From time to time, it’s good to review why having a complete, up-to-date set of estate planning documents is so important. A holistic estate plan not only confirms your own desired goals, it can provide valuable insights to your friends and family of the values you believe make the world a better place. Unfortunately not all plans are created equal. Here are five common estate planning mistakes to avoid:
1. Not having a plan
Every state has laws for property is distributed for those dying without a Will — but not very many people would be pleased with the results. State laws vary, but generally they leave a percentage of the deceased’s assets to family members. (Non-family members, like an unmarried partner, will not receive any assets.) Many people believe a surviving spouse will just get everything, but it is common for the surviving spouse and children to each receive a share. This could mean the surviving spouse will not have enough money to live on. If the children are minors, the court will control their inheritances until they reach legal age (usually 18), at which time they will receive the full amount. (Most parents prefer their children inherit later, when they are more mature.)
2. Not naming a guardian for minor children
A guardian for minor children can only be named through a Will. If the parents have not done this, and both die before the children reach legal age, the court will have to name someone to raise them without knowing whom the parents would have chosen.
3. Relying on joint ownership
Many older people add an adult child to the title of their assets (especially their home), often to avoid probate. This misguided approach can create all kinds of problems. When you add a co-owner, you lose control. Jointly-owned assets are now exposed to the co-owner’s creditors, divorce proceedings, “unauthorized” or unintended borrowing, and even misuse of the assets. There could be gift and/or income tax issues. And if you have more than one child but only name one to be co-owner with you, fluctuating values could cause your children to receive unbalanced/unintended inheritances and could cause fighting (lawsuits!) among your children.
4. Not planning for incapacity
If someone cannot conduct business due to mental or physical incapacity, only a court appointed Guardian can sign for this person—even if a valid will exists. (A will only goes into effect after death.) The Court usually stays involved until the person recovers or dies and the Court, not the family, will control how their assets are used to provide for their care. The process is public and can become expensive, embarrassing, time consuming and difficult to end.
Giving someone power of attorney as a way to avoid the court process can be risky because that person can do anything they want with your assets with no real restrictions. For this reason, a living trust is often preferred for incapacity planning. With a trust, the person(s) you choose to act for you can do so without court interference, yet they are held to a higher standard as a trustee; if they misuse their power, they can be held accountable.
Someone also needs to be given the power to make health care decisions for you (including life and death decisions) if you are unable to make them for yourself. Without a designated health care agent, you could be kept alive by artificial means for an indefinite period of time. (Remember Terri Schiavo? Terri’s story and information about the Terri Schiavo Foundation can be found at http://www.terrisfight.org/, ) The exorbitant costs of long term care, most of which are not covered by health insurance or Medicare, must also be part of incapacity planning. Consider long term care insurance to protect your assets.
5. Having a plan that is out of date
Every estate plan is based on the personal, family and financial situations, and tax laws, in effect at the time it was created. All of these will change over time, and your plan needs to change with them. It’s a good idea to review your plan every couple of years or so and make sure it still does what you want it to do. Your attorney will let you know when a tax law change might affect your plan, but you need to let your attorney know about other changes that could affect it.