Many estate plans aren’t as solid as the estate owners and their families believe. Key defects are widespread.
The imperfect estate plans either won’t deliver the expected results or meeting their goals will cost significantly more than anticipated.
Be alert to the possibility that your estate plan has one or more of these gaps.
Letting too much time pass. Estate planning is a continuous process, not a once-in-a-lifetime event.
Once a plan is completed, many people don’t want to devote the time and resources to that effort again. They want to leave the binder of documents on a shelf (or in a safer place) until they’re needed, preferably by someone else.
But many things change over time, often requiring adjustments to the plan. An outdated estate plan can cost a family a lot of money and time.
Some factors that change include the tax law, other areas of the law, your circumstances, your family, and your goals. People often don’t know about or recognize important changes until they review their plans.
An outdated trust. What was once a very effective trust provision now might defeat your goals. Many events can cause trust provisions to become obsolete or adverse to your goals.
A trust might have been drafted when children were young or less sophisticated than they are now. Provisions put in to protect them and the wealth now aren’t necessary and will be considered demeaning (and expensive) if they remain in effect.
Your values and goals might have changed. Perhaps it’s no longer necessary for a trust to give beneficiaries incentives to obtain an education or achieve some other goals. Or maybe new incentives and goals are in order.
Many people now want their trust assets invested with some social or other goals in mind while others don’t want those factors considered at all.
You or the trustee might have relocated to another state, or your state might have amended its trust laws. Either action requires the trust to be updated.
Vague plans for passion assets. Passion assets include collections and those related to personal interests and hobbies.
They might have significant monetary value or only emotional value to the owner and perhaps a few family members.
They can be hard to value, difficult to sell, expensive to maintain, and often require specialized knowledge. Many heirs consider caring for and managing the assets a burden or obligation.
Develop a specific plan for dealing with the passion assets and review it from time to time to be sure it still makes sense.
Incomplete plans for specialty real estate. Many people own specialty properties such as vacation homes or other secondary real estate, such as ranches, farms, and undeveloped land.
A goal often is to have the property, especially a vacation home, continue in the family because the family enjoyed time there together and the parents would like that tradition to continue. Often, the succeeding generations don’t have the resources to purchase similar properties.
When the children inherit such property jointly (whether in their own names or through a trust or other entity) a lot of joint decisions must be made.
How will use of the property be shared? How will the expenses of the property be split? Who will make decisions about repairs and improvements? What if one beneficiary lives much closer to the property than others? What happens when one beneficiary wants to cash out and the others don’t? That’s only a sample of the issues.
Don’t fall into the trap of thinking the kids will work it out. Ask each about their interests in owning the property with others. Are they able to and interested in maintaining it? Will they use it regularly when you’re gone? Can they share with their siblings?
Often the best choice is to direct the executor to sell the property or sell it during your lifetime. Another option is to bequeath it to those who really are interested in it and adjust the disposition of the rest of the estate to equalize inheritances.
Unprepared heirs. You accumulated the estate gradually over time. You became used to handling it. Investments might have appreciated for decades without affecting your lifestyle or the attention you pay them.
Heirs often are in a different position. They have far less experience with that amount of wealth and perhaps with the types of assets you own.
Sudden wealth becomes quite a burden for such people.
It often is a good idea to take time now to make the heirs familiar with the wealth they’re likely to inherit eventually and how it should be managed. Don’t let them be surprised by the value of the estate.
Consider whether they should inherit assets outright or indirectly through a trust that is managed by a professional trustee for a period of time.
The key is to have a strategy that gives beneficiaries some time to get used to the amount of money they’ll inherit and prepare themselves.
Ownership of hard-to-market assets. Hard-to-market assets include small businesses, commercial real estate, and investments that aren’t publicly traded.
The first problem is, if they’re valuable, the assets could trigger estate taxes. Keep in mind that over the years the assets are likely to increase in value while the estate tax exemption could decline. Don’t forget state estate and inheritance taxes, if they apply in your state.
The second problem is these assets are difficult to sell in a hurry for a fair price.
A potential third problem is determining who will manage the assets (especially a business) after you’re gone.
You need to integrate succession planning into your estate plan.
One action is to begin selling some assets and streamlining your estate. Another option is to select and train someone to manage specialty assets after you.
When estate taxes might be a concern, consider buying permanent life insurance or arranging a line of credit so assets won’t have to be sold in a hurry to pay estate taxes. Your estate planner might propose strategies that can reduce the taxable value of your estate.
Inadequate cash flow. Estate liquidity is an overlooked issue. Failure to ensure the estate has access to the cash it needs to pay basic expenses and make specific bequests in the will often diminishes inheritances. Assets might have to be sold at fire sale prices to raise cash.
Failure to optimize tax planning. These days, including income taxes in your estate planning is more important than focusing on estate and gift taxes.
For example, if you sell an investment that’s appreciated a lot you’ll owe long-term capital gains tax on the appreciation. But if you retain the asset, heirs could increase the tax basis to its current fair market value and sell it immediately without owing capital gains taxes on the appreciation that occurred during your lifetime.
Be sure your plan considers ways to minimize family income taxes over time.