Monthly Archives: September 2024

Recently, this blog examined the benefits of creating an Estate Plan and made the point that while many individuals think that they need only a “simple plan” because they don’t have significant assets or have few beneficiaries, that’s simply not true, see Estate Planning – There’s Something Here for Everyone Part I. This second part of the series will examine the most common mistakes that occur in an Estate Plan and how to avoid them.

Of course, any individual who fails to create an Estate Plan makes the biggest mistake of all. 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. As we learned in the first part of this series, without a proper Estate Plan, the state of your domicile controls distribution of your assets upon your death which has a snowball effect. Even if an individual undertakes Estate Planning, that alone does not guarantee a successful plan. Numerous opportunities exist for blunders to create chaos in an Estate Plan. For purposes of this article, I have divided those mistakes into four categories below.

The first type of mistake results when an individual seeks to shortcut the Estate Planning process in some way. Some individuals try to avoid creating an Estate Plan by retitling their assets jointly with another individual so that the asset passes to that individual automatically upon the death of the first individual. While doing this avoids probate, it creates other issues. For example, either joint tenant has the right to all the assets in the joint account, regardless of who supplied the funds. Further, joint tenants share legal worries. Property owned as joint tenants with rights of survivorship becomes vulnerable to the legal claims of each joint tenant, even if the other joint tenants had nothing to do with the legal issue. Revising the title to an asset may also raise gifting issues. This can be particularly troublesome for real estate because lenders will require the approval of every owner to refinance or sell the property.

Next, failing to account for the circumstances of a beneficiary results in mistakes in an Estate Plan. This could involve leaving assets outright to a minor, an individual with special needs, or a spendthrift. Any of these could have disastrous results. If an individual leaves assets outright to a minor, then most states require the establishment of a guardianship. Guardianship proceedings involve significant time, trouble, and expense, and often mean continuing court oversight. Usually leaving assets outright to a beneficiary with special needs results in loss of public benefits. Finally, beneficiaries known for spending money, battling addiction, facing legal woes, or dealing with creditors need the benefit of a trust holding their inheritance, rather than outright distribution. Mistakes in failing to account for beneficiary circumstances lead to disastrous results for the beneficiary.

The next category of mistakes are those plans that surprise the beneficiaries. As Trust and Estate litigators know, a beneficiary whose inheritance failed to meet their expectations makes a great client. Plenty of contentious battles begin because the grantor treated one beneficiary differently than another or one person decided something of which another disapproved. To prevent those surprises, this author suggests having a conversation with beneficiaries, no matter how uncomfortable so that they know what to expect. Clients may hesitate to discuss their plan because they worry that a beneficiary who knows that they will receive an inheritance will lose motivation to work hard. Others may worry that disclosing the information will cause current conflict or believe that the details of their plan should remain private until after their death. Still, others may have a hard time assessing family dynamics or the limitations of their intended beneficiaries. An experienced Estate Planning practitioner assists a client in working through these concerns and encourages an open dialog with the beneficiaries and fiduciaries to reduce conflict after death.

The final category of mistakes occurs because the individual fails to consider the Estate Plan holistically. An Estate Plan involves more than just the documents evidencing the plan. Effective estate planning requires an understanding of an individual’s assets and how the plan will work for those assets. It also involves knowing what assets the plan won’t cover. Under normal circumstances, any asset that passes pursuant to a beneficiary designation, such as a retirement plan, life insurance, or an annuity passes outside the Estate Plan. Sometimes, these assets make up the bulk of an individual’s wealth. Thus, coordinating beneficiary designations for those assets constitutes an integral part of comprehensive Estate Planning. In addition to considering assets that pass pursuant to beneficiary designation, it’s important to consider the overall impact that taxes will have on the plan as well as the beneficiaries themselves. An attorney creating the Estate Plan needs to understand whether the estate exceeds the Applicable Exclusion Amount ($13.61 million in 2024) which includes determining whether lifetime gifts reduced that amount. Further, if the estate will have an estate tax liability, then it’s important to consider which assets the estate will use to pay such liability. In a situation in which the client has children from a prior relationship, this matters a great deal. While assets passing to a surviving spouse do not incur an estate tax because of the unlimited marital deduction under Internal Revenue Code Section 2056, when those assets pass from the surviving spouse to the children of the first deceased spouse, a tax liability may occur and determining which party ultimately bears the taxes matters.

Finally, I can help every client understand potential income tax consequences of the plan. For example, if the client has designated a beneficiary on an Individual Retirement Account (“IRA”), that beneficiary will have to pay income taxes on the distributions from the IRA unless it’s a ROTH IRA. The income tax consequences of receiving these assets may influence the client to structure their plan another way. Perhaps they intended to make a charitable bequest and after discussing the income tax consequences of distributions from an IRA decide that using a portion of the IRA to fund that charitable bequest makes more sense for their plan. Of course, the practitioner advising the client needs to be aware of these issues. Retaining a competent me makes a world of difference in creating and implementing a comprehensive Estate Plan.

As this article has demonstrated, mistakes happen in many ways and lead to various unintended and potentially catastrophic consequences for the loved ones of those who fail to plan. These mistakes may make an impact during the life of the individual who failed to plan, and they certainly cause problems at death. Making matters worse, these mistakes may cause lasting trouble after an individual’s death either through an unnecessary (and possibly expensive or time-consuming) probate process or by improper planning for the intended beneficiary which takes numerous forms.

I often hear that someone didn’t or doesn’t need an Estate Plan, or needed only a “simple plan” because they didn’t have much in the way of assets, or they only had relatively few beneficiaries. Other potential clients indicated that they didn’t need a plan because they added a beneficiary to all their assets.  None of these circumstances means that an individual doesn’t need an Estate Plan.  In fact, individuals whose estates are modest, who have few beneficiaries, or who have added beneficiaries to assets may require more planning than they realize.  I make it my mission to disabuse potential clients of the notion that they need a large estate or multiple beneficiaries to create an Estate Plan.  Nothing could be further from the truth.  Let’s examine why in this first part of a two-part series.  Part II will examine the most common mistakes that occur in an Estate Plan and how to avoid them.

As a threshold matter, it’s a good idea for anyone aged 18 or older to have at least the basic Estate Planning documents that include a Will, or Will substitute also known as a Revocable Trust, a Property Power of Attorney, a Health Care Power of Attorney, an Advance Health Care Directive / Living Will, and a Health Insurance Portability and Accountability Act (“HIPAA”) Authorization.  These documents need to lay out who should make decisions if the adult cannot and who should have access to their protected health information.  These documents play an invaluable role both during life and at death.  For young adults headed off to college or living on their own for the first time, they establish clear boundaries and instructions regarding circumstances in which those individuals want their parents or another individual to have access to their financial or health information.  For older adults, it provides those same benefits plus many more.  During life, the plan gives directions regarding finances and medical care during incapacity or other periods when an individual cannot articulate their preferences.  At death, the Estate Plan provides a roadmap complete with instructions regarding who should distribute assets, in what manner, and to whom.

If an individual dies without a Will or Revocable Trust, that’s called dying “intestate.”  When a person dies intestate, the laws of intestacy in their state of domicile control what happens to their assets upon death. Intestacy laws usually give at least half of those assets to the surviving spouse and distribute the remainder among an individual’s children, all outright. Allowing the laws of intestacy to dictate disposition of assets upon death equates to a failure to plan.  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 establishment of a guardianship for such child to receive the assets. Outright distribution could result in a beneficiary’s creditor, rather than such beneficiary, receiving assets.  Any of these consequences could prove costly, costlier, in fact, than if the individual had simply decided to create a comprehensive Estate Plan.  If outright distribution would not cause any of the issues raised above, the distribution pattern set forth in the intestacy statutes may not match an individual’s preferred pattern of distribution. Creating a comprehensive Estate Plan that consists of the documents noted above avoids these potentially catastrophic results and leaves control of important decisions to the individual creating the plan.

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 assets at death. As any good Trusts and Estates attorney knows, 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. Finally, this form of ownership could create gifting issues if one or more of the owners failed to contribute to the purchase price of the property or failed to contribute funds to the account.  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 and that could continue for multiple generations.

As this article demonstrates, there are many great reasons to create an Estate Plan.  First, it provides detailed instructions regarding what happens both during life and death.  Next, it avoids application of the laws of intestacy upon death.  Further, an Estate Plan provides an opportunity to consider the individual circumstances of each beneficiary and plan in a way that protects those beneficiaries.  This is particularly important for any beneficiary with special needs who may receive government benefits, for minors who cannot hold legal title to property directly, and even for spendthrift beneficiaries whose creditors might obtain the assets.  While potential clients may be tempted to use shortcuts to create an Estate Plan, those shortcuts often cause more problems than they solve.  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. 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. The next part in this series will explore the most common mistakes that could undermine an Estate Plan.