I. Choosing the Wrong Controlling Instrument
Don’t let the fancy language scare you. It just means that some people choose wills when they should have a trust, and vice versa. I’ll admit to you right here that I prefer trusts for most of my clients, even for those who do not yet have substantial net worth. However, I always leave that decision to a conference between the clients and their attorney. In cases where wills are used instead of a trust, I still often like to see provisions in the will for the creation of a trust or trusts at death. Briefly, my main reasons for preferring the trust are “privacy” and “asset protection” for the beneficiaries, including in many cases the surviving spouse of the first-to-die client. Also, trusts don’t die. What I mean is that you can provide continuity of purpose and management of your assets for possibly two or three generations. (I’m writing a book about that. Stay tuned.)
II. Not Integrating the Plan
Your estate documents—wills, trust, powers of attorney, living wills, etc.— must be integrated with each other as to who, how, where, and when. Assets must be titled in a manner consistent with trust documents. Likewise, beneficiary designations must be updated to be consistent, though not necessarily identical, with your documents. I like to have my clients bring their newly drafted and signed documents to our office, so that we can be sure that everything that needs to be changed—ownership, beneficiaries, etc.—has been changed. We’ve had to do this for clients (including my father) on their deathbeds, and that’s really not ideal.
III. Not Creating a Minor’s Portion
This will sometimes be called “An Emergency Medical Authorization for Minors”. Imagine you’re a grandparent caring for your grandchild. Horror of horrors, that child gets whacked with a baseball bat and needs emergency surgery. The parents, who usually are the people who can authorize emergency care, just happen to be away from home and unreachable by cell phone. If the grandparents were given those emergency powers in advance, they could authorize the needed surgery when time is the very essence of the emergency. Stuff like that happens all the time.
IV. Believing Life Insurance Isn’t Taxable in an Estate
There are exceptions, but life insurance is almost always paid to the beneficiaries free of income tax. However, life insurance death proceeds are almost always includable in the estate of the owner. It’s always a good idea for your estate planning attorney, your CPA, and your financial advisor to know how much life insurance you have and who owns it, so they can be sure that it’s been accounted for in your estate plan—and appropriately titled. Depending on the size of your estate, you may need to create an irrevocable trust to hold your policies to remove those death benefit proceeds from your taxable estate. No estate plan should be a do-it-yourself project, and this is one of the biggest reasons why.
V. Underestimating the Value of the Estate
This really is two mistakes in one. Let’s start with the life insurance we just discussed in paragraph IV. You have your documents—wills, trusts, etc.—when you’re forty-five years old. Then you buy a business or farm, or you build a new house. Over time, any or all of those assets can appreciate in value at an amazing rate, lifting your net worth well into seven digits. It’s not rare for that to happen. Then your bank wants you to own more life insurance. Before you realize it—say in fifteen or twenty years—your net taxable is subject to a 35% estate tax rate. Your IRA or 401)k) has grown, too, and you’ve failed to provide stretch provisions for your beneficiaries. Double trouble: Estate tax of 35% or more; ditto, income tax on your IRA. Your life insurance isn’t enough to pay all the taxes, so your heirs have to sell the farm or business. Most of you probably know whether you’re in this situation or not, but as Nick Murray says, “knowing is to doing, as one is to sixteen.”
VI. Not Planning for Your Own Medical Emergency
Estate planning can be stressful. After all, it forces you to contemplate your own death. Two years ago, when Linda and I decided to update our plan, the death scenario wasn’t the most difficult part. We really struggled with what would happen if one or both of us became mentally disabled; and beyond that, the idea that one of us—or even worse, one of our children—would have to decide whether we should kept on life support. We each came to our own decision independently, so no one else will be put in that most uncomfortable situation.
That’s not all you need to know, obviously, but you know that tomorrow is promised to no one; and it’s your job to make sure that your affairs are in order, regardless of how much time you may have left. mh