When I made a mistake once on my taxes, I got a notice from the IRS in the mail asking me to pay what I actually owed and a little extra for interest and penalties. This was certainly not a pleasant experience, but all it really cost me was money and my pride. However, when you make a mistake in estate planning and don’t catch it, you may not know it until it is too late. The very people you were trying to take care of may end up muttering your name under their breath in frustration because they have some problems on their hands.
I reached out to a couple of colleagues at Financial Finesse and asked them about some common estate planning nightmares they encountered in their professional lives. Interestingly, the most common mistakes weren’t from complex strategies people were trying. They were from ordinary human mistakes we all can make — procrastinating, not following through and cutting corners.
Here are some of the examples we saw and some tips on avoiding them:
Procrastination. I found just putting this chore off to be a very common estate planning mistake, not because people didn’t know they needed one, but because difficult decisions needed to be made. Case in point, I had clients who were in their early forties and had two children who were eight and twelve. They knew they needed to appoint a guardian but they couldn’t decide who to pick. Their best friends were their first choice because they were wonderful parents and very loving, but they weren’t great with money. The brother would be a prudent trustee on the inheritance and life insurance proceeds for the kids, but they felt he didn’t have the best parenting skills. So they never set it up.
They came in to see me one day in shock since the best friend passed away suddenly. They felt their own mortality as we all do when someone close to us passes away. They immediately got their estate plan in order with a will and a trust – the brother as the guardian to care for the kids if needed and to manage any inheritance for them. They didn’t realize they could have actually chosen different people to manage each function – the friend to raise the children and the brother to manage the funds. Ask a financial planner or an estate planning attorney to help you if you are battling these types of difficult decisions instead of simply defaulting to inaction.
Not following through. Scott Spann, CFP®, our planner from Charleston, South Carolina ,shared that a mistake he often uncovered with new clients was not funding a trust once it was set up. After doing all that work and going through the expense of setting up a trust, many people never re-titled the assets and the trust sat unfunded. The will had language to fund the trust after death (a pour-over will which makes everything go into the trust that wasn’t funded) but the problem with this is the trust has to go through probate then. This is the very thing that people were trying to avoid when they set it up. A pour-over will is intended to be a stop-gap measure in case there are assets that are inadvertently left out of a trust – not as a primary funding mechanism. After setting up a trust – make sure you fund it!
Work with your attorney to re-title the appropriate assets to the trust name – especially the title to your home. For those who don’t have a trust and live in a state that allows beneficiary trust deeds (Arizona, Arkansas, Colorado, Kansas, Minnesota, Missouri, Montana, Nevada, New Mexico, Ohio, Oklahoma and Wisconsin), look into adding a beneficiary to your trust.
Cutting corners. We all try to economize in one way or another, but on estate planning documents, it not a great idea. Diane Winland, CFP®, CPA gave an example of one of her former clients when she worked as a financial advisor. A wealthy couple wanted to gift each of their grandchildren $10,000 so they met with an estate planning attorney and set up an irrevocable trust for each grandchild. Where they made their mistake was when a new baby was born. Instead of going to the attorney and having a new trust set up, they simply photocopied an old one, used it as a template, replaced the name on the document and added the new grandchild’s name. Then they signed and notarized the document, thinking everything was fine. Unbeknownst to them, the tax law had changed and that new trust wasn’t valid because of the language on it. Each year until the grandchild turned 18, they had to pay additional taxes since the trust was irrevocable. Cutting corners ended up costing much more in the end.
There is no perfect estate plan. We can’t plan for every contingency, but if we take some time to think about the major things, plan for them and double check that the right people are on the right documents, it can go a very long way in the end. If you have a good solid estate plan, that is probably about as perfect as you can get and the beneficiaries are going to be very relieved because they’ll have a lot of other things to deal with when the time comes.
Next week, I’ll share a five step checklist for setting up an estate plan.