In a recent Kiplinger article, T. Eric Reich wrote about “10 Surprisingly Common Estate Planning Mistakes.” This week I thought I would share ten mistakes that we see on a regular basis.
- Failure to Clearly and Correctly Identify People. A will or trust should clearly and correctly identify individuals so as to avoid confusion down the road. Lack of birth dates, addresses, or misspelled names can create confusion and make it difficult to properly identify beneficiaries.
- Failure to Provide for Trustee Succession or Removal. Trusts should provide a clear procedure for removal and replacement of Trustees in the event of the incapacity or death of the current Trustee. One of the benefits of a trust is avoiding court involvement. Lack of a clear path for succession can result in the need for court intervention. Additionally, if the Trustee fails in her duty or abuses her position, the trust should provide a method for removal to avoid protracted court battles.
- Failure to Provide Flexible Distribution Provisions. If a unique circumstance arises, such as a beneficiary becoming incapacitated or addicted to drugs, a Trustee should have the authority to use discretion in distributions. No one wants a $100,000 inheritance going to a beneficiary with a drug problem.
- Failure to Address How Incapacity is Determined. Many trusts do not address how to determine when a Trustee is incapacitated. This failure will result in the need for court intervention to remove the incapacitated Trustee.
- Failure to Provide Contingent Beneficiaries. Many trusts do not include provision for who will inherit should something happen to the initial beneficiaries. This opens the door for even more court involvement and the associated costs. If a retirement account lacks a contingent beneficiary it could result in adverse tax consequences.
- Failure to Provide for Special Needs Beneficiaries. A trust should clearly address distributions to beneficiaries who are receiving needs-based government assistance such as Medicaid. A trust should also address what happens if a beneficiary subsequently becomes disabled and falls into this category. A springing special needs trust can come into existence to protect beneficiaries who may subsequently become disabled. Failure to address this issue can cause that beneficiary to lose benefits such as SSI or Medicaid.
- Failure to Address Retirement Plans. Retirement plans are often, next to the family home, the single largest asset in a person’s estate. Most estate plans simply ignore them. This leaves a big hole in the estate plan and can lead to an acceleration of income taxes following your death.
- Failure to Fund the Trust. One of the most common problems is the failure to properly fund (transfer) assets into the trust. The trust only applies to assets that it owns. If the trust does not own an asset it will not be distributed according to the provisions in the trust. This could delay or completely frustrate the intentions of the party who created the trust.
- Failure to Complete Supporting Plan Documents. Trusts are not stand alone documents. They should always be part of a complete estate plan that includes the trust as well as other supporting documents. These documents include durable powers of attorney, health care directives that include proper HIPAA authorizations to comply with privacy laws, and pour-over wills, to name a few. These documents support the trust and assist it in addressing both physical and financial needs that can arise. One crucial element of a trust-based estate plan that is occasionally overlooked is the need for a pour-over will. This will ensures that if funding of the trust has not occurred properly, the assets can be moved into the trust at death and the plan of distribution will still be effective.
- Failure to Maintain the Estate Plan. Just like a car needs regular maintenance and upkeep to keep it running well, an estate plan also needs regular maintenance to ensure that it will work effectively when called upon. Changes in the law, changes in assets, changes in your personal life, or changes in the life of a beneficiary or trustee could all be reason why your trust won’t function as intended. Regular maintenance will make sure you keep that will or trust up to date so your family doesn’t find itself figuratively stranded on the side of the road.
A qualified estate planning professional should strive to make sure all of these potential problems, and many others are addressed in your estate planning documents. Quality does make a difference.