Introduction
Estate planning is primarily about the transmission of wealth. However, it should be about much more. Many people don’t want to delve into family skeletons or tackle emotionally charged issues. But the reality is that if you fail to plan, or fail to address tough issues, or ignore practical planning logic, you might be planting the seeds for family dysfunction or much worse. While the list of ways to mess up your kids with a poorly handled estate plan is long, hopefully the following will help you avoid many of the traps.
Not Planning Flexibly
If you want any planning to work, ask lots of “what if” questions. Stress test your plan. To many plans are just documents and decisions made to address whatever the client wants today. That is rarely prudent. Here’s an example if one of the worst inflexible plans. The couple had four children and were active with a number of charities. They even referred to charity as their fifth child and they wanted to treat all of them equally. So, years ago they hired an attorney who drafted a will that left their $1 million estate as follows: $200,000 to each of the four children and the remainder to a list of charities. That works, but is dangerously inflexible. When they finally went back to a new estate planner more than 15 years later their estate was $10 million. They would have wanted to pass $2.5 million to each child and to their list of charities. But because of the inflexible way their old will was drafted, had they died before signing a new will each child would have received $200,000 and the charities would have shared $9.2 million. Not even close to what they wanted.
The moral of this tale is to have plans created that are flexible to change with changing circumstances. Market declines or increases should not undermine your plan.
The above plan could have been created with the thought that the client’s wanted to be sure that their children each received the minimum amount before charity received anything (but no one could remember as it was so old). But the wills were drafted in a way that a large increase in the estate would result in the opposite of what they wanted. A smarter way to have drafted their will might have been, had they wanted to make sure their children got a certain amount like $200,000 would have been to bequeath the first $800,000 of wealth equally to the children and the excess then in equal shares for each child and charities. Whatever your desire is, be sure that the priorities are reflected in your plan.
Another similar type of issue might occur, for example, where one child has greater needs then the others. If you feel that the assets are sufficient to divide them equally for all the children, and in so doing the child needing greater help will be adequately provided for, that might be acceptable. However, if your estate declines in value (remember, stock markets don’t always go up), that needy child might not get enough. In that case you might instead provide the first say $500,000 shall be bequeathed to that particular child and thereafter all assets in your estate divided equally. As discussed below, be sure all heirs understand what you are doing and why to reduce surprise and hard feelings about one heir being favored.
There is no magic formula. While certainly the best answer is to review your will and other planning periodically, and especially if there is a change, and update them. But it is rarely prudent to plan on that happening. Most people feel about as happy about updating their will as they do about having a root canal done. So, while you should review and update, get your planning structured in a way that it has a better chance of accomplishing your goals whatever might occur.
Not Considering Children’s Attitudes and Beliefs
You want to name your oldest son as your executor because you somehow believe that is the right thing to do. But will he in fact be fair and objective? What happens when a decision has to be made that might put his interests in conflict with those of another child? What might he do? Does he have the right temperament and values to serve in a fiduciary role?
If you really want to have fireworks name a child as your health care agent to make health care decisions who has very different religious or philosophical views of those decisions, then you and the other children do. Perhaps your entire family is devoutly religious, and your religious beliefs materially inform end of life decision making. But you’ve named your oldest daughter, who is a physician, to serve as your health care agent. You know that she has veered far off the religious path in which she was raised, but you feel as a physician and your child she should be named to make health care decisions. Perhaps you have not really acknowledged her significant changes in religious views. This is one of the implications of a non-religious agent making end of life decisions that contradict the fundamental religious beliefs held by you and the other children.
Consider the following, which is sadly not an uncommon problem. An elderly mom names her oldest son her agent under her financial power of attorney. Her son takes care of her finances, medical care and all her needs and she feels he is the only child to pick for this role. As the years go by and son continues to provide care giving help to his mom he grows more resentful of the fact that when Mom passes his siblings will share equally in her estate. So, he resorts to some self-help. Son uses the financial power of the attorney mom signed naming him her agent to change beneficiary designations and account titles to assure that most of the estate passes to him alone. Not what mom intended, but what son eventually felt entitled to.
The moral of the above story is to carefully consider the scope of the powers and rights given to any fiduciary you appoint.
Hiring a “Yes” Adviser
Hire advisers that will tell you want you need to hear, not what they think you want to hear. If you want to hear “yes” all the time buy a parrot, don’t waste your money hiring professional advisers. Clearly inform every adviser you work with that you want them to tell you what they really think, and if you ask them to do something imprudent, they should tell you they think it’s a dumb move. Some clients react really negatively to advisers telling them what they want to do won’t work. You should want truth and guidance, not milquetoast.
Not Using Trusts
“I want a simple plan.” “I hate trusts, my parents set one up for me and it was horrible.” The list goes on. But leaving money outright to any heir is usually a mistake. If you leave a child’s share of an inheritance outright (i.e., no trust) and the child is divorced or sued after you pass, that entire inheritance might be lost. Many inheritances have been wiped out by IRS liens, malpractice claims and other risks that all could have been avoided with a simple trust. If you really have confidence in your child’s fiscal skills, so make the child a co-trustee of his or her trust. Or if you really want the heir to control, make them the sole trustee of their own trust. Note, if that is done the child/trustee should be limited to only making distributions to or for his or her own benefit that are limited to a “health, education, maintenance and support” standard. That is a technical definition/requirement that your estate attorney can explain. Using those magical words in a precise manner that the law requires can let the child inherit money in a trust and be the sole trustee but have those assets outside his or her estate and out of the reach of his or her creditors. That is a smart move. Use trusts.
Making Unequal Distributions
You might feel that your youngest daughter is a better child than your oldest son, but likely your oldest son doesn’t feel that way. Be very deliberate if you are going to leave unequal bequests. Discuss this with your professional advisers as it can be a very delicate matter. Consult with a mental health expert to also evaluate options for how to handle the disparity and attendant issues. Mishandling this can result in war between your heirs. That should be avoided. Sometimes there are simple ways to address a desire, or even need (e.g., a child with greater needs as discussed above), to have a disparate distributions. Some families have open discussions as to the reasons a particular child may need more and everyone is on board. Likely, those open and frank discussions may avoid later conflict. But sometimes any preparatory measures may be to little or no avail. There may be ways to accomplish the same objectives with less afront. For example, parents believe that they would like to bequeath $1 million extra to their oldest daughter because their younger son married a very wealthy spouse and himself has been very successful financially. They worry, however, that their sense of “fairness” will never be shared by their son. So instead of having a will leaving a disparate distribution, they purchase a $1 million life insurance policy on their lives (or one of their lives) which they have their son own (or a trust for his benefit). They pay the premiums each year. While their daughter might figure out that there has been a disparate distribution, this approach is certain less “in the face of” their daughter. In fact, the will can now bequeath the estate equally to the two children. Sometimes, a little creativity can lessen the risks of later disputes.
Not Updating Accounts and Beneficiary Designations
Another easy way to wreak havoc with your plan and create issues with your heirs is failing to keep account ownership and beneficiary designations both current and coordinated. A common problem created about this seems so obvious that it should not happen, but it does. Mom has two children and names her oldest as the beneficiary of one brokerage account, and her youngest the beneficiary of her second brokerage account. The account balances are equal. Mom pays for her living expenses out of the first account whose balance declines while the second brokerage account grows in value. Unintentionally the youngest child gets an increasingly large share of her estate as time goes on. This is simply poor planning. This might happen from a misplaced priority on avoiding probate. Using joint accounts or pay on death accounts can avoid probate. But it also can lead to unintended dispositive results. For younger parents that try these simple approaches to avoiding probate, what happens if they have two children listed on various accounts or IRA beneficiary designations, but then they have a third children and don’t get around to updating account titles or beneficiary designations.
A key point from the above examples is to illustrate that it is not only your will that is important to minimize estate disputes or angst amongst beneficiaries. You need to consider all of your assets and how they are owned and what is contained in beneficiary designation forms.