Pitfalls of Estate Planning

In our role as a corporate fiduciary, we see many different estate planning situations. Often, we are faced with situations that make estate settlement unnecessarily complicated and lengthy. Learn from other’s mistakes! Below is a list of some of the estate planning pitfalls we have encountered that can cause problems.

“Making the perfect the enemy of the good.”

Too often, individuals will engage in the estate planning process with all the best intentions. They will contact their attorney, discuss what their wishes are and have the attorney create a draft of a Will or Trust. The attorney then sends them a draft of the trust for review. In the process of reviewing the draft, it is commonplace to consider whether the terms stated in the draft are indeed consistent with their intentions.

However, some reach this stage and get bogged down in “analysis paralysis”: a sometimes endless loop of over analysis of the situation due to fear of making a bad decisions of foregoing a more optimal solution. As a result, such individuals often fail to follow-through with executing their estate plan. In such cases, family members might be faced with intestacy or the implementation of an outdated estate plan.

Keep in mind a Will or Trust can be changed or revoked during your lifetime. Bottom line: an imperfect, up to date estate plan is better than an outdated or nonexistent estate plan.

Trying too hard to be “fair.”

Decisions regarding “who gets what” and “how much?” can be difficult. Someone creating a Will or Trust can be troubled by what is felt as a need to be “fair” to all beneficiaries, thinking that bequests to heirs must be equitable. However, the creator of a Will or Trust does not have an obligation to financially equitable. Bequests of assets can be made according to their wishes without regard to one party getting more than another. For example, lets assume Mary is creating her Will. Mary has three children, John, Mark and Ann. Ann is a surgeon, very responsible and financially independent. John is a graphic designer, married with two children, who is working hard to build some savings to send his children to college. Mark is divorced, has no children, and has a history of poor management of his personal finances. On one hand, Mary feels she needs to be “fair” to her children and is inclined to divide her assets equally among her three children. However, she recognizes each of her children will likely have different financial needs. Ann is likely to be financially secure for the rest of her life. John does okay financially, but his children could benefit from some financial assistance for their education. Mark may have a financial need, but perhaps leaving money to him directly isn’t in his best interest.

Mary is not obligated to divide her assets evenly. However, she could decide to split her estate into thirds, one share for each of her children. She could decide most or all of her assets go Mark and John based on their greater financial needs. Or she could decide that John gets an outright bequest at her death, while Mark’s share is held in trust. The bottom line is Mary can decide who will get her assets at her death based on her wishes alone.

“Cutting the pie into too many pieces.”

Let’s say Anna has an estate of about $1.5 million. In this example, let’s assume she has no children of her own but does have 14 nieces and nephews she would really like to help. However, she’s concerned most are too young to handle their own finances. She then hears about the possibility of having the funds go into trusts where a trustee could control distributions of trust assets for each.

Though Anna’s basic premise – making sure the funds aren’t misspent – is valid, her solution is likely impractical. Anna’s estate plan calls for the creation of 14 separate trusts. Based on the size of her estate, each trust would contain just over $100,000. Trusts of such size are not typically economical. Someone will have to manage the investments, keep records of distributions and file an annual fiduciary tax return while the trust is in existence. Corporate trustees like banks are unlikely to accept appointment of such small trusts, and an individual trustee would likely require the assistance of an attorney and/or CPA to ensure they are properly administered.

Failing to follow through – not funding a trust.

Let’s say you see an attorney about setting up an estate plan. The attorney highlights the advantages of creating a revocable living trust to hold the bulk of your assets. Such a trust will allow your estate to bypass probate and provide an additional level of privacy once you have passed away.

The attorney drafts the document, then tells you the steps you need to take in order to have the assets titled in the name of your trust. Unfortunately, you neglect to follow these relatively simple steps and never get around to retitling your assets. What happens if you then pass away? The assets are still titled in your name and not the trust, necessitating your successor trustee to go through the process of hiring an attorney to open a probate, defeating one of the main reasons to create the trust. As a result, it will now take longer and likely be more expensive to settle your estate. So, remember to follow-through and title your assets in the name of your living trust.

Failing to “ask first.”

When creating an estate plan, it will be necessary to name either an individual or a bank with trust powers to serve in certain roles like successor trustee, personal representative or power of attorney. Often, individuals will name family members to serve in such roles. However it’s important to remember that no individual or entity is required to accept appointment to serve in any such role. When called on to serve due to death, such individuals or entities can decline to serve for any reason.

As a result, it is important to talk to any individual you contemplate for such roles to ensure they are comfortable serving if called on to act. If you are contemplating a bank to serve in such roles, make sure they would accept appointment; also ask about any minimum asset levels to ensure they are a suitable choice for the size of your estate.

Keeping the plan where it can be found.

Once you have signed your estate plan, keep it somewhere safe. Also make sure the location is know to someone like a family member or close friend. A personal representative or successor trustee will have difficulty fulfilling your wishes if only a copies of your estate plan are located. Such situations can require court approval, slowing down the process and likely resulting in greater cost.

Skipping legal assistance to “save money.”

These days, the internet is full of so-called “self-help” advice showing individuals how to do many things on their own. Included in this list is estate planning. Some websites will advise that it’s not necessary to engage an attorney and encourage people to “save money” by drafting their own Will or Trust. Simply put – don’t do it! Like members of other professions, estate planning attorneys have gone through extensive training and often possess several years of hands-on experience drafting Wills, Trusts and other related estate planning documents. Professionally drafted documents are far less likely to contain errors or to omit important facts that can be very important during the estate settlement process. This is especially important in situations that might involve disputes due to family discord, divorce or other potentially litigious situations.

If you are interested in learning more about whether a corporate trustee is right for your situation, please contact us at PrairieTrust@prairietrust.com or (262) 522-7400.


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