Authored by Terri R. Stallard
For too many people, estate planning is avoided and underestimated. However, estate planning offers benefits to every estate, no matter the size. When utilized properly, estate planning can ease your worries about the future and ensure that maximum benefits flow to your beneficiaries. When thinking about your estate plan, or lack thereof, there are common mistakes that should be avoided.
1. No Estate Plan. The biggest mistake is not to have an estate plan at all, which includes failing to have a will. Clients fail to realize the consequences of not having an estate plan. If no plan is in place, the state designates how property is distributed at your death. The state's intestacy statute predetermines to whom your property goes, and in what percentages. Suppose a man dies, leaving a wife and two kids. In Kentucky, the surviving spouse will receive half of the estate. The remaining half will be divided equally between the children. The state has no discretion distributing your estate. Having an estate plan avoids state distribution of your property, and the undesired consequences that accompany it. Proper planning gives you the opportunity to make informed decisions while alive, and assures your property will be handled and distributed the way you wish.
Failing to make an estate plan also affects matters of incapacity and disability. Without a plan in place, you are unable to prepare for potential disability or incapacity, which will require the court to appoint a guardian to manage your medical and financial affairs. A court-appointed guardian may not be familiar with your life, and may be unaware of how you wish to handle your financial and medical affairs. However, with the proper documents, these problems easily can be avoided. You can preselect who will have a power of attorney and draft a health care directive in the case of medical disability. Both documents guarantee that your affairs will be handled by the person you select, and decisions will be made according to your wishes.
2. Do-It-Yourself Wills. Clients should be wary of do-it-yourself wills. Every estate is different, but most do-it-yourself wills are designed for basic estates and are not state specific. The forms fail to provide for idiosyncrasies associated with your individual estate; as such, they may fail to fully carry out your wishes. Clients should enlist the help of an estate planner to avoid this undesirable result. An estate planner can properly advise clients on the particularities regarding their individual estate, ensuring that the clients' planning needs and wishes are met.
Do-it-yourself wills also may cost more money in the long run. Do-it-yourself wills are often ambiguous or silent as to important issues, resulting in discontent among beneficiaries and inviting will contests. Consequently, families often spend more on litigation than the deceased would have spent, if an estate planner had been hired in the first place.
3. Outright Bequests to Children. Clients should avoid leaving outright bequests to minor children, to children with special or specific needs, and to adult children who would not realize the benefit of such bequest. Directing a child's inheritance into a trust for his or her benefit protects such beneficiary from possible "predators and creditors," those who would seek money from an outright bequest. An estate plan should be organized to pass assets to your intended beneficiaries in the most beneficial way. Estate plans that include trust can be arranged to restrict spending to certain purposes, restrict the times when money can be accessed and restrict who can access the money. For example, if the beneficiary has any special needs, a trust can be established to provide for him or her, while protecting the assets. Trusts can also offer protection in the case of divorce. Structuring a bequest through a trust will help protect the beneficiary from overreaching relatives seeking a payout, and any creditors looking to be paid.
4. Failure to Coordinate Beneficiary Designations With Your Will. Proper estate planning ensures coordination of beneficiary designations with your will. Beneficiary coordination is an important part of estate planning because non-probate assets pass outside of the will, meaning that the asset is transferred pursuant to a beneficiary designation or due to the manner in which it is titled. Common non-probate assets include life insurance, retirement accounts, annuities and jointly held assets. Wills do not control the distribution of non-probate assets and have no impact on beneficiary designations previously made. Instead, non-probate assets pass directly their designated beneficiary.
Failure to coordinate beneficiaries designations or the titling of property with your will can have unintended consequences. Without coordination, there may be nothing in the estate to distribute because all assets may already have designated beneficiaries. If so, the assets pass directly to the designated beneficiaries, regardless of a will's directives. Coordination also ensures that the client still wants the designated beneficiary to inherit, that no beneficiary receives more property than the deceased intended and that there is enough money in the estate to fund all bequests in the will.
5. Failure to Provide Flexibility in Estate Plan. A proper estate plan provides for flexibility. Flexibility enables you to take advantage of any future changes in the tax law. Currently, the federal estate and Gift tax is unified and portable, allowing married couples to take full advantage of the applicable exemption amount. The exemption for 2012 is set at $5.12 million ($10.4 million for married taxpayers). Taxpayers with estates larger than the applicable exemption are subject to tax at a maximum rate of 35 percent. Unfortunately, the current tax regime is set to expire at the end of 2012 with the estate tax exemption returning to $1 million and the estate tax rate increasing to 55 percent. However, there is great speculation as to what Congress will actually do. Therefore, flexibility in your estate plan is necessary because it is impossible to anticipate what the future changes may be. Properly structured, an estate plan will provide enough flexibility to allow you to work with any upcoming changes in the law.
6. Trusting People to Do the Right Thing. Frequently clients leave intended beneficiaries out of a will with the expectation that another beneficiary would "take care" of them. Unfortunately, because their expectation is not written in the will, it is not always fulfilled. To avoid this situation, any expectation you have should be a well-defined, unambiguous direction in your estate planning documents. Your expectations should either be written in your will, or a trust should be set up for your intended beneficiary. Either way, you should avoid relying on another to carry out expectations that are not part of your estate plan.
After you have created your estate plan, the most important thing to remember is to continually review it. Circumstances change over the years, so you should review your estate plan every couple of years, adapting it to any changes in your life. Death, divorce and marriages all affect dispositions of your estate, and changes should be made accordingly.
Terri R. Stallard is a member with McBrayer, McGinnis, Leslie & Kirkland, PLLC. Ms. Stallard concentrates her practice in estate planning and administration and corporate law. She is located in the firm's Lexington office and can be reached at email@example.com or at 859-231-8780, ext. 1258.
This article is intended as a summary of newly enacted federal law and does not constitute legal advice. Special thanks to Margaret Barr, Law Clerk, for contributions to this article.