Estate planning failures are mostly preventable. If you have a plan, you've avoided one big problem, but other pitfalls lurk. Problems often arise when people fail to update their plans and inadequately address issues involving incapacity, minor and special-needs children, beneficiary designations, end-of-life care and other matters.
There are many reasons why estate plans fail, but they tend to have one factor in common - the failures are avoidable.
When creating a comprehensive estate plan, you'll find there's a lot to learn about how various legal documents operate separately and work together - wills, trusts, powers of attorney, advance health care directives and so on.
If you're like most Americans, you've wisely relied on your attorney or consultant to explain in detail how the sea of paperwork protects your interests and provides for your beneficiaries. But in too many cases, those planning documents gather dust on a shelf or hide in a drawer. In the meantime, those documents - if they exist to begin with - can become outdated, ineffective and lead to outcomes you no longer intend or never intended.
Planning mistakes lead to unpleasant surprises in the future - disinherited loved ones, rewarded ex-spouses, disqualification for entitlements or lawsuits among warring family members - and they don't have to happen. Your estate plan, like most things in life, requires some adjusting, maintenance and even professional help from time to time to remain viable and succeed.
Here's a look at seven preventable failures that can make your life, and death, more difficult and give your loved ones more grief than necessary:
- Failure to create an estate plan
- Failure to plan for incapacity
- Failure to review your plan
- Failure to plan for children as beneficiaries
- Failure to plan for special-needs beneficiaries
- Failure to plan if you outlive a beneficiary
- Failure to plan for end-of-life issues
There perhaps is no planning blunder greater than having no plan at all. The estates of those who lack at least a valid will are subject to the delays, expense and lack of privacy of probate and state laws of intestacy that have rigid rules on how assets are distributed. Family members may find themselves fighting among each other - and in court - over your assets. Without a will, parents can't name a guardian to care for their minor children. If you ever become incapacitated and lack powers of attorney for health care and finances, an advance health care directive or a revocable living trust with explicit instructions, you could force your family to petition a court to appoint a guardian to make decisions for you. You may relinquish control over health care and financial decisions to a total stranger. A judge, unaware of your preferences, could appoint an ill-motivated professional guardian. Without a plan, you also lose control of the distribution of your assets when you pass away. Without a comprehensive plan, you'll burden loved ones with the hassles of probate, be vulnerable to an unwanted guardianship and squander the ability to control your financial legacy.
Your planning documents need to address more than how your property is distributed when you die. One recent study found that those who reach the age of 65 have a 50 percent chance of becoming incapacitated in their lifetime. But incapacity can happen to anyone, young or old, at any time due to an accident, disease or disability, so there's no excuse to delay being prepared. With powers of attorney for health care and finances, you can be proactive and create a plan that names trusted people of your choosing to act on your behalf. Otherwise, your loved ones may be subject to costly court proceedings to be allowed to care for you or challenge an unwanted guardianship. Another way to plan for incapacity is to create a revocable living trust in your lifetime that can enable your successor trustee to protect and manage your assets, on your terms, upon your incapacity. Remember, a will only takes effect upon your death, and the personal representative you name in your will cannot manage your affairs while you are alive.
Peace of mind is a good thing. Out of sight and out of mind isn't. A failure to update your plan is an oversight that can lead to its downfall in many ways. As time passes and family dynamics change, your plan must be amended to include or exclude people and provisions depending on life events and your current priorities. If you get married, divorced, remarried, have children or suffer a death in the family, it's time to review and amend existing documents. Otherwise, you risk passing assets to an ex-spouse or leaving behind a new family member. Beneficiary designations (and alternate designations when allowed) for annuities, insurance policies, retirement accounts and bank and brokerage accounts must be up-to-date. They must be coordinated with the beneficiaries named in your will and trust for your plan to succeed. When the “wrong” beneficiaries receive assets, lawsuits from disgruntled family members challenging the estate are to be expected. Beneficiary designations supersede the provisions of a will or trust, and conflicting documents can lead to legal challenges. Regular reviews (after major life events or every few years) are required.
Part your plan is to make sure the kids have a financial safety net. But naming a minor as a direct beneficiary can backfire. When beneficiaries automatically receive an inheritance at a young age, long-term financial planning usually falls by the wayside. One nightmare is not being around for your children. Another is imagining them squandering their inheritance in short order. A better option is to ensure your will or trust specifies that minor children receive their inheritance once they reach a certain age, and that your representative or trustee will be responsible for managing their assets and providing support. If the child - not your trust - is the beneficiary of your life insurance policy, the child stands to receive a lump sum at age 18 or 21. Proper trust planning is required if you intend assets to be paid out over time or when a child reaches certain milestones. Another potential mistake is adding adult children to the deed on your home as co-owners with rights of survivorship. With this arrangement, they could expose the value of the home to their liabilities (divorce settlements and debt claims come to mind) and possibly create a tax burden by receiving the home as a gift.
Leaving assets directly to a beneficiary who has special needs and receives government assistance can be disastrous. In many cases, those with special needs rely on Social Security and Medicaid benefits to provide support over a lifetime. A windfall of income, however, could disqualify a special-needs individual from receiving government entitlements. Most of the inheritance would have to be spent down to enable the individual to once again qualify for assistance - a contradiction of your objectives. A better solution is to create a special-needs trust within your will or living trust that can be rigorously controlled by a qualified third-party successor trustee and maintain eligibility for assistance. But even a professionally designed special-needs trust is fraught with challenges because of strict rules in the administration of trust assets. Its trustee faces complex duties that require a high degree of formality, and it's not a job easily assumed by a family member. In many cases, a professional trustee is necessary to prevent administrative failure.
Beneficiary designations are praised for their ability to distribute assets quickly to your loved ones after your passing. They help achieve the important goal of bypassing probate. Unfortunately, our presumptions about the order of death of our beneficiaries are sometimes wrong. You need to update your beneficiary designations as circumstances in life change, otherwise assets can wind up in your probate estate or in the hands of an unintended recipient. If a beneficiary dies before you do, your plan can fail, and most banks don't allow alternate beneficiaries for payment-on-death accounts. Proceeds from life insurance policies, retirement funds and other assets also are at stake, and alternate beneficiaries should be named, whether you're leaving behind a checking account or a Chevrolet. Meanwhile, other problems arise when former spouses or departed family members were named as beneficiaries long ago when accounts were initially created. Your paperwork is only as good as the last time it was updated.
Many people avoid planning for the possibility of a terminal illness or a tragic accident. After all, it's an unsavory subject. But if misfortune strikes, there's no good reason to lack control of your fate or force your family or loved ones to make difficult treatment decisions on your behalf. Many people fear being placed on artificial life support or having to endure a long, slow death. A living will, also known as an advance health care directive, enables you to express your end-of-life treatment preferences. It's important, while you can still communicate, to decide the extent of life-sustaining treatment you want - or don't want. Otherwise, you leave treatment decisions at the sole discretion of medical professionals, who may not share your preferences or those of your family.