Common Pitfalls in Estate Planning

Many people think of estate planning as a one-time transaction – a thing to check off their responsiblility list. However, estate plans really work best if they are flexible and maintained on a regular basis. Without such maintenance and flexibility, there is a risk that a portion of the estate plan will fail and that a court will need to intervene. Typically, we see the following scenarios:

1.     Failing to change, review, or update beneficiary designations.  Failure to check that the beneficiaries designated on assets such as life insurance, bank accounts, retirement accounts, etc. are legal and correct.  Many times people’s family relationships will change without making appropriate changes to their beneficiary designation, leading to assets being gifted to the wrong person.

2.     Failing to protect beneficiaries.  If loved ones are not the best of money managers, there are measures that can be taken to ensure that a received inheritance is not squandered and is protected from creditors.  Statistics show that no matter how large the inheritance, the average beneficiary will have spent it within 18 months.  Beneficiaries are commonly under pressure to make loans or gifts causing more strain.  Talk with a competent estate planner about trusts that can protect your assets.

3.     Not planning for retirement plans or IRAs.  There are particular tax penalties that can be incurred depending on what planning is done, some of which are excessive, all of which can be prevented, mitigated, or otherwise planned for.  Make sure your estate plan accounts for your retirement plans or IRAs.

4.     Not planning for heirlooms or items with sentimental value.  It is worth the time to make some specific gifts or instructions as to how such items are to be dealt with in one’s estate plan to avoid family fighting or strife of any kind.

5.     Not planning for your own disability.  If you should become incapacitated or severely limited in your activities, it is important to have someone designated to act on your behalf or otherwise provide instructions for your care through instruments such as a power of attorney, living will, or advanced directive.  You may also choose to nominate a guardian and conservator for you as part of your estate plan should such a person become necessary.

6.     Not planning for future healthcare costs.  Many individuals seek to retire with sufficient means to maintain their standard of living at retirement for as long as possible.  However, advanced medical care such as that provided in a nursing home can cost anywhere from $4,000 to $10,000 per month.  There are solutions within your estate planning that can prepare you to meet that potential burden.

7.     Putting property in joint tenancy with your children.  While occasionally convenient for various reasons, this can subject children to avoidable income taxes upon the sale of such a piece of property and provides no protection against creditors.

8.     Putting property in joint tenancy with your spouse.  This option may cause the surviving spouse to lose or waste their unified credit exemption amount which will in turn lead to unnecessary estate tax.

9.     Self-planning.  While certainly better than doing nothing, simply filling out a form or using an online service is insufficient for most people’s needs because it does not account for so many factors that can affect heirs and inheritance.  Few do-it-yourself estate planning documents account for life insurance, real estate, retirement plans, probate, etc.

10.  Doing nothing.  If you fail to plan, you plan to fail.  All of the above pitfalls are complicated by doing nothing.  If you fail to make an estate plan, the law provides one for you which may or may not have anything in common with your desires, may be costly, time-consuming, and wasteful.  Care for your family now by planning today. [/expand]

Is Your Estate Plan Up to Date?

An estate plan is something that we would prefer to think about once and then forget about until it’s needed.  The problem is that with changes in the law and changes in our own circumstances, an estate plan set up as a young parent, or as a working professional, or upon retirement may not address the needs of post-retirement years, particularly as new costs or concerns present themselves.

The following questions can guide you in considering whether your estate plan currently meets your needs.

Have you prepared a will or a trust at all?
If you fail to prepare an estate plan, the State of Colorado has one prepared for you called intestacy.  There are pre-set rules for how your legacy will pass after your death that will come into play absent a valid will or other estate plan that you’ve created.  This usually ends up being a costly process with no assurance that your wishes will be met.

Have you reviewed your estate plan in the last two years?
If you do have a plan, you’re ahead of the game.  Even if your financial or family situation hasn’t changed since then, there are regular changes to tax and probate law that can affect the plan that you’ve made.  Estate planning is a process, not a step.  Make sure that your estate plan is still crafted in such a way that your wishes are carried out.

Are you comfortable with your heirs’ financial responsibility?
Unless you specify otherwise in your estate plan, your children will inherit your estate without restriction in a lump sum.  If you have concerns with how that inheritance is spent, you can provide direction to address those concerns in a proper estate plan.

Are you absolutely certain that your assets will not be subject to probate?
It is good practice to make a list of each asset that you own and identify how each asset is going to avoid probate.  Assets owned as “joint tenants with rights of survivorship,” assets owned in the name of a trust, and assets that pass by specific beneficiary designation (such as IRA’s, life insurance, etc.) will avoid probate.  Everything else is subject to probate, which can be costly and typically requires between 12 and 18 months from the date of death to resolve.

Do you hold assets jointly titled with children or someone else?
Holding assets jointly with someone other than a spouse is quite common but can have consequences that frustrate your estate plan about which most people are unaware.  For example, a creditor of a joint tenant can take the entire asset to satisfy that claim.  A creditor can include a divorcing spouse, judgment creditor, or business creditor.

Does your current plan provide heirs with asset protection, divorce protection, and lawsuit protection?
Generally, your heirs will receive your legacy outright as a single payment.  That sum is immediately subject to attack in a divorce, lawsuit, or by creditors.  A proper estate plan can help your heirs avoid losing that inheritance as soon as they receive it.

Is this your first marriage?
Second or subsequent marriages present unique planning issues, particularly if both spouses have children from a prior marriage.  Proper planning is critical to prevent undesired results.

Does your plan account for the cost of long-term care?
Many financial and estate plans account for maintaining one’s standard of living late into life as it stands at the time of planning.  Most of those plans do not take into account the prospect of illness or injury that could lead to assisted living costs as high as $8,000 per month.  A well-crafted plan can ensure that those costs are covered while protecting your ability to leave a legacy behind.