Common Mistakes in Estate Planning . . Part I

As most individuals realize, creating an Estate Plan that includes a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization provides benefits both during life and at death. During life, the plan gives directions regarding your finances and medical care if you become incapacitated or are otherwise unable to articulate your preferences. At death, the plan provides instructions regarding who should distribute your assets, in what manner, and to whom. If only drafting and signing the documents were enough; however, as I can attest, there are numerous issues that cause the best-laid plans to go awry.

As a threshold matter, the worst mistake is failing to plan. Many people procrastinate when it comes to their Estate Planning for various reasons, such as lack of money or time, an unwillingness to face their own mortality, or indecision regarding their affairs. The excuses never end. Failing to prioritize your Estate Plan or failing to ensure its completion leaves your affairs and your family in limbo both during life and after your death. Without a proper Estate Plan, the state of your domicile controls distribution of your assets upon your death. When you die without an Estate Plan, that’s called dying intestate and the laws of intestacy in your state of domicile control what happens to your assets upon your death. Intestacy laws usually give at least half of your assets to your surviving spouse and distribute the remainder among your children, all outright. Outright distribution could have disastrous consequences for any special needs beneficiary by making them ineligible for the benefits that they were receiving. Outright distribution causes issues for a minor child by requiring a guardianship for such child to receive the assets. Finally, the distribution pattern may or may not match your intended plan of distribution. Creating a comprehensive estate plan that consists of the documents noted above avoids this result and solves the threshold issue of failure to plan.

Even with the documents noted above, an Estate Plan may not work as intended. For example, consider the couple that creates an Estate Plan when their children are young but then fails to update it as their children reach the age of majority, marry, and have children of their own. Each of those milestones represents a time that the couple should revisit their plan and update it accordingly. Even in the absence of major life events, it makes sense to review and update an Estate Plan every few years to ensure that it continues to accomplish your goals, especially as they change, and that it reflects any changes in the law.

Some individuals try to avoid creating an Estate Plan by using titling mechanisms to transfer their assets at death. Practitioners often cite avoiding probate as one of the reasons for creating a Revocable Trust to govern the distribution of your assets at death. As I know, probate avoidance comes in other forms. For example, taking title to an asset as joint tenants with rights of survivorship avoids probate as long as the other joint tenant(s) survive. However, using that form of joint ownership raises certain issues that using a Revocable Trust does not. Because joint tenants each have rights to the entire asset, a joint tenant could deplete a joint account without the permission or knowledge of the other joint tenants. In addition, joint tenants could share legal worries. Property owned as joint tenants with rights of survivorship becomes vulnerable to legal claims of each joint tenant, even if the other joint tenants had nothing to do with the legal issue. Transferring assets to a Revocable Trust, however, avoids those problems. Owning assets in a Revocable Trust allows the owner to maintain the use of the assets during life and prevents the creditors of another individual from getting to those assets while the trustor is alive. The Revocable Trust also allows the trustor to include safeguards for the beneficiary that will continue after the death of that trustor.

Another tempting way for clients to avoid probate without creating a Revocable Trust involves holding title to real estate with a child or other beneficiary. This causes a myriad of issues. In addition to creating vulnerability to the creditors of both owners like that of joint tenancy ownership, adding a beneficiary to the deed raises issues of gifting. If the beneficiary failed to contribute to the purchase price of the property, then adding the beneficiary to the deed constitutes a gift if the beneficiary’s interest exceeds the annual per donee exclusion amount, currently $16,000. Further, if the original owner wants to refinance, lenders will require the beneficiary’s approval and signature on those documents. Finally, if the original owner desires to sell the real estate, every other owner listed on the deed needs to approve the sale.

As this article demonstrates, while it’s tempting to use shortcuts such as titling assets as joint tenants with rights of survivorship, or adding a beneficiary on a deed, that generally causes more problems than it solves when it comes to Estate Planning. A true Estate Plan entails creating a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization, but that’s just the beginning. YOUY MUST FUND THE TRUST! An unfunded Trust means nothing!! A comprehensive Estate Plan involves regular meetings to ensure the plan remains current both with the grantor’s goals and the ever-evolving estate tax laws.