Fall is typically a time for financial planning conferences, and this year I attended a couple of them. The closing speaker at Financial Planning Associations MN Chapter’s program was Rebecca Cumming, an estate attorney from Georgia. She shared these 20 potential estate planning mistakes pitfalls and how to avoid them. We have counseled our clients to prevent most of these pitfalls at some time over the years, and it seemed helpful to pull them all together to share.
1. Not sharing healthcare directives and treatment preferences
A healthcare directive serves two primary functions.
- Instructive – It tells your health care provider that under these circumstances, do this. The client gives their instructions to their health care team and the person they have appointed as their health care agent. Minnesota has a healthcare directive template, as do most health care providers.
- Proxy - The healthcare directive gives authority to person(s) to carry out your instructions. It also provides the proxy’s contact information should your health care provider need to contact them.
Filling out a healthcare directive and thinking about your treatment preferences can be very important. Don’t forget to share it with your proxy(s) and medical providers. If the healthcare directive is not shared, it is not doing you any good. Doctors will upload it to your medical file and keep a copy for future reference. A copy is just as good as the original. Make sure the document includes a Health Insurance Portability and Accountability Act (HIPAA) release authorizing your proxy(s) to be able to receive confidential medical information. You can also have a standalone HIPAA release if you want to appoint additional people.
2. One child on the bank account as a joint owner
Here is a typical example of how this often plays out: The client is a widow, has three kids, and one lives nearby, and the client adds the nearby child to the bank account to have access to the money if needed. The client’s estate plan leaves everything equally to 3 kids. The pitfall is that the bank account will pass to the one child on the bank account instead of the three that the client had wanted. What could the widow have done differently?
- Signatory on account: Instead of adding the nearby child to the title of the bank account, they can be added as a signer. This allows the child to sign off on checks, but the child would not inherit the account directly. Instead, the account would be distributed based on the will.
- Create valid and broad Power of Attorney (POA) forms. The POA role adds a Fiduciary requirement which means the POA must use the money for the widow. When the widow dies the money will transfer via the will. Minnesota has template power of attorney forms, although you may want to work with an attorney to understand how these forms can be used fully.
3. A well-hidden will and/or safe deposit box
Your last Will and Testament needs to be an original. If an original Will cannot be found, it is assumed void, as if you ripped it up or revoked it. Because of this, it is essential to safeguard your estate documents but not be hidden.
Ensure the executor knows where the original Will is saved; some attorneys will hang onto the original, others send them home with the clients. If you choose to hold the documents in a safety deposit box, be aware that most banks will not let the heirs into the safety deposit box just because they have a key, they must be authorized to access the box.
At home, safes are often a better solution but be sure to share the combination. It is wise to share the location and access information to your Will with more than one person.
4. Nobody with money or access to cash – and no death certificate
The client has financially done well, but no one else has money to start the legal process, and the death certificate is not yet available. Payable on Death (POD) or Transfer On Death (TOD) registrations need a death certificate to get access, and it can often be weeks before getting the death certificate.
Solution: Leave some amount of money in a joint account with access to the executors so they can pay essential bills. Think about if someone around you has enough cash flow to carry the early-on costs, or if not, consider a small joint account. Then, the estate can reimburse expenses if access or timing is an issue.
5. No relationship with a probate lawyer who knows about state and local rules
Getting your estate plan drafted or reviewed by a local attorney could save the family a bunch of time and money knowing the local ins and outs. For example – going to the courthouse and filing probate papers can speed up the process by months compared to mailing in the paperwork in some areas. We would recommend working with attorneys where estate planning is 50% or more of their practice.
6. Probate with a missing heir or problem heir
Let’s start by explaining the difference between heirs and beneficiaries.
Heirs: people who are typically closely related to the family and entitled to your estate if you don’t name beneficiaries. Heirs are determined by state law (intestate rules), and each state has its own intestate rules.
Beneficiaries: people you have chosen to leave money to.
When probate is opened, the first step is to notify heirs. During the probate process, heirs have the right to challenge the Will. If an heir cannot be found for any reason, it is a problem since all heirs need to be notified.
All of this can be avoided by having and implementing an estate plan. For example, you can use trusts to avoid probate and draft your estate documents to exclude designated people from an inheritance.
This issue can cause a ton of headaches for the other heirs. For example, if one of the heirs were single and had no kids and pre-deceased you– their heirs are further out on the family tree and may be harder to find and notify.
If you are missing an heir or problem heir, consider using a trust, so you do not have the notification issue.
7. Out of state will
If someone dies with a Will that was created from another state, the Will is still perfectly valid, although there can be issues. You will likely want to have the Will updated in accordance with the new state rules. For example – does the state allow you to waive the executor accounting requirements.
Keep in mind that states that do not have state income tax tend to have expensive probate. For example, Florida. If a client moves from Minnesota to Florida, you will want to make sure they update their Will with an attorney in Florida to minimize the cost of probate when possible.
8. Blended family
With blended families, each spouse/partner must decide what to leave to the new spouse, their kids from prior marriages, kids from the current marriage (if any), and often, step kids. It is essential to talk with your attorney about options and communicate the plan to the family members. If minimizing conflict between the families is a goal, everyone knowing the plan and your reasoning for the estate design can make the transition easier. Imagine if all of your deceased parent’s assets passed to the new spouse with no explanation.
9. Funky investments and no way to get out of them easily
Often more sophisticated investments may be difficult to sell for estate purposes. For example:
- Real estate deals that require accredited investments and none of the inheritors are accredited.
- Property that has no market
- Timeshares can be messy. When the owner dies, the timeshare becomes part of the estate. The inheritors of the timeshare become the new owners, and they are obligated to take over the timeshare fees. However, they do not have to accept it, in the same way that anyone has the right to refuse any part of an inheritance
10. Family executor left without names and contact information for experts/resources
Settling an estate can be a complex puzzle to piece together. However, by leaving behind a list of the professionals in your life (tax preparer, accountant, insurance agents, attorney(s), financial advisors, bankers, etc.), you can help settle the estate or guide the inheritors with their newly inherited assets.
11. Not enough cash
We often get involved with estates that have been designed so there is not enough cash to cover the estate’s expenses. If all assets are beneficiary-driven, you can end up leaving the estate with no money to cover expenses.
For example: if all accounts, including bank accounts, have beneficiaries and the house is titled in the deceased's name, the house would be a probate asset. The beneficiary accounts will be divided and paid out to the beneficiaries, but that leaves no resources for the care and maintenance of the house before the sale of the asset. What cash do they use to get the house ready to sell or cover the carrying cost while waiting to close on the sale? It is important that the estate has some money available for the executor to cover funeral services costs and a host of day-to-day expenses before disposing of the assets.
12. Tangible personal property too difficult to divide (stamps, guns, jewelry, baseball cards, cars, etc.)
Most states allow you to have a separate list where you can specify who gets what. Unfortunately, if inheritors want to fight, this can be where it will happen.
A smart estate plan will have a list/memo, and it will live with the Will. Some families gather before the death and put stickies on the items they want, which can work, too. It is important to include the stuff that would be fought over and maybe note why you made your gifting decisions.
13. Old unknown valuations of significant assets
Significant assets can make it hard to divide the estate fairly. Suppose the client has a business or real estate. In that case, the executor will often need an attorney’s relationship to ensure the proper documents are in place and a fair evaluation is used. Documents such as buy-sell agreements give the terms on how the business will be valued but may not have had a current valuation done for a while.
14. Executor who is too busy to do the job right
One child is often the one who has the skill set to do the job but may not have the capacity. Some of the other inheritors may need the money as soon as possible and can get upset that it is taking too long to settle the estate. Clients need to be practical, and it may make sense to name a professional executor.
15. Beneficiary designations not coordinated with the estate plan
We see this all the time. For example, an estate plan is designed to leave everything in trust for young kids, although they have named the kids directly for the beneficiary of the retirement accounts. Ideally, any money inherited by the underage kids needs to go to the trust to be overseen by the trustee and used in the manner the parents have outlined in the trust documents.
If beneficiary designations do not mirror the estate plan, which is sometimes done intentionally, it needs to be documented. Upon completing the estate documents, good estate attorneys will give the clients a letter of instruction providing guidance on the specific designations. Make sure you understand the instructions or enlist a professional’s help to help implement the instructions.
16. Unnecessary formula–funded credit shelter trust
Historically, estate plans often were designed to leave everything up to the federal estate tax exemption limit to their children tax-free in one trust and everything above that to a trust for the spouse. Historically the federal exemption number was much smaller than it is now. The exemption has risen from $675,000 in 2000 to over $11 million in 2021; spouses can port the exemption to bring that number up over $22 million if none of it was used at the first death. If the estate plan was drafted before 2000, it might have a formula to fund the kids’ trust and leave nothing for the spouse’s trust.
17. Passwords only in the head of the decedent
Using a password system like LastPass allows you convenient access to your passwords during your lifetime, and you can share your access password with your executor. You may want to be picky about what passwords you leave.
18. Out of state real estate
Probate laws are different in different states. If you own real estate in another state, the real estate passes according to the state unless you hold the property in a trust or LLC. Setting up a revocable trust can be done when you create your estate plan, and your attorney can help move your properties into your trust to avoid multiple state probates.
19. Outright gifts to grandchildren or other minors
Minors cannot take procession of money of more than a certain amount. Custodians cannot release the money to minor children, so someone must become a legal guardian/conservator of that money. Should you want to leave money to minors, you will work with your estate attorney to establish the terms in which the money will be managed on behalf of the child.
20. Beneficiaries who are left $1 or $10 with a “no contest” clause
The no-contest clause is designed to be used to deter anyone contesting the Will. Typically, a specific inheritance amount is accompanied by a no-contest clause that specifies, “If anyone contests this Will, they will get nothing.” If the amount of the particular gift is too small, the beneficiary is not discouraged from contesting. If you plan to use this clause, it is important that you allocate enough to discourage the beneficiary from contesting.
The bottom line is that estate planning is complicated, varies from state to state, and is not a one-and-done event. Your estate plan needs to ebb and flow with your life, the age of your kids, the state(s) you live or own property in, the type of assets you hold, to mention but a few of the many variables. Therefore, it is essential you work with an estate planning professional to avoid the conflicts and pitfalls that can easily make it difficult for your appointed people to administer your plan