Common Estate Planning Mistakes and How to Avoid Them

Bridget Handke, CFP®, CAP®
May 18, 2023 11:58:49 AM

Most Financial Advisors will tell you it’s essential to have an estate plan and to update it as your life and estate tax laws evolve. This will help ensure that your heirs will rightfully receive your assets after your death.

It may also allow you to structure their inheritance to promote their education and independence while offering a safety net. There are many articles on the advantages of a good estate plan. This article will focus on some of an estate plan's unintended consequences and how to avoid them in partnership with your estate attorney.


You Do Not Have An Estate Plan or Will

If you don’t go out of your way to create an estate plan, the state where you reside will control how your estate will be divided. This could potentially have devastating consequences. Every state is different, but many have an inheritance order. For example, if you have a spouse and children in Minnesota, the property will go to them by a set formula. If not, the property will descend in the following order: grandchildren, parents, brothers and sisters, or other relatives if there is no immediate family. Those in Minnesota will remember Prince died without a will and his assets were distributed according to Minnesota state law. Without a spouse or children, his estate passed to his half-siblings after a six-year court battle. If you have a long-time significant other or friend you want to receive your assets, state laws generally leave them out. If you have a blended family, your state might have a complex structure that may not be near what you hoped. The solution to this is to create an estate plan. A qualified estate planning attorney can help you with a will or trust that explicitly names the beneficiaries and the percentage of assets each will receive. Including beneficiary designations on retirement accounts, bank accounts, and life insurance will help also.

Read more: Why You Want An Estate Planning Attorney Working With Your Financial Planner

Your Estate Goes Through Probate

Probate is the legal process of validating a will and distributing the assets to heirs. Probate can be a lengthy and expensive process that is more demanding in some states than others. Without a will, your estate will be considered intestate and go through probate. Even with a will, assets will go through probate if you are the sole owner or did not establish a beneficiary designation. You can avoid this process by creating a trust, naming beneficiary designations, or setting up an account with joint and survivor titles, such as a joint bank account. Doing so will speed up the process of transferring the assets to your rightful heirs and may be less expensive than going through probate.

Your Will or Trust is Contested

If a will or trust is poorly executed, it could be contested. This is the case with Lisa Presley, who recently died. Lisa had a will and trust, but there was a trust amendment changing trustees with a misspelled name, inconsistent signature, and missing notary or witnesses. An obvious solution is to ensure your estate plan and amendments follow your state’s requirements for notaries and witnesses and that the document is well-crafted with the help of a good estate attorney. 

Another reason an estate plan may be contested is due to incapacity or undue influence. ElderLawAnswers suggests several ways to avoid these concerns, which include, having your attorney test you for competency as well as video record the signing session. You might also speak to your heirs about how you structure your estate and why so they aren’t surprised after your death.

Read more: Have You Talked With Your Children About Your Estate Plan? Start Here.

Regarding undue influence, let's say you want to leave more to your child who cared for you during an illness than your other children. ElderLawAnswers suggest that the child not drive you to the attorney’s office, meet with the attorney with you or be in the room when you are signing. 

You Didn’t Fund Your Trust

One of the most common pitfalls of creating trusts is that people need to remember to fund them. If they aren’t funded, then all your effort of doling funds out to your heirs in a specific manner will be for naught. Once you’ve created your trust, you will need to retitle assets to go into your trust so that all your efforts will have the desired effect.

Your Children Can’t Access Funds

I once worked with a client who was the beneficiary of a trust, but when they tried to receive a distribution, the trustee wouldn’t send funds until they had shown the trustee their entire budget and income shortfall. That was because their parent had made an irrevocable generation-skipping transfer trust (GSTT). The parent had been told this was a great way to help his children and grandchildren alike. But in this case, the GSTT favored the grandchildren, and the children could not receive funds unless they could prove they had a specific need. This was not the actual intent of the parent, but as the trust was irrevocable, nothing could be done. When creating a trust with your attorney, be sure to ask questions about how the trust will actually work in various specific circumstances so you don’t inadvertently make it difficult on your heirs.

Another reason children might not be able to access funds is if you’ve structured things narrowly. For example, you might have them receiving funds for college and at certain ages, such as 30, 35, and 40. If you don’t allow for flexibility, the kids might find themselves in a situation with a need that can’t be met, like being unable to pay a school loan until many years after graduation.

Your Children’s Access to Funds Differs; One can Fund a Higher Lifestyle than AnotheR

My husband and I were considering redoing our estate plan, and one suggestion we received was to create trusts where the children were their own trustees upon our death. For the kids to shelter their inheritance from divorce and creditors, they could receive funds from the trust under the HEMS provision: Health, Education, Maintenance, and Support. Our oldest daughter was launched with a good job, while our youngest was in graduate school, living in an old apartment and driving a beat-up car. If we were to die under this situation, my youngest would be able to receive funds from the HEMS provision to pay for school, but she would not be able to upgrade her living conditions or her car as she currently has a lower standard of living.  Our oldest, who has been in the workforce longer, would be able to use funds to maintain a higher standard of living.  A potential way around this might be to name a different trustee and write the ability to upgrade their standard of living in the trust or to distribute funds according to certain timelines. 

Taxes May Consume a Significant Portion of Your Estate

Currently, an individual can leave their heirs $12,920,000 without paying federal estate tax. Most people won’t pay federal estate tax; however, in 2026, our current tax law is set to sunset, so the estate tax exemption will be reduced to about $6,000,000. Estates larger than that could face a federal estate tax of about 40%. In the example of a client who has $10,500,000 of an estate made up of $500,000 of their home and $10,000,000 of an Individual Retirement Account (IRA), they might owe $1,800,000 in federal estate tax. That means that some assets will need to be sold to pay the tax. Once the house is sold for $500,000, then $1,300,000 of tax will need to come from the IRA. However, IRA distributions are subject to income tax. The Executor might have to take a $1,800,000 distribution to net $1,300,000. That would mean the estate is selling $2,300,000 in assets to pay a tax bill of $1,800,000 after tax. Knowing about this problem in advance and working with a qualified Financial Advisor and estate planning attorney could help you mitigate this issue.

In summary, there are several ways that your beneficiaries may not receive the assets you intended to leave them if you do not plan your estate properly. It is important to work with an estate planning professional to create a comprehensive estate plan that takes into account all of your assets and provides clear instructions for their distribution. This can help ensure that your wishes are carried out and that your loved ones are taken care of after you pass away.

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