In our business, nearly every day we will speak with clients, present educational material, and continuously publish articles and legal reports on the importance of estate planning and how to ensure that your assets are protected while you are alive and provide your family with a smooth transition when you are gone. However, we are also aware of how ineffective estate planning can affect your family and lead to problems and unintended consequences when you are gone.
Therefore, we have listed the Five Major Estate Planning Mistakes that can wreck your estate plan:
- Only Establishing a Last Will and Testament
This is by far the most common estate planning mistake that we see. Although, a Will is the cornerstone of your estate plan and is a legal document that every person needs regardless of wealth. It is not the only document that you need. It is extremely important to have your disability legal documents in place including your Financial Power of Attorney, Health Care Power of Attorney, and Living Will Declaration. These documents allow the trusted family member of your choosing to make important financial decisions, access medical records, and make medical care decisions if you are ever in a position where you are no longer able to make those decisions. You should note that if you do not have these documents in place, your family would have to initiate a guardianship proceeding against you in court so that he or she could make those decisions on your behalf.
In addition, every individual should consider a living trust plan. By establishing a living trust, you can avoid probate, avoid nursing home poverty, and even protect your children’s inheritance from divorce and creditor claims.
- Failing to Update Executors After Major Life Changes
Another common estate planning mistake that we see is failing to update your executors and back-up executors to your Will and disability documents after major life changes. A common situation occurs where we will speak with a new client and review their existing estate planning documents that they set up 10, 20, or even 30 years ago. In addition, we will see that their spouse, who passed away many years ago, was the executor, and the back up executor is a child who lives across the country or in another country, or even is a close family friend who has since passed away. In the event that this client did not update their estate planning documents prior to death, the Will would not follow their wishes. The reason for this is that since there is no executor that is alive or willing to serve, an executor or administrator would need to be appointed before the estate could be closed and the assets distributed. This, of course, would take additional time, costs, and stress that the family otherwise would not have had to go through had the estate plan been properly updated after those major life changes.
- Failing to Set Up a Trust When Your Family Has a History of Being Admitted to the Nursing Home
A very common trap and major estate planning mistake that we see is when clients plan way too late for their upcoming nursing home expenses. It is a common occurrence in this country when an individual goes into the nursing home with $50,000 in bank accounts and $200,000 to $400,000 in an IRA, 401(k) or other investment account. Unfortunately, over the course of their nursing home stay, the individual’s assets are dwindled down to $0 and this person relies on Medicaid benefits to support their nursing home expenses for their final years. At the end of this tragic story, when this person dies, their loved ones do not receive their planned inheritance, and the home that this person owns is sold to reimburse Medicaid (called TennCare in Tennessee) for all the Medicaid benefits that this person received while in the nursing home.
When a person has a family history of longevity, Alzheimer’s, and spending time in a nursing home, it is important to engage in proper Medicaid planning with an Irrevocable Medicaid Trust. This type of trust can be used to protect your assets from having to spend them on your future nursing home care. Through this type of trust, if you establish an irrevocable Medicaid trust, fund the trust with all of your assets, and stay out of the nursing home for at least five years, your assets will be shielded and protected from having to spend your own assets on nursing home care and you would qualify for Medicaid benefits to pay for your nursing home care.
- Giving Your Assets Away to Your Children and Loved Ones During Your Lifetime as an “Advance” on their Inheritance
It is quite common that people will give away assets to their loved ones as a gift or to be deemed as an “advance” on their inheritance. However, it is very common that families will complete these acts without knowledge of the tax consequences of these decisions. For example, let’s say that you bought 100 shares of stock in ABC, Inc. in 1955 for $10. Now, let’s say today that this stock is worth $200 a share. If you gave away all 100 shares of stock in ABC, Inc. to your son, your son would then experience a “carry-over” of your tax basis. What this means is that your tax basis of what you paid for the stock of $10 would be passed along to your son. Therefore, when your son decided to sell the stock, your son would owe capital gains tax on the $190 gain (the difference between $10 and $200). As such, in this example, your son would owe capital gains tax on the $19,000 gain that he earned.
However, if you hold onto those assets in a revocable or irrevocable trust for example, and then your son inherits the 100 shares in ABC, Inc. at your death and immediately sells all 100 shares for the going price of $200 per share, your son would owe $0 in capital gains tax. The reason for this is when you inherit an asset at death it has a step-up in tax basis. This means that the tax basis that your son received is the $200 per share going rate for the stock in ABC, Inc., and not the $10 per share that you purchased for the 100 shares of stock. As you can see, there are significant tax consequences for giving an asset away during your life as opposed to transferring those assets to your loved ones at your death.
- Failing To Set Up a Revocable Living Trust
However, by far the most common and most damaging estate planning mistake that we see is the failure to set up a revocable living trust for the proper transfer of your assets to your loved ones after your death. Sometimes, most people will have the foresight to have their Will written and their disability legal documents including their Financial Power of Attorney, Health Care Power of Attorney, and Living Will Declaration. However, people that fail to educate themselves on the probate process will completely fail to set up a revocable living trust.
If you do not have a revocable living trust in place, even if you have a last will and testament when you die, all of your assets will be frozen and your surviving family members will be forced to go through the expensive, difficult, and lengthy probate process. Quite simply, probate is the process of the transfer of all of the assets that you own at the time of your death to your loved ones as stated in your will or according to Tennessee law if you do not have a will. The probate process takes anywhere from six months to two years or longer, is expensive and may cost $20,000 or more when it is all said and done, and is a public court proceeding allowing anyone to read all about the assets that you own and the debts that you owe after you die.
However, a revocable living trust on the other hand, when it is set up appropriately and funded correctly, will allow your family to completely bypass the probate process and be given immediate access to all of your assets in accordance with the customized provisions of your trust. This avoids all of the unnecessary costs, delays, and stresses involved with the probate court process.