Special Guest Author Chris Barry: The Ten Most Gruesome Estate Planning Mistakes
Few of us like to think about our own death, but it will happen eventually and the most responsible action you can take is to not only think about it but prepare for it with a professionally drawn estate and trust plan. A good accountant and estate attorney can partner to ensure you don’t make any of these ten estate planning mistakes:
1. Dying Intestate:
If you die without a will or some other form of estate planning, the state in which you reside and the IRS will simply make one for you. Of course, they have no interest in avoiding or reducing estate taxes, minimizing estate administration costs or protecting your family and legacy. The distribution of your assets will be turned over to the Probate Court. The probate process is needlessly time consuming, frustrating and expensive. It is also open to the public, meaning creditors, predators or anyone else will have complete access to all information about your estate. For the vast majority of people, the benefits of a Will or other estate planning tools far outweigh any initial costs.
2. Having an “I love you” Will
An “I love you” Will is one in which all the decedent’s assets have been left to the spouse. On paper, it might seem to be a caring, thoughtful gesture, but the reality is quite different. That’s because such a Will simply passes the complex issues and problems associated with transferring and protecting wealth onto the spouse or other loved ones. An “I love you” Will creates more problems than it solves, particularly for future generations.
3. Giving property outright to your children
Here is another “solution” that might sound good at first, but ignores several important realities. For instance, what if the child in question is too immature to handle the responsibility of a large sum of money on his or her own? What if the child suffers a severe financial setback that puts the inheritance at risk to creditors? What if the child marries a fortune-hunter, is addicted to drugs or alcohol, gets divorced or remarried? In short, you may need to protect your children and heirs from their own poor decisions.
4. Owning property jointly
There are two types of joint ownership, Joint Tenancy with Right of Survivorship (JTWROS) and Tenants in Common (TIC). Problems with JTWROS include postponement of probate until last tenancy, loss of the double step-up in tax basis, and outright distribution. With TIC, you also lose the double step-up in tax basis, and your property is subject to the estate plan of each tenant as well as probate for each tenant.
5. Not having a trust
A trust is the single most effective estate planning tool available. There are many different types of trusts. Among the better known and more commonly used are revocable trusts, irrevocable trusts and testamentary trusts. In addition to protecting your privacy, a trust will help you leave what you want, to whom you want, in the way you want—at the lowest possible cost.
6. Not funding your trust
A trust can be thought of as a safe. It can do a great job of protecting your hard earned wealth, but if there’s nothing in the trust—i.e. nothing in the safe—what good does it do you? None whatsoever. Which begs another question, why would someone go to the trouble of creating a trust and then not fund it? The answer is quite often that the person in question simply never gets around to it. He or she procrastinates, resulting in an unfunded trust—which is worse than no trust at all.
7. Not having your documents reviewed and updated
Once they have their estate planning and other documents created, many people simply file them away and never look at them again. Big mistake. An outdated plan can be as bad or even worse than having no plan at all. Your documents should be reviewed, at the very least, every two years. Why? In a word, change. Your needs and goals change; your financial situation changes; your children grow older and their needs change. The law itself is constantly changing. And even if you’ve specified a trustee or executor, the named person’s ability to follow through on your wishes may change as well. Updating your plan allows you to take these changes into account and avoid unintended consequences.
8. Dying in the wrong year
We may say this tongue in cheek but, given the uncertainty of the estate tax laws, there is nothing funny about how much of your estate will be lost to estate taxes should you pass away in the “wrong” year. That’s because Congress has picked up the estate tax as a political football, whose changes are subject to the election cycle. Laws that are in place today have certain tax advantages available to experts who are aware of the opportunities. At the same time, things are only certain through 2012, after which either the estate tax reverts back to the pre-Bush era levels of a $1MM exemption and a maximum rate of 55% or we’ll get another new estate tax law. If you think this is unusual, consider this: laws governing estate taxes have changed more than 20 times since 1986. Which only underscores the importance of getting expert legal advice to prepare for and cope with continuous change.
9. Thinking a Living Trust alone is enough
The Living Trust is a powerful estate planning tool, but to truly ensure your wishes are carried out should you become incapacitated and incapable of making decisions for yourself, addendums can be extremely helpful. For example, an Advanced Healthcare Directive can dictate how you wish to be cared for and what steps you authorize medical personnel to take to prolong your life. A HIPAA Authorization can ensure your privacy while still making crucial medical information available to the people you want to have it. A Power of Attorney for financial affairs determines in advance who will be able to make financial decisions for you. Other commonly used addendums include Pour-over Wills, Assignment of Personal Property, Community Property Agreements, Appointments of Guardianship or Conservatorship, to name a few.
10. Not understanding that the biggest problem is not the IRS
If the biggest threat to preserving your wealth is not the IRS, who or what is? Frankly, it is human nature. None of us wants to think about our own deaths or the possibility of becoming incapacitated. Consequently, we tend to put off taking the steps necessary to prepare for what the future may hold. We procrastinate. And our loved ones often suffer the painful financial consequences. Perhaps Walt Kelly put it best: “We have met the enemy and he is us.”
Christopher J. Berry, Esq. is a partner with Witzke Berry Carter & Wander, PLLC in Bloomfield Hills, Michigan. Born in southeast Michigan, Mr. Berry has devoted his career to the practice of estate planning and elder law, including Medicaid planning, Veterans Benefits and asset preservation planning. As part of his work with the law firm, Mr. Berry has founded the Michigan Elder Law Center whose mission is to help Michigan seniors, veterans and their families navigate the long-term care legal maze.