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Many estate planners will admit that a lot of the plans don’t achieve the owners’ goals. Most of these failures were avoidable.
The failures most often result from the nontechnical aspects of the plan, what some refer to as the human side, or soft side, of an estate plan. There’s not a lot of data on the issue, but there’s enough to be concerned. About 70% of estate settlements are followed by asset losses or a reduction in family harmony, according to the 2007 book Estate Planning for the Post-Transition Period by Roy Williams and Vic Preisser. In the past, the magazine Private Wealth found that most of the estate planners it surveyed periodically said a high percentage of the plans they prepared failed to meet their goals.
There are two main reasons for estate planning failures.
One reason for estate plan failures is lack of follow through. You need to implement and then regularly update the plan.
Estate planners have at least one thing in common with doctors. Doctors know that a number of their patients fail to follow recommendations, such as taking their medications as prescribed. Likewise, estate planners know from experience that a meaningful percentage of their clients won’t follow through.
A common mistake is not to fund a living trust. The trusts are set up to avoid probate and ensure assets are managed in cases of disability. But for those goals to be met, assets must be transferred to the trust. The deeds to the family home and other real estate must be put in the trust’s name. Automobiles must be registered with the trust as the owner. The same holds true for financial accounts and other assets. If those steps aren’t taken, the trust is empty; it owns no assets. All the assets are subject to probate.
Powers of attorney and advance medical directives are other sources of failure. People often walk out of their attorneys’ offices with these documents and then put them on a shelf or in a filing cabinet. They don’t do any good if nobody else knows about them. The documents appoint agents to act on your behalf when needed. The agents need to know about the documents and have access to them.
Not updating plans is another way people don’t follow through. An estate plan isn’t something that can be completed once and forgotten. An obsolete plan can be worse than no plan.
Your situation changes, as does the law and other factors that affect your plan. Every few years, and more frequently if there’s a major change in your life or family, review the plan and your situation with the estate planner.
You aren’t likely to know if your plan succeeds or fails, because you’ll be gone. But you should take steps to ensure success.
Ÿ Inform your heirs. Let them know at least generally the value of the estate, the assets and liabilities in it, and the outline of your plan. That way, they won’t be surprised and will have an opportunity to express any views they have.
Ÿ Prepare your heirs. Try to educate them about how to handle the wealth and what your intentions and wishes are. If they don’t seem to have high levels of financial literacy, consider actions you can take. These can range from helping them gain financial experience and acumen to putting the wealth in trusts so that others will make the major decisions.
Ÿ Follow through on your plan. You should leave the estate planner’s office with a checklist of actions you need to take. Then, follow the checklist.
Ÿ Update and revise as needed. Like all plans, an estate plan isn’t fixed and unchangeable. It’s a continuing project that needs to be revised and fine-tuned over time. Plan on seeing your estate planner at least every couple of years.
Another cause of estate plan failures is the heirs aren’t prepared for the financial transition. Some heirs simply don’t have the skills or knowledge to handle the money or property. Others aren’t emotionally or mentally equipped to handle the wealth. Some heirs have both problems. The problems are especially common when the estate is very valuable but can occur in estates of almost any value.
Often, the parents who accumulated the wealth focused on providing for the children. They weren’t focused on teaching the children their values regarding wealth or their methods for accumulating and managing it.
When heirs aren’t prepared, wealth often disappears. It can be wasted through poor spending decisions, bad investments, neglect, fraud, and other causes.
For your estate plan to succeed, your heirs need to know how to manage and spend the wealth before receiving it. They aren’t going to learn quickly as the estate is distributed. Teaching them about money before then is important. If you can’t do it, ensure someone else is. Some people have their financial advisors meet with their children or hold family workshops or retreats.
Another way heirs aren’t prepared is they are surprised by the estate details. They first learn of their parents’ wealth and how it will be distributed after the parents pass away. Evidence of this is in a report from BMO Wealth Management titled Estate Planning for Complex Family Dynamics.
The report included a survey, which found:
Ÿ 40% of parents never discussed their estate intentions with their children;
Ÿ Only 28% of adults said they knew details of their parents’ estate plans;
Ÿ 40% of those whose parents passed away believed their parents’ estate plans were unfair; and
Ÿ 25% of married adults said only their spouses know the locations of their estate planning documents.
Heirs need some advance knowledge of the estate plan.
Family disharmony and litigation often result when one or more children are unpleasantly surprised by the estate distribution or other details. Periodically tell your children the general value of your estate and how you plan to distribute it. In most cases they don’t need to know the details or read the documents, but they should have a general idea of your estate and plans. They also should be updated as things change.