Top 5 Mistakes in Estate Plans – Does Yours Have Any?
The primary purpose of an estate plan is to provide for the thoughtful transition of asset ownership to intended heirs. After a plan is drafted, mistakes can creep in and upset a carefully-drafted plan. Below, are five of the more common problem areas to consider.
1. Misusing Joint Ownership
Joint tenancy is a common form of ownership that automatically transfers ownership to the surviving joint owner. Very often a widowed parent will add a child as a joint tenant on a bank account so that the child can access the parent’s cash should the need arise. When the parent passes away, the joint owner child is the sole, outright owner and is not required to pass the assets according to the decedent’s will or trust. The solution is to let the child have access via a power of attorney, which provides access and not ownership.
2. Failing to Title Assets in a Revocable Trust
Revocable living trusts have become the estate planning document of choice since they help avoid the costly court proceeding known as probate. They also help address a person’s affairs if he or she becomes disabled. When a trust is drafted, a person should work with his or her attorney to make sure the ownership of appropriate assets is changed into the trust name so that the trust terms will apply as planned. Leaving assets in a person’s name only may be appropriate in some circumstances but doing so will likely trigger the need for probate.
3. Failing to Update Beneficiary Designations
Beneficiary designations transfer ownership of assets to the named beneficiary. The more common assets that utilize beneficiary provisions include life insurance, IRAs, 401k plans and annuities. The named successors to assets should be reviewed periodically with an attorney and financial advisor. Perhaps the owner’s revocable trust should be the beneficiary so its provisions control. After all, the trust usually contains a person’s main planning strategies. The surviving spouse may be the best choice for IRAs or similar assets. Making the surviving spouse primary and the owner’s trust contingent beneficiary may give the surviving spouse the most planning flexibility.
4. Powers of Attorney – Keeping Up With the Times
A power of attorney (POA) for property authorizes a person (agent) to act for the principal. Such instruments are critical when a person is unable to tend to his or her affairs and it is important to have financial matters tended to. POAs can become outdated such as in the case of digital assets and website access credentials. Unless a POA specifically states that the agent may access the principal’s digital assets and websites, the agent may be prevented from doing so. Having health care POAs with current provisions are important too given the ever-changing health laws such as those concerning privacy in HIPAA legislation. POAs are easy to update and should be reviewed often.
5. Distributing Assets Too Early to Children
Parents generally leave assets in trust to their children. A child’s trust can delay outright receipt of assets until a given age or place other constructive restrictions to help a child make good financial decisions. Parents are often under the misconception that a child has no access to trust assets until the specified age for outright distribution. Before such age (or ages), the trust usually permits distributions for “health, education, maintenance and support.” Why not delay outright receipt to a later age so long as a child has access for necessary expenses?
An estate plan has many important aspects to it. Visiting with an attorney to make sure all aspects of a plan are in good order is critical for the plan to accomplish a person’s objectives.
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute and Illinois State Bar Association. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.