Mistakes

By Mark T. Coulter, Esquire
Estate Planning Attorney

Estate planning is nothing new. People have been making wills since the ancient times. Archeologists have discovered a will from 2550 B.C. from Sekhenren to his wife Teta, believed to be the oldest written will in existence. So, for about 5000 years we have been making written wills. Despite this lengthy history, we still see people making the same mistakes, over and over. Most times, it is because of a failure to take the time to consult with someone who actually practices in this field of law. What follows here is a list of the most common estate planning mistakes, focusing on those relevant to matters typically handled in an estate plan involving a Will.

1. Failing to get around to making a plan.
2. Failing to keep an Inventory of your assets and information
3. Failing to appoint a guardian for minor children
4. Failing to choose a good executor
5. Failing to use the annual gift tax exclusion effectively
6. Failing to review and update your Will, Trust and Power of Attorney
7. Failing to plan to avoid Estate Taxes
8. Failing to leave assets to anyone other than your spouse
9. Failing to update beneficiaries on life insurance and retirement accounts
10. Failing to provide liquid assets to pay estate debts
11. Failing to prepare for a comprehensive estate plan
12. Failing to accept that estate planning isn’t only for the rich
13. Failing to consider the effect of joint titles and beneficiaries on your plan
14. Failing to keep life insurance out of your probate estate
15. Failing to provide a Trust for minor beneficiaries

Now let’s examine each of these reasons.

1. Failing to get around to making a plan.
   Everyone should have an estate plan, including at least a will, a living will/health care proxy, and probably a durable power of attorney. Most people would agree that this basic planning is needed, and yet many people don’t. The main reason why people don’t have an estate plan prepared? “I just didn’t get to it yet.” That’s it; simple procrastination. Without a plan, you have no control over how your estate and your family affairs are handled if you are unable to manage them for any reason, incapacitated, or upon you death. All it takes is one call to an estate planning attorney, and the ball will roll from there. Without that first step, however, then nothing likely will ever happen.
2. Failing to keep an Inventory of your assets and information.
   The best estate plan in the world will have great difficulty functioning if your executors, trustees and family members don’t have an easy way to know what you own, where it is, and where important papers and information regarding your estate can be found. Estates can linger on for months and months while surviving family and fiduciaries attempt to locate the necessary information about all of your stuff. This can be avoided by taking the time to prepare a comprehensive list, such as the Personal Information Inventory which we provide for our clients. You can save your family an enormous amount of aggravation, worry and delay by this simple recordkeeping.
3. Failing to appoint a guardian for minor children.
   If you don’t have any estate planning yet, then you likely haven’t taken steps to nominate someone to act as a guardian for your minor children in the terrible event that someday neither parent is alive or competent to take care of them. Instead of making an orphan’s court judge select a person, you must take advantage of this opportunity to nominate the person who you know to be the best qualified to take care of your children and/or their finances if the ultimate loss should occur to them. Can you name a good reason not to do it?
4. Failing to choose a good executor.
   The executor named in your will is responsible for collecting and managing your assets, assembling and assessing your debts, paying taxes and bills, and distributing remaining assets under the terms of your will. This process involves multiple steps over a period of months or longer, requires numerous financial transactions with careful record keeping, and ultimately controls the distribution of your life’s savings to your beneficiaries. Many people fail to consider whether the person they want to list as an executor has the skill set necessary to perform the job. Some don’t even check to confirm that the person would be willing to serve as an executor if the need arises. When a poor executor is chosen, you have just guaranteed a protracted probate process, inefficient handling of your estate assets, and probably disgruntled heirs. Instead, take the time to choose a capable executor, and confirm that they will do the job. Remember that it doesn’t have to be a family member. Even an attorney who you trust can serve as your executor if your are confident in them.
5. Failing to use the annual gift tax exclusion effectively.
   Many people worry about having to pay estate taxes from their assets after their death, and yet the majority of these same people fail to effectively use the annual gift tax exclusion to benefit their estate plan. You can give up to $13,000 (2009) per person to as many people as you like, every year, completely free of gift tax consideration. Amounts over that level will decrease your available lifetime gift exclusion amount (currently $1,000,000), or possible result in a gift tax due. At or under that $13,000 per person figure, however, you have the ability to make lifetime gifts to your intended beneficiaries and thereby get the property out of your estate and into their hands with no tax liability whatsoever.
6. Failing to review and update your Will, Trust and Power of Attorney.
   Estate planning documents are very powerful, and can help to achieve your goals for your family and your estate. These documents are typically drafted to withstand the time delay which may be expected to pass between when the documents are prepared and when they need to spring into action, such as upon incapacity or death. Many times, however, the best planning documents still cannot accommodate important changes which go on in the lives of you and your family which may alter how you would like your plan to work. Common examples of life changes which warrant a review of your planning documents include: a material change in the size or nature of your estate, purchase or sale of significant assets, marriage, divorce, births, and more. It is a good idea to take a few moments at least once per year or so and look over you documents, alone or with us, to see if they still accurately reflect your current ideas for how you would like your estate plan to work.
7. Failing to plan to avoid Estate Taxes.
   Estate taxes are a crippling load for estates burdened thereby. The current estate tax rate is typically 45%. Fortunately, there are exclusions, deductions and credits which with proper planning can substantially reduce, and often eliminate, your estate tax liabilities. Less tax means more assets to pass on to your beneficiaries. This savings, however, won’t magically occur on its own. Instead, you need to consult with an estate planning professional to discuss how to best structure you plan to maximize these available benefits.
8. Failing to leave assets to anyone other than your spouse.
   For a variety of understandable reasons, many married people provide in their will for all of their assets to pass to their surviving spouse. The assets are thus available for the survivor, and current law lets them pass to the spouse tax free. Unfortunately, the assets are all now in the surviving spouses estate, which is now larger and thus subject to even greater taxation upon their death. Instead, the wiser choice is often to take advantage of the Unified Credit for Estate Tax purposes, which permits you to transfer a significant level of assets to anyone, free of estate taxes. As of 2009, that amount is as high as $3,500,000. Instead of dropping all of your assets into the lap of the surviving spouse where they will be taxed before passing to your family, you can put those assets into a common Credit Shelter Trust, wherein the money is available for the support and maintenance of your spouse if needed, but then otherwise passes on directly from the Credit Shelter Trust to your beneficiaries upon the death of the second spouse. Since the Trust assets are not a part of the estate, no estate tax is due.
9. Failing to update beneficiaries on life insurance and retirement accounts.
   Many valuable assets can pass completely free of the probate process through the operation of beneficiary designation on contracts such as life insurance policies and retirement account applications. By naming a beneficiary and a secondary beneficiary, you assure that someone will receive those valuable assets upon your death, outside of the delays and expense of probate. If you fail to make those beneficiary designations, or fail to keep them current when, for example, your listed beneficiary dies, then the assets default back to your probate estate where they will be subject to treatment under the typical probate procedures. In addition to the possibility that you might have dead beneficiaries listed, you may also find incomplete or incorrect ones too, such as when you list your two children, but later have a third child. Or when you get a divorce but your policy is still technically payable to your ex-wife. Make sure to list beneficiaries, including secondary beneficiaries in the event the primary beneficiary is deceased, and thereafter review them periodically to make sure that they continue to reflect your current intent.
10. Failing to provide liquid assets to pay estate debts.
    Following your death, taxes, debts and expenses will need to be paid. Without advance planning, then your executor and family may have trouble getting the money together to pay them. For example, if your primary wealth is in real estate and a business you own, what will the executor use to pay these expenses? Far too often, an executor has to do a forced sale of assets, quickly liquidating such non-cash property to generate the cash flow needed. Under such circumstances, property you intended to pass to your heirs disappears, and the price obtained is often far less than fair market value when the assets are sold quickly due to the time constraints of probate. You can plan ahead to assure that some liquid assets are available to pay for you reasonably anticipated probate debts, including the use of bank accounts, readily marketed securities, bonds or even life insurance. You estate planner can assist you with this evaluation and preparation.
11. Failing to prepare for a comprehensive estate plan.
    Your estate plan should be more than just a will leaving your property to your spouse or kids. Could your children need a guardian? Do any of your heirs need protection from creditor claims or just their own financial innocence? Who will manage your property if you suffer an incapacitating condition, and how will they do it? Who will make decisions about your health care if you can’t? When should your family stop taking life-prolonging medical steps if you are unconscious and your quality of life and prospects for recovery have hit bottom? Questions like these and more should be part of your planning analysis, and answered in your final estate plan documents. Otherwise, you haven’t really finished the job.
12. Failing to accept that estate planning isn’t only for the rich.
    Related to the very first estate planning failure in this serried (procrastination), this failure is an excuse, not a reason. I will bet that anyone who thinks estate planning is only for the rich has never talked to anyone who knows anything about estate planning. While the rich can obtain their own benefits from an estate plan, anyone at all can get their own planning rewards, including control over how your affairs are handled during periods of diminished capacity, how your medical care is handled, who takes care of your kids, and how your money and assets are distributed. These aren’t the needs of the rich; they are the needs of everyone.
13. Failing to consider the effect of joint titles and beneficiaries on your plan.
    For many people, a fair estate plan involves one which treats a group of beneficiaries equally. For example, take a will which splits all of the property equally between three adult sons. That may treat them equally as to the probate estate, but many people overlook the impact of non-probate assets. What if one child is listed on the deed to your house, or on your bank account, or is the only beneficiary named on an insurance policy taken out years ago. All of these assets would go straight to one child, not the others. Failing to take the existence of jointly titled property and contract beneficiary designations into account in your planning can unbalance your overall plan, deviating from your intended results and causing family tension at the same time.
14. Failing to keep life insurance out of your probate estate.
    Life insurance is used by many people as a powerful weapon to create efficiently processed assets for your heirs, or to pay estate debts and taxes. If the life insurance ends up in your probate estate, then it instead becomes ensnared in the probate process, with the attendant delays and expenses. Keep your beneficiary designations current to keep it out of your probate estate. Even better, keep the ownership of the policy out of your own name, either by putting ownership in the name of a beneficiary or spouse, or by using a Life Insurance Trust to hold the policy, and then the benefits are not only free from Probate expense, but further are not subject to that onerous Estate Tax either !
15. Failing to provide a Trust for minor beneficiaries.
    The will of a parent or even grandparent may provide for bequests to a beneficiary who is a minor when it is time for the distribution to occur. The courts do not permit minors to take title to property. If no planning is done, then such property will instead have to be placed into a custodial account, under the supervision of a named custodian. The courts often restrict the ability of the custodian to access the property, even for the benefit of the minor, and may require court permission every time the custodian sees a use or need for the minor’s assets. This process involves delay, hassle and frequently attorney’s fees which are borne by the custodial assets. Moreover, the assets must pass to the minor free and clear when they reach adulthood, regardless of their fiscal maturity. It is often better to provide for such bequests to a minor to be placed into a trust, where they can be easily held, managed and used for such purposes you describe. No court supervision is required, they assets can be used for as narrow or wide a range of options as you decide, and you retain the ability to control the minor’s full access to the property even after age 18 if you so desire.

About Our Law Office

At the Estate Planning Centers at Coulter & May, P.C., we devote our practice to estate planning and assisting families through such transition times with estate and trust administration counseling. We offer guidance and advice to our clients in every area of estate planning, and offer comprehensive and personalized estate planning consultations. For more information or to attend an upcoming seminar or to book a consultation directly, please contact us at (412) 253-7526 or visit us online at www.estateplanningcenters.com.

Disclaimer: The information presented in this article is a conversational summary of a complex area of law and should not be construed to constitute legal advice. No person should rely upon the content of this article for making any decisions, and should instead consult with appropriate legal and tax professionals.