Many people spend substantial time and effort putting together an estate plan with their attorney and then throw a wrench in it with last minute changes. Often, they do not even realize that what they are doing will impact their will or trust. Other times, they are taking advice from someone else and not checking with their attorney. Whatever the reason, it can cause big problems down the road.
Here are the top five mistakes I have seen people make that upends their planning.
• Leaving money to someone during life, but not changing their will. People often include cash gifts in their will. Sometimes it is $50,000 to a favorite niece, $10,000 to the cleaning lady, or $100,000 to a childhood friend. It is not uncommon when meeting with family members after a loved has passed to hear that the gift was satisfied during life. “Oh, mother already gave the cleaning lady $10,000 before she died,” or “She put $50,000 in a joint account with her niece last year to help pay for college. Most of it is gone now.”
The problem with this approach is that the will was not changed. When the will gets probated, the individual named still gets the gift (or an additional gift). The court does not know that the gift was satisfied during life. There is also the possibility that your mother intended to give the person a second gift. She is no longer here to tell us.
Often the gift needs to be paid again, or we have to ask the cleaning lady to confirm that it was paid during life. You can take the approach that the lifetime gift was an advancement on the inheritance, but if the recipient of the gift does not agree, you could be arguing about it in court. None of these are good results.
• Not enough assets to fund their trust. If you created your trust years ago and your overall assets have decreased in value, make sure there are enough assets coming into your trust to pay all the gifts. Some people create grand estate plans leaving cash gifts to friend and family and creating trusts for others. These are all good intentions. However, if you do not have enough money in your trust to pay for all of these gifts, some people will get short changed, or worse, receive nothing at all.
Remember, the cash gifts get paid first. If you leave $1,000,000 to your brother and the rest in trust for your two children, but you die with only $1,100,000, your brother will receive $1,000,000 outright and $100,000 will stay in trust for your children.
It is also possible that the trust provisions will not get funded at all because there is no cash to fund it. However, we still must have the awkward conversation with the intended recipients that they were supposed to receive something in trust, but unfortunately they will not.
• Thinking all assets pass under the will. Some people think they have enough money to satisfy all the gifts in their will because they total up all their assets and it comes to a large enough amount. However, not all the assets will come into the will. That is the difference between probate and non-probate assets.
Probate assets pass from the deceased person’s name to their estate and get distributed according to the will. Non-probate assets pass outside the will to someone else, often by beneficiary designation or joint ownership. You need to know the difference so you know how much money will actually be in the estate to be distributed in accordance with the will. Do not forget to deduct debts, expenses and taxes.
• Adding a joint owner. This one is so easy to do that I can see why people get tempted by it. If you want someone to receive an asset when you die, such as a bank account or a piece of real estate, just add them as a joint owner. It’s that easy.
However, if your will is reliant on that asset coming into your estate to pay other people (or to pay debts, expenses or taxes), there could be a problem after you die. Adding joint owners often leads to will contests and prolonged court battles. Proceed cautiously and be sure to speak with your attorney first.
• Changing beneficiary designations. Changing your beneficiary without speaking with your attorney can have all kinds of unintended results. This often happens with life insurance. The policy could have been payable to your trust to pay bequests, shelter monies from estate taxes, or pay estate taxes. If it is paid to someone else, your planning could be thwarted.
Similarly, if you have a retirement account that was supposed to be payable to an individual and you change the beneficiary to your trust, the result could be adverse income tax consequences.
Talk to your attorney and meet with him or her regularly to review your estate plan, your assets and your beneficiary designations. Your plan may need to be updated, or it may be just fine as it is.