5 Common Ways People Mess Up Their Estate Plan
1. Misunderstand How Your Assets will Pass on Your Death.
Many people think their Wills control how their assets will pass upon their death, yet most assets today pass outside of Wills.
For instance, joint tenancy assets pass to the surviving joint tenant. If there is a surviving named beneficiary (such as on life insurance, annuities, or IRAs), then such assets pass to the surviving named beneficiary. It is only the other assets (sometimes called your “probate estate”) that will pass pursuant to your Will.
Example: Bill named his oldest son as the beneficiary on his life insurance. His Will left his estate equally to his three children. The oldest son gets all of the life insurance and 1/3 of the remainder of the estate.
Another example: While still single, Don named his brother as the beneficiary on his retirement plan and his life insurance. Don purchased his first home in joint tenancy with his brother who shared the house with Don. Don later had a falling out with his brother and still later got married. Don changed his Will to leave everything to his wife.
But because Don never changed his beneficiary designations and joint tenancy, the bulk of his estate passed to his brother on Don’s death and not to Don’s wife.
This problem can be avoided by having a Living Trust to be the focal point of your estate plan. All or at least most assets can be titled in the name of your Living Trust or with the trust as the named beneficiary. That way, your trust will control how your assets will be distributed. If you ever want to change your estate plan, you do it only in one place.
2. Failure to Minimize Estate Taxes.
The estate tax exemption, which was $600,000 for many years, was increased gradually in the late 1990’s and today the exemption is temporary set at $5,000,000.
Many of my clients say things like, “My estate is only about $400,000 – I don’t think I will even have a taxable estate.”
Perhaps they didn’t want to pay the extra fee for estate tax planning. However, despite current market conditions these same clients will see their assets double twice over over the years.
We don’t have any idea what the estate tax laws will do in the next year, so do you estate plan once, and do it right.
3. Failure to Avoid Probate
Probate is the court procedure for proving a Will, paying the bills, and distributing the estate.
Probate can be expensive, time consuming, and frustrating. Probate often runs 5-7% even on small estates, and can take an average of 16 months.
Probate is a matter of public record. Once probate is opened, anyone can examine your file, even make a copy of your will and get a list of your family members and their addresses.
Probate gives disgruntled heirs a low-cost opportunity to challenge your Will. A simple letter to a probate judge by a disgruntled heir can tie up probate for a year or more.
If you own real estate in other states, your family may have to open probate in each of those states. Probate can be totally avoided by creating a Living Trust during your lifetime and then transferring record title of your assets to that trust.
4. Relying on Joint Tenancy to Avoid Probate
Many married couples own their home and other assets in joint tenancy so as to avoid probate. Yet, joint tenancy avoids probate only on the first death. Everything usually ends up in the probate estate when the survivor dies. Worse yet, all family assets are usually included in the survivor’s taxable estate when he or she dies.
If the couple dies in a common disaster in which we cannot tell who died first, there could be TWO probates: half of the assets will be subject to the husband’s probate, and half subject to the wife’s probate.
By creating a Living Trust and transferring their assets to that trust, a married couple can avoid probate on both deaths, and, with proper drafting, reduce or totally eliminate estate taxes.
5. Loss of Control by Adding Someone Else’s Name to Your Account.
In the early 1990’s, Jill, lost her checking account to her father’s creditors. Here is what happened:
The put her father on her checking account so he could pay her bills while she was traveling. He had several creditors, however, and one of them filed a lien on the account. The bank was forced to pay the creditor $80,000 of Jill’s money. When he was added as a signer, he legally became a co‑owner of the account. He had a legal right under California law to withdraw the entire account, and the creditor “steps into the debtor’s shoes.”
In addition, Jill was deemed to have made a taxable gift to her father at such time as the creditors withdrew money from the account! Don’t you just love our tax laws!
Interestingly, if Jill had had a Living Trust, she could have had her father as a co-trustee with herself. As such, he still could have paid her bills from the account, but his creditors could not have attached the account. He would have been only a trustee and not an actual owner of the account.
When you simply add someone’s name to your account, you are subjecting that account to his or her creditors. You don’t have to be a bad person to be sued these days or to be subject to a tax lien.
A Living Trust can protect your assets while still allowing another person to pay your bills.
