LAW FIRM BLOG
Estate Planning Mistakes to Avoid
February 27, 2024
Estate planning requires individuals to acknowledge their potential incapacity and unavoidable death, then, actively plan for it. Yes, it is an uncomfortable task most people would rather avoid, but it can ensure that your assets, interests, and loved ones will be protected after you die.
It is also, however, fertile ground for mistakes. Errors can result in your assets being frozen in court for years, cost thousands of dollars in legal fees, leave property to people you don't know or like, and add stress for your heirs in a time of grief.
With a proper estate plan, you can ensure that your assets are efficiently distributed to beneficiaries, reduce estate taxes, avoid the hassle of probate, donate to charitable causes, plan for incapacitation, provide financial support for a disabled loved one, and lessen the chance of chaotic estate disputes among your heirs.
Trying to Create a Will or Trust Yourself
Too often a person decides to put a lifetime of their hard-earned assets in a will or trust that they downloaded from the internet for $70. Seems crazy, right? Unfortunately, this scenario is commonplace.
It might be tempting to create a will or trust through an inexpensive online template, but don't. These poorly drafted documents may ultimately cost you or your heirs additional money. Cheap “do-it-yourself’” estate planning can be a trap because even a simple estate can be misrepresented, resulting in errors, inequities, or uncertainties for loved ones.
Do-it-yourself wills and trusts create a myriad of problems. Everything from having to prove to a court that the will was executed with the formalities required by law, to failing to take advantage of appropriate tax planning, to having bequests go outright to minor children, or ineligible beneficiaries on governmental assistance.
An online service doesn't know all the details of your situation. They tend to not be state-specific, even though they advertise they are. Moreover, you are not an expert, and you will find yourself trying to work your way through confusing legal documents. Miss a step and they are void. Even if you have minimal assets, failing to meet these legal requirements results in someone dying as though they had not drafted them and they may not be admitted to probate at all. In that case, the person’s property will instead pass by “intestacy.” That means that their property will transfer to the persons that the law of the state where he or she lived says inherits them.
What makes a will or trust more likely to be effective is the legal advice received with it. Therefore, you should hire an estate-planning attorney to make sure that your documents are properly drafted.
Failure to Sign a Will or Have Witnesses or a Formal Execution Process
Another common problem with online services, or when a person tries to create a will without an attorney, is a failure to sign it or have it properly witnessed and notarized following the laws of your state. A loved one can be disinherited from a million-dollar estate entirely because the will was not properly executed.
Failing to Communicate Your Plans About Your Estate with Your Heirs
Telling someone about your estate plan can lead to an awkward and emotional conversation. After all, you’re sharing your plan for what will happen to you and your belongings after death or incapacitation. However, having these conversations can help your loved ones understand your plans for your estate. Setting expectations now, in advance, with an opportunity for discussion, if needed, makes everyone aware of your intentions, increases the possibility of acceptance, and lessens the likelihood that there is any contention or disagreement after your death. This can avoid hurt feelings, damaged relationships, and, importantly, litigation. First, speak to your future executor and make sure they are comfortable with the responsibilities. Then talk with your beneficiaries (those you're leaving assets to). It potentially reduces confusion and arguments if everyone knows what they are getting, and it leaves time to rearrange your plans.
Poor Organizing and Record-Keeping of Assets and “Hidden” Estate Documents
Common advice says to put your estate documents in a safe place. Unfortunately, many people interpret this to mean that they should hide them completely from the world. A scattered estate plan by a secretive decedent may cause some assets to be left unfound, uncollected, undistributed, and even lost. Poor rerecording and organizing will make it challenging for your executor to find and distribute your assets after your death. Estates can linger on for months while surviving family and fiduciaries attempt to locate the necessary information about all of your property.
Instead, leave a comprehensive and detailed list of your accounts and investments that tell your executor (the one who will be responsible for managing your estate after your death) where property is located, the names and contact information of those they will need to transact with, such as your banker, broker, insurance agent, financial planner, attorney, landlord, or tenants, etc. By sharing information with your executor (and updating it whenever necessary), you’ll ensure that your estate remains intact and is easier to administer.
Finally, keep all your original estate planning documents together, organized, and in a secure place. Storing them in a fireproof safe is a great idea. Be sure to let a trusted person know where this is located. Avoid putting them into a safety deposit box as it can become problematic when your loved ones try to gain access after you die.
Having a Non-Wills, Trusts, and Estates Lawyer Prepare Your Estate Plan
There may be a temptation to work with a lawyer who is not a specialist in estate planning because someone’s cousin, who normally does litigation, is willing, or your divorce attorney thinks they can draft a will for you at a reasonable fee. Don’t fall into those traps. Estate planning is complicated and there are a lot of pitfalls for the unwary, even unwary lawyers.
Search for an estate planning specialist, knowledgeable about tax implications, strategies for avoiding probate, how to protect your assets if you go into a nursing home and state-specific as well as federal estate-planning laws. Poorly conceived estate plans can cost your family far more than the few extra dollars it may take to hire an attorney who concentrates on estate planning.
Not Including Sentimental Items in Your Will or Trust
People generally think of a will or trust as relating to money, but often what beneficiaries want most are low-value belongings with sentimental value. Oftentimes the division of tangible personal property becomes an emotional and adversarial process. Include these items in your will if only to eliminate misunderstandings and disputes. If it is a special book, artwork, letters, family recipes, something that belonged to an ancestor, jewelry, a photo album, furniture, or another artifact from your life, bequeathing such objects is a good way to help a loved one remember you through that item.
Failing to Nominate a Guardian for Minor Children.
If you have minor children, a will allows you to nominate a guardian to care for them until age eighteen if someday neither parent is alive or competent to do so. This is especially important because if you don’t specify a guardian, a judge will decide who is responsible for them without knowing who you would have chosen. You must take advantage of this opportunity to select the person who you believe is best qualified to take care of your children and/or their finances if the ultimate loss should occur to them.
Appointing the Wrong Executor(s)
You will need to appoint an executor of your estate. It's critical to carefully select this person as you are empowering them to implement the terms of your will. Duties of an executor include hiring an attorney, representing your will in probate, filing taxes on the estate, paying your liabilities, and distributing remaining assets as you specify, whilst acting at all times in the best interests of beneficiaries. Sometimes, either people choose someone who cannot without reservation implement the decisions they have made or select someone who can’t be relied on to act responsibly, or choose a person who is ultimately untrustworthy.
Consider the suitability of the executor for the role, and the nature of the relationship between multiple proposed executors. Ideally, you want to choose someone who:
• Lives close to you (or at least in the same state).
• Is likely to outlive you.
• Has the financial understanding to be able to implement your plan.
• Is trustworthy.
• Has the time to act as your executor (it can be very time-consuming).
• Has expressed willingness to act in this role.
The executor named in your will shall oversee the probate process. This requires numerous financial transactions with careful record keeping and ultimately controls the distribution of your life’s savings to your beneficiaries. Many people fail to consider whether the person they list as an executor has the skill set necessary to perform the job. Some don’t even confirm that the individual would be willing to serve as an executor if the need arises. Sometimes the selected executor has neither the time nor the inclination to devote to the often-long process of estate administration.
When a poor executor is chosen, you have just guaranteed a protracted probate process, inefficient handling of your estate assets, and, probably, disgruntled heirs. Instead, pick a capable executor, and confirm that they will do the job. Remember that it doesn’t have to be a spouse or child. What if they are too overwhelmed with grief to manage a complex probate? What if they do not have the best understanding of finances, investments, or tax laws to manage a trust or large estate? Your options include other relatives, a bank representative, an attorney, an accountant, or a licensed trustee company to be the executor.
When deciding which executor is right for you, it’s important to consider family dynamics, as well as administrative management and tax experience or skills. In the event no executor is chosen, a court will appoint one.
Designating Co-Executors
You should definitely have just one executor and then have alternate executors. A lot of testators think, in fairness, they want to make all their children responsible for administering the estate, but that invites conflict. You'll need to have everybody agree on everything. If you have two or more executors who are unable to reach agreement, then the administration of the estate can be delayed and additional costs may be incurred. Consider having a discussion with potential executors and choosing one as the primary and one or two more people as successors rather than co-executors.
Believing that Your Children Will Be Honored to be Chosen as Executors
Believing that the children you name as executors/trustees/agents/health care proxies will consider it a great honor and those who are not appointed will feel excluded. The duties associated with administering your assets and medical care require substantial responsibility, time, and effort. You should choose your appointees based on their skills and availability, not by their birth order or a perception that someone will feel left out.
Trusting Promises of Family Members to “Take Care of” a Loved One
Sometimes, a person leaves a loved one out of a will with the expectation that another family member will “take care of” that person. Often this is done because the person omitted receives means-tested governmental assistance. Other times it is because they have creditor problems or are in the process of a divorce.
Relying on another beneficiary to keep oral promises after they have been given a lump sum of money and/or assets under a promise that they will “take care of” another family member is risky. There are too many cases where the person who was supposed to “do the right thing” did not.
Unfortunately, time and money can have the tendency to change the perceptions of people. Establishing a trust will be more complicated and costly at the onset, but it can ensure the proper care of your loved ones for decades after your passing.
Updating Your Plan Too Infrequently
Estate planning documents are typically drafted to withstand the time delay between when they are prepared and when they need to spring into action, upon incapacity or death. However, such planning is not a static set-it-and-forget-it operation. Thus, if your life circumstances change, so should your estate documents. You must regularly review and update wills, trusts, powers of attorney, living wills, life insurance policies, and individual retirement accounts (IRAs). You must keep them current, and make sure they reflect your life changes as they happen and your current goals.
Any major life event is cause for an update. This could include a marriage, divorce, remarriage, birth or adoption of a child or grandchild, death of a family member, primary or secondary beneficiary, or your minor child’s intended guardian. Purchasing a new home, changes in job status, state residence, and having acquired a business or life insurance policy should trigger a review of your plan. Of course, a change in your goals or the law should also be a catalyst. As your finances and your life situation change, your estate plan should evolve to reflect your then current needs. For example, events such as bankruptcy, the sale of a business, retirement, lawsuits, or inheritance of a substantial sum of money all carry estate planning consequences.
Beneficiary designations (and alternate designations) for annuities, insurance policies, retirement accounts, and bank and brokerage accounts must be coordinated with the beneficiaries named in your will and trust for your plan to succeed. Beneficiary designations supersede the provisions of a will or trust, and conflicting documents can lead to legal challenges.
In addition to updating your estate plans after any major life event, it’s important it is to conduct a general review every three to five years even if no major life events have occurred, so they remain current and effective.
Not Planning for Disability or Incapacity.
Many people fail to plan for incapacity. According to the Society of Actuaries, one in seven workers will be disabled for five years or more before they reach retirement age. Another study found that those who reach the age of 65 have a 50 percent chance of becoming incapacitated in their lifetime. Incapacity, temporarily or permanently, can happen to anyone, young or old, at any time.
A comprehensive estate plan indicates what happens if you become incapacitated. When such planning is not included in your estate plan, your family and friends may struggle to identify your preference for care and who should be responsible for making decisions on your behalf. Your family could be forced to petition a court to create a guardianship so as to make decisions for you, no matter how costly and unpleasant for all concerned. You thus might relinquish control over healthcare and financial decisions to a total stranger. A judge, unaware of your preferences, could appoint an indifferent professional guardian.
Proper planning requires an up-to-date healthcare proxy, power of attorney, an advance healthcare directive (living will), or a revocable living trust with explicit instructions. Without these documents, your loved ones may not legally be allowed to make decisions about your finances and healthcare.
Directly Leaving Assets to a Minor Child or Grandchild
The will of a parent or grandparent may provide for bequests to a beneficiary who is a minor when it is time for the distribution to occur. The courts do not permit minors to take title to property. If no planning is done, such property will instead have to be placed into a custodial account, under the supervision of a court-appointed guardian. The court often may require its permission every time the custodian observes a use or need for the minor’s assets. This process involves delay, hassle, and, frequently, attorney’s fees which are borne by the custodial assets. Additionally, the assets must transfer to the minor when they reach eighteen years old, regardless of their fiscal maturity.
It is better to provide for such bequests to be placed into a trust, where they can be held, managed, and used for the purposes you describe. The trust will allow you to specify who is going to manage the funds. No court supervision is required, the assets can be used for as narrow or wide a range of options as you decide, and you retain the ability to control the minor’s full access to the property even after age 18, if you so desire. It will also specify at what age the funds should be given entirely to the beneficiary or when the child could become the trustee of their trust.
Failure to Consider the Capital Gains Tax Consequences of a Gift
As generous as it may seem to gift property to your heirs during your lifetime, it is usually much smarter – and more generous – to delay the transfer until you’re deceased.
When you convey the deed to a property to your next of kin before you die, they may face a hefty tax bill whenever they sell the property. This is because the basis for that house or condo will be tagged to the date on which you made your purchase, not the date when you made your gift. This could, therefore, leave your heirs forced to pay a large sum that would have been averted had they been granted the deed after your death.
An example: Cynthia was diagnosed with terminal cancer. She had heard that probate could cost her children thousands of dollars. She decided that it could be avoided by deeding her home to her kids while she was alive. But when the kids sold Cynthia’s home after her death for $180,000, they discovered that their “basis” (cost for determining taxable gain) was Mom’s cost 30 years ago, which was $20,000. The taxable gain was $160,000 and at 25% (the federal and state tax on the capital gain at the time), the tax was $40,000.
If Cynthia had owned the property on her death (or if it were owned by her living trust), then the children would have inherited it with a “step-up in basis.” That means that their basis would have been the fair market value on Cynthia’s date of death. There would have been virtually no capital gains tax payable on the sale shortly after her death. Cynthia avoided probate but exposed the children to unnecessary capital gain taxes which cost them $40,000.
Failure to Plan for End-of-Life Care
A living will, also known as an advance healthcare directive, enables you to express your end-of-life treatment preferences. It's important, while you can still communicate, to decide the extent of life-sustaining treatment you want or don't want. This ensures your wishes are respected and also relieves your loved ones of trying to guess what you would have wanted — a common source of family infighting.
A living will, enables healthcare workers to know exactly how your wishes should be implemented even if you cannot communicate directly due to your condition. It allows you to plan, if you were terminally ill, what medical interventions you would want, such as mechanical ventilation, artificial nutrition, or dialysis. You can also express how you feel about organ donation.
Naming a Beneficiary Without Naming Contingent Beneficiaries
In the event that a beneficiary dies before you do, you’ll want to have a “contingent beneficiary.” A contingent beneficiary (sometimes referred to as a secondary or alternate beneficiary), is the person or entity who receives an asset in your will or trust if the primary beneficiary dies before you do. Naming these individuals for each asset is vital because if the primary beneficiary dies without one designated, the undistributed asset returns to the estate, and your heirs may have to go through a long, costly probate.
Similarly, when creating beneficiary designations on retirement accounts or insurance policies, you should name multiple beneficiaries in case of divorce, death, or other changes in family circumstances.
Failure to Coordinate Beneficiary Designations with Your Will or Trust
Many people mistakenly believe their will or trust controls how all of their assets will transfer upon their death. Therefore, some individuals make the mistake of creating or updating their will or trust, but fail to coordinate the beneficiary designations for their retirement accounts (IRAs and 401(k)s), life insurance policies, and annuities, which are often the largest assets in their estate. These assets will pass to the person(s) you name in a beneficiary designation form. These forms are legally binding documents, which override whatever is written in your will. Assets like these pass directly to beneficiaries and are not subject to the probate process.
Therefore, in addition to enumerating the beneficiaries and their respective shares in your will or trust, you must also communicate a directive to your financial institution or insurance company. If you fail to do this, their rules will override anything you’ve written in your will or trust as to that account — leaving your total estate passing in percentages different from those expressed in your will or trust.
Example: While unmarried, Lee named his brother as the beneficiary on his retirement plan and his life insurance. Lee later wed Julia. After his marriage, he changed his will to leave everything to his wife. Because Lee never changed his beneficiary designations on his retirement account and life insurance, the bulk of his estate passed to his brother on his death and not to his wife.
Failure to Plan For and Protect a Disabled Beneficiary
Leaving assets directly to a disabled beneficiary who receives government assistance (which imposes strict asset limits) can be problematic. In many cases, those with special needs rely on government benefits such as SSI and Medicaid to provide support over a lifetime.
If you leave the inheritance to them outright, they may be ineligible for public assistance until they “spend down” the inheritance to the statutory limit ($2,000). To avoid this situation, the inheritance of any disabled person should be passed to them using a specially-drafted trust that keeps them eligible for needed financial assistance and other benefits from the government.
Failing to Provide Liquid Assets to Pay Estate Debts.
Following your death, taxes, debts, and expenses will need to be paid. Without advance planning, your executor may not have the funds to pay them. For example, if your primary wealth is in real estate and a business you own, what will the executor use to pay these expenses? Far too often, an executor has to do a forced sale of assets, quickly liquidating such non-cash property to generate the cash flow needed. Under such circumstances, property you intend to pass to your heirs disappears, and the price obtained is often less than fair market value when the assets are sold due to the time constraints of probate. You can plan ahead to ensure that some assets are available to pay for your reasonably anticipated probate debts, including the use of bank accounts, readily marketed securities, bonds, or even life insurance.
Failing to Use the Annual “Gift Tax Exclusion” to Make Non-Taxable Gifts to Reduce Your Estate Tax
You can save your heirs money by gifting certain assets before your death. Giving such gifts is one way to avoid hefty estate taxes after you are dead. The federal gift tax law allows each individual to make a gift of up to $18,000 per year to any individual or charity free of gift tax considerations. A married couple together can gift up to $36,000 per year. This is called the “gift tax exclusion.”
These gifts can reduce your estate subject to estate tax, or perhaps even eliminate the potential estate tax. Furthermore, the appreciation on the gifted assets is also excluded from your taxable estate. Gifts in excess of the annual exclusion amount can also be beneficial under the appropriate circumstances; such gifts reduce the unified federal lifetime gift and estate tax exemption (or are subject to gift tax if you have already exceeded the lifetime exemption amount).
The lifetime gift tax exemption is the amount of money or assets the federal government permits you to give away over the course of your lifetime without having to pay the federal gift tax. For 2024, you can give up to $13.61 million in gifts throughout your life without ever having to pay gift tax on it. If you are married, you and your spouse could give away a total of $27.22 million before paying the gift tax. Note that this tax reform is temporary and will expire on Jan. 1, 2026. After this date, estate tax limits will be approximately half their 2024 amounts.
Neglecting to Fund Your Living Trust Forgetting About Estate Taxes Excluding Immediate Family Members from your Will Without Prior Communication Titling Property, such as Your Home, Jointly with Your Children Not Including Funeral and Burial Wishes Depending Solely on Beneficiary Designations Not Making Special Provisions for a “Problem” Child Not Considering the Income Tax Aspects of Your Assets Failing To Realize That Wills Can Be Changed By the Maker Planning Your Estate Around Specific Assets Getting Too Specific Expecting Too Much From a Power of Attorney. Insufficient Cash to Pay Gifts. Not Avoiding Probate Funding a Gift to Charity Using Taxable Assets Not Avoiding “Living Probate” Including Non-Probate Assets in a Will Not Making Direct Gifts for Tuition and Medical Expenses Failing to Prepare a Comprehensive Estate Plan. Not Being Involved and Fully Understanding Your Plan. You Believe that a Will is All You Need to Avoid Probate. Not Including Pets in Your Estate Plan Believing a “Durable” Power of Attorney Continues to be Effective After Death Failing to Establish State-Specific Powers of Attorney and Healthcare Directives Not Updating an Estate Plan While Divorce is Pending or Final Adding Someone to Your Bank Accounts to Help Manage Your Finances Not Having Any Estate Plan Thinking You’re Too Young Thinking You Don't Have Enough Assets Not Avoiding Probate, New York Style Conclusion
Establishing a trust is not sufficient; you must also fund it and transfer assets into it by legally re-titling them in the name of the trust, including real estate, stocks, or motor vehicles. For instance, if you create a revocable living trust to transfer your assets to your children and spouse after your death, but do not fund it then, or have them flow into the trust upon your death, your entire estate will remain outside the trust and might go to people you did not intend.
For some assets funding is easy. Household and personal effects are transferred to the trust with simple language in the trust or a schedule of assets attached to it. For real estate, most attorneys will draft and have you sign a deed moving any real property you own into your trust. For bank accounts and investment accounts, you have to change the ownership of the account to the name of the trust
None of these steps is difficult or expensive, but many people neglect, or forget, to do them. The result is they wasted thousands of dollars paying for the trust document. Their assets won’t avoid probate, and they won’t reap the other expected benefits of the trust.
Ask your lawyer how to immediately fund all trusts and also help re-title larger assets such as real property, motor vehicles, family businesses, bank accounts, life insurance policies, securities, and retirement accounts into the trust.
Estate tax liability can put a significant dent in what you plan on leaving your beneficiaries. In addition to your estate owing taxes before beneficiaries are paid, you also want to think about how your gifts will impact individual heirs, too.
Most often, federal estate tax liability isn’t going to be an issue. Unless you have a very large estate ($12.92m per person or $25.84m per couple), it will not be taxed at the federal level. However, in not too many years, unless an extension is put into place, the law will revert to the former $5.49 million exemption limit.
Additionally, you should know if the state you and your beneficiaries live in has a state estate tax, and understand what the limits are. The New York state estate tax threshold is $6.94 million in 2024. The estate tax rate for New York is graduated. It starts at 3.06% and rises to 16%.
If you plan on disinheriting an immediate family member it is best to either intentionally leave a nominal amount to that individual or have a discussion with them as to why you are disinheriting them. Small specific bequests and/or open communication reduce the chances of a will contest by that relative after your death. Defending will contests can significantly reduce the assets in your estate for an issue that could have been previously resolved. It is essential that the will-maker has the benefit of expert legal advice in making this decision and in preparing the estate plan, as this sort of act can leave the estate exposed to the risk of litigation.
Parents, before they die, sometimes add their adult child’s name(s) to the deed to their home (or other assets) as co-owners with rights of survivorship because they believe this is a simple way to transfer property, avoid probate and eliminate taxes. The rationale behind this is that the property will automatically pass to the child upon their death. This is a bad idea for multiple reasons. This kind of “do-it-yourself” solution can backfire because by listing your child’s name on the deed, you are essentially giving them irrevocable title to your home.
The worst-case scenario is that the child records the deed with the proper municipal authority. Afterward, they can eject you from your home or sell the home and keep the profit for themselves. Ultimately, you lose control of your asset.
Another scenario is that by titling the home in their name, you have given them a taxable gift. This means that you won’t save them any money by putting their name on the deed. When you go to sell the home, you can use your primary residence capital gains exclusion ($250,000 for individuals and up to $500,000 for married couples in 2024) only on your fractional share. Each of your children may have a large long-term capital gains tax bill to be paid that could have been totally avoided if the house had been titled in the name of your revocable trust. Good estate planning avoids this unnecessary tax and allows you to pass along a real estate or its value tax-free.
Also, with this arrangement, you could expose the value of the home to the children's liabilities (such as divorce settlements and debt claims). In many jurisdictions, creditors can actually foreclose on (force the sale of) your home to get at your child’s fractional share.
Instead of making your child co-owner of any of your assets, simply titling such assets in the name of your revocable trust will help the child receive the full benefits without having these problems.
Planning in advance what you’d like in terms of your funeral or burial arrangements can be a blessing for those you leave behind. Think about how you’d like your life celebrated and what type of funeral, memorial, or burial you want. This ensures your final wishes will be respected while alleviating a bit of stress for those grieving your loss or struggling to know what you would choose. If you had the foresight and means to purchase a burial plot and make funeral plans, document it in your estate documents. If you have not made such plans, you should write your wishes into your will or trust. Failure to do this may cause your potentially overwhelmed family to struggle to make decisions about your service or memorial.
And don’t assume that your executor will necessarily be the one making these decisions. Delegate a point person who will be in charge and make sure that individual understands your preferences. If you fail to specify your directives prior to your death, it may become an issue to be resolved in the probate court – which could significantly delay your being laid to rest.
Relying solely on beneficiary designations is one of the estate planning mistakes to avoid. This method does not work well with unforeseen circumstances and contingencies.
For example: Kim named his son and daughter as beneficiaries of his life insurance policy. However, the son predeceased his father by two months. The insurance company paid the surviving beneficiary — the daughter. The son’s family was all left nothing.
Most of us would think Kim would have preferred for his son’s half of the money to be paid to his family, but the insurance company had no choice. To avoid this sort of scenario, naming a trust as the beneficiary of your life insurance will allow you to control how the proceeds will be distributed to your heirs no matter the contingency.
After you are dead, will your beneficiaries constructively use their inheritance? Or will they waste it foolishly? Will it be available for the future education of your grandchildren, or will it all be exhausted in just a few years? Failure to put specific terms in place could allow your “problem” child to quickly squander your hard-earned wealth.
Most people attempting to curb this usually hold an inheritance in a trust until their intended beneficiary reaches a certain age, such as 30. Others give their children 1/3 after they are both dead, with another 1/3 in five years, and the last third five years after that. Or they decide that the entire inheritance be distributed as monthly payments across several years.
Some even asset-protect that particular child’s share for the child's entire life. Others will require him or her to submit to a drug and alcohol test over some time before the authorized trustee can release an inheritance to the child outright. As long as an inheritance is being held in trust, it can be shielded from the beneficiary’s spending habits, from divorcing spouses, and even from creditors.
Also, your trust can control where the inheritance goes upon the death of the child. Many would prefer to see a deceased child’s inheritance go to their other children or grandchildren rather than their deceased child’s spouse.
Judy's two major assets were her life insurance and her IRA, and they were of equal value. So she named her son as the beneficiary on the life insurance and named her daughter as the beneficiary on her IRA. The proceeds of life insurance are income tax free, but the proceeds from an IRA are generally subject to income tax. The daughter lost approximately one-third of the proceeds to income taxes.
Consider naming all children as beneficiaries, or better yet, leaving all assets to your trust, with the trust dividing them equally and providing who will receive what in the event a child should predecease you.
Hector and Maria had been married for more than 25 years. Each of them had two children from prior marriages. They wanted to provide for each other first, and then leave the assets equally to all four children. Although their wills stated this intention, the survivor could always change their will to leave everything to his or her children only. Or if the survivor’s will cannot be found (perhaps destroyed?), then all of the assets would pass to the survivor’s children.
The rate of surviving spouses, even after long-term marriages, that change the terms of their will after the passing of their spouse to disinherit all of the deceased spouse’s children from a prior relationship is astronomical.
The use of trusts can help protect children from a prior marriage by either having separate trusts or by having a joint trust listing the assets of each spouse on a separate property schedule. There are also special provisions for sub-trust funding at the death of the first spouse that can be crafted to protect the children of a previous marriage. Second marriage planning is often complex and doesn’t get the attention it usually deserves, even from many attorneys.
One of the top estate planning mistakes individuals make is bequeathing specific assets to a particular person. Unless there are compelling reasons why a specific person should receive a specific item, it is a poor idea to do this.
Example: Kobe had three children and wanted to treat them all equally. His will even confirmed this. Several years before he died, he transferred half of his home to his older son, added his daughter as a co-owner on his savings account, and named his younger son as the beneficiary on his life insurance policy. When he did this, all three assets were about equal in value. But between these actions and his death, he sold the home, put the proceeds in the savings account, and let the life insurance policy lapse. The savings account passed to the daughter and not pursuant to his will. By planning around specific assets, he actually disinherited two of his children. This is not what he intended and this could have easily been avoided with proper planning.
Normally you should be specific when creating your estate plan. However, there is one exception to that. You may own assets at one time in life that you might not necessarily have in the future. Are you putting stocks in your plan? Real estate? Season tickets to your favorite sports team? Are these all items you're guaranteed to have decades from now?
A power of attorney (POA) is an essential estate planning document, but many people don’t know its limits. Ideally, the agent named in your POA seamlessly manages your affairs when you can’t and continues doing so, either until you again are able to resume or die.
Often, however, it doesn't work that way. It can take time and some effort to convince a financial institution to accept a power of attorney and the designated agent. Many institutions require a copy of the POA in their files well before the agent takes authority, so their lawyers or other staffers can review it. Others only accept power of attorneys executed recently, say in the last six or 12 months. Some institutions insist that you execute their POA forms or have specific language in the POA, and others require you to re-affirm a POA periodically if it hasn’t been used.
Your estate must have enough cash to pay any specific gifts listed in your will. Remember retirement accounts and life insurance pass outside of the will and go directly to named beneficiaries. If the only asset passing under your will is your home which you want to leave to your children, but your will includes cash gifts to others, the house will need to be sold to pay them.
When an asset passes to others through a will, it must go through the probate process. Probate is time-consuming, expensive, public, and disruptive to the management of your assets. When you own assets in more than one state, your estate might even have probate procedures in each of the states. As previously discussed, some assets avoid probate by operation of law. Others can avoid probate by transferring them to a trust, such as a revocable living trust.
Charities are not charged income tax by the government. So, it makes sense for you to save your family from paying unnecessary income tax by making a charity a beneficiary from a taxable income asset.
An example: Tyler wanted to leave $100,000 to his church upon his death, and the rest to his children. Tyler’s attorney drafted Tyler’s trust as instructed: “$100,000 to my church and the balance equally to my children.” Tyler’s IRA passed to his children, who had to pay income tax on it.
Had Tyler funded the charitable bequest with his IRA, there would have been $100,000 less taxable income to the children, increasing the amount that passed to them after income taxes by, perhaps, $30,000 (at a 30% rate for both federal and state income taxes). Charities willingly receive taxable income property because they don’t pay income taxes anyway. Tyler, in effect, cost his children $30,000.
What most Americans don’t think about is that they could find themselves in the midst of probate while they’re still alive. Living probate ensnares those who suddenly find themselves unable to make personal or financial decisions as a result of a debilitating illness.
Living probate has as its goal to protect an individual who can no longer protect himself or herself. It seeks to identify the person or persons best suited to manage the individual’s financial affairs and personal care. In theory, living probate is ideal. But in practice, it can be a costly, time-consuming, bureaucratic, and public process that often achieves an outcome vastly different from what the individual would have wanted.
Using a living trust, you can choose who will decide when you’re disabled, who the trustee will be, and leave detailed instructions about how you want to be cared for during your disability.
By default, most assets must pass through probate. However, certain assets are automatically transferred to another person upon death. For example, funds in a bank account with a joint account holder, jointly-owned real estate, and retirement account funds. However, it is essential that you do not include these assets in your will, as they are technically not a part of your estate. If a will conflicts with a beneficiary designation, the beneficiary designation will trump. For example, assume you have a bank account with $100,000, and you named your son a joint account holder. Upon your death, your son would automatically own the assets in the account, even if you named a different person in your will.
Federal gift tax law also allows you to make unlimited gifts that do not reduce the exempt amount if the gifts are in the form of direct payment of tuition or medical expenses. This is in addition to the $18,000 annual exclusion. Thus, you can directly pay the tuition bill of a child or grandchild (or anyone else) without gift tax consequences, even if the bill exceeds $18,000 in a year. The same rule applies to the direct payment of medical expenses.
Creating a comprehensive estate plan is more than just a will leaving your property to your spouse or kids. Could your children need a guardian? Do any of your heirs need protection from creditor claims or their financial innocence? Who will manage your property if you suffer an incapacitating condition, and how will they do it? Who will make decisions about your health care if you can’t? When should your family stop taking life-prolonging medical steps if you are unconscious and your quality of life and prospects for recovery are poor?
An effective estate plan consists of a set of essential documents including a power of attorney, a healthcare proxy, a will, a living will (advance healthcare directive), and possibly trusts to hold assets. If you don't have all of these in place, your plan is incomplete.
Many clients rely entirely on their estate planners and just assume the expert knows best. Even the sophisticated and wealthy sometimes become passive when estate planning. It is important to be involved in the process and understand the plan put in place. It’s not unusual for a person to sign the documents and say to the attorney, “I don’t need to read it, I trust you.” A few years ago a survey of estate planning attorneys reported that they believed a high percentage of the plans they prepared weren’t fully implemented, and that the major reason for failure to implement is the clients didn’t understand the plans or what they needed to do after signing.
Part of the estate planning attorney’s job is to be sure you understand the basics of how the plan works, what you need to do to implement it and fund your trust, and how it works for you and your beneficiaries. It is also part of your job to ask questions if you don’t understand. You need not comprehend all the legal language used, but you do need to know the basics of how it operates. Don’t be afraid to ask detailed questions, the most important part is that you understand what you are signing. If you do not, you need to let your attorney know so that they can better explain it to you.
Believing that a will alone will avoid the probate process is a common mistake. Probate is the legal process of administering a person’s estate both when they die intestate, (meaning without a will), and when they die with one, (which is known as proving the will). Although a valid will can ultimately direct where assets are allocated, it will not avoid the probate process.
If you have a will in place, but an account (bank account, investment account, etc.) that does not have a beneficiary designation, i.e., it is solely in your name, the assets will likely have to go through probate before being distributed according to the terms of your will or the law of intestacy. To avoid it, you must use a revocable trust, or title all of your assets to transfer automatically to someone upon your death.
You will want to formally assign someone to care for your beloved pet, though it is recommended that you communicate this before writing it into a will or trust in case there are objections. You can also leave a portion of the estate to help fund your pet's care. If you don't have someone to foster your pet when you die, you can make arrangements with an animal sanctuary or no-kill shelter — although this is usually in exchange for a donation from your estate that will need to be included in your will or trust.
"Durability" in this context refers to the ongoing validity of a power of attorney after the principal becomes incapacitated. All powers of attorney are immediately revoked upon the death of the principal.
Failing to establish state-specific powers of attorney and health care directives when changing state of residence. Many states have specific requirements for the content or formalities for the execution of these documents. To be sure that your documents will be effective in your state of residence, it is important to check with a local lawyer when moving to a new state.
If you get a divorce, in most states your ex-spouse is automatically disinherited from your will. But what if you die before the divorce is final? In that situation, your soon-to-be ex-spouse will still inherit under your will or trust. Therefore, it is important to change or amend your estate plan as soon as a divorce petition is filed. Also, note that a divorce decree does not automatically change beneficiary designations, such as on life insurance and qualified retirement plans. Instead, you must file a change of beneficiary designation form.
When you simply add someone’s name to your account, you are subjecting that account to his or her creditors. You may also be inadvertently giving that person an ownership interest in your account (which could affect your gift tax exemption). If you need help managing your finances, you can appoint an agent using a durable power of attorney and give them authority to do so without exposing your assets to their creditors. You can also use a revocable living trust to achieve the same result by transferring your bank accounts to your trust and listing the person you want to help manage the accounts as either the current trustee or as a co-trustee with you.
The biggest, most obvious, and common mistake you can make with your estate plan is simply to not create or complete one. But failing to do so, ultimately means you’re putting at risk the financial future of your estate, your legacy, and most importantly, your loved ones.
Estate planning is essential, yet many people neglect this important task. In fact, 60% of Americans have not yet completed a plan according to the AARP. This may be, for example, because they believe that they are too young, that they do not have enough assets, or that they do not have dependents.
One of the most serious misconceptions about estate planning is that you only need to think about it when you’re older. Just because you’re young and healthy doesn’t mean you’re invulnerable to accidents, injuries, or sudden illness. But with an estate plan in place, your loved ones can make medical and financial decisions for you. If an accident or illness results in your death, having a plan makes executing your estate easier and ensures your wishes are met. If you have a family or you’ve managed to accumulate even a modest amount of assets, forming an estate plan is even more important.
Many individuals question if they have enough assets to create an estate plan. The answer is yes, because having significant wealth is not necessary to create one. The reality is that nearly everyone has estate or non-estate assets. These may include real estate, cars, bank accounts, shares of stock, personal belongings, life insurance, social media accounts, or digital assets.
If you die and have not created an estate plan for how, to whom, and in what percentages your assets will be distributed, the court conducting the probate process ultimately has one for you, based on the rigid law of inheritance. Not a lot of persons would deliberately want the New York State legislature to impose an estate plan on them, but that is the result if you die without a pre-existing plan. Without one, the state of New York decides who gets your assets. When no heirs can be found, everything you own automatically becomes the property of the state
A court-inflected estate plan has sometimes unexpected, and undesirable, consequences. Suppose a man dies leaving a wife and two children. In New York State, the estate does not automatically pass to the surviving spouse. Instead, the surviving spouse will receive the first $50,000 plus ½ of the rest of the estate, and the two children will each receive ¼ of what is left. This precludes good tax planning. It also puts assets into the possession of children who may be too young, irresponsible, or suffer from additions or creditor problems to receive the property outright.
Every year more than 3.3 million people die in the United States. According to a 2022 survey by Caring.com, just 33 percent of U.S. adults have estate planning documents, such as a will or living trust. For those with plans, mistakes can be very costly, can create unintended outcomes or negative impacts for beneficiaries, and can have long-lasting impacts on family relationships. With advice from an expert estate planning lawyer, the risk of conflict and potential disputes can be minimized and the estate uncontested.
