Estate planning isn’t just about Wills, trusts, and power of attorneys. Those are the legal instruments you and/or your attorney put together to execute your plan effectively.
Estate planning is a strategy that allows you to transfer your assets to a chosen beneficiary—whether it’s a non-profit, charity, your kids, a favorite relative, or all of the above—in the most expeditious and tax-efficient manner possible.
In other words, estate planning is what you should do while you’re still alive to help ensure your wishes for all the assets you’ve spent a lifetime building are well-defined and easily carried out after you have passed.
Unfortunately, we’ve seen too many estate planning mistakes happen in the past. Here are the biggest ones to avoid:
1. Not Having a Will
None of us like to think about death, even the rich and famous. However; everyone should have a plan, not just rich people. Perhaps it’s easiest to understand the perils and mistakes that can occur by reading about celebrity deaths and their estate planning failures.
Take the musician, Prince, for example. He died April 21, 2016 without any estate planning documents in place–no Will, no power of attorney, no documents—nothing. As of this writing, Prince’s heirs have spent an estimated $6 million in attorney’s fees, but the estimated $200 million estate is still tied up in probate court because there was no estate plan in place. No one has received a penny from his estate—except lawyers and the legal system.
Note: Keep in mind, if someone has only a Will, the estate will still go through probate. Trusts are the only way to avoid probate; therefore, allowing your estate to pass immediately and privately to your beneficiaries, most of the time.
Probate court is a dreadful process. It’s lengthy, very public, expensive, and it’s usually completely avoidable if you are proactive in creating your estate plan.
2. Not Planning For Weird Assets
Another recent celebrity example is chef, world-foodie, and television journalist Anthony Bourdain. He did have estate planning documents in place when he died on June 8, 2018. His estate plan prevailed even though he was going through a divorce, which wasn’t final. His trust allowed easy passage of his estate to his daughter (beneficiary) via his estranged wife (trustee).
However, one unusual asset did come into question: his frequent flyer miles.
Because Bourdain traveled all over the world for his work, he had accumulated a massive amount of frequent flyer miles—a tangible asset that wasn’t listed in his Will. Eventually, the miles went to the estranged wife after confusion, problems, and delay. All of these problems could have been avoided by listing this unique asset properly in the estate plan.
3. Using The Boilerplate Language “Divide Equally”
Too many times, estate planning documents contain the words “divide equally.” In order to understand why this is a problem, let’s walk through two examples:
First, let’s consider an unfortunate situation. Let’s say there are three children and one family heirloom that must be “divided equally”—in this case, three ways. Let’s use the family’s Steinway Concert Piano. Even if one child wants the piano and the other two don’t, the Will has to be followed as written. The piano would have to be sold and the proceeds split, unless one child can afford to pay the others for it.
Second situation: an expensive second home on beachfront property in Hawaii. The whole family (including three kids) spent summer vacations there growing up, and the place is left to them with the instructions to “divide equally.” The problem is, the now-grown kids don’t have equal economic means. One of them is a successful doctor, the other one is mid-level management, and the last one’s a grade school teacher.
This is just one example of how you could bankrupt your kids. It makes more sense to have a conversation during your lifetime discussing how your children would like the property to be used once you pass.
Many people make the mistake of only setting up a distribution plan for their investable assets like stocks, bonds, and mutual funds and cash in their Wills and estate documents. These types of assets are very easy to divide up. It’s the tangible assets like real estate, pianos, furniture, jewlery, dishes, artwork, etc. that are a lot more difficult to distribute to your beneficiaries and cause the most problems when the estate documents say “divide equally.”
4. Family Fights Over Assets
Even when assets are clearly distributed in your final estate documents, if your heirs don’t know who gets what when you pass away, they may feel slighted, which can cause irreparable family rifts after you’re gone.
Some statistics say nearly 70% of Americans feel their parents’ assets were distributed unfairly. It’s sad to see beneficiaries sue each other over tangible assets that haven’t been clearly divided in the Will, and it cannot be stressed enough how important it is to have open conversations with your beneficiaries while you’re alive in order to plan accordingly with your estate documents.
We recommend a sticky note game. The next time you gather your family together, whether it’s over the holidays, a birthday, 4th of July, whatever, give each child a different color pad of sticky notes. Then, have them go around the house and put sticky notes on anything that matters to them.
Once all the sticky notes are in place, everyone can have the conversation about how to divide up assets, so no one feels shortchanged, conflicted, or upset when you pass. Your kids will be grieving at that point. It’s already an emotionally difficult time. Don’t leave your kids guessing about how things will happen or be divvied up. Fights over possessions have ruined many families. Don’t let that happen to yours.
5. The “Lottery Effect”
The “lottery effect” is documented. The majority of people who have won the lottery or received a large windfall go bankrupt within a few short years or become worse off than before they won. Money can ruin people; unfortunately, it happens all the time.
What happens when someone inherits a large sum of money? One, they usually quit their job. Two, their spouse leaves them and takes half of everything. Three, after five years of reckless spending, the inheritance is gone. They’re left in a situation where they’re worse off in mind, body, and soul than they were before they received the inheritance.
Your estate planning can help. How? By creating a trust, you can avoid having all your money go to your heirs in one lump sum, as it does if passed on through a Will. A trust allows you to specify distributions over time and set up scenarios of when and how your heirs will receive their money. That way, they can’t go spend-crazy purchasing items that don’t matter. They get a little bit at a time, so they can avoid falling into the pit of the lottery effect.
For instance, you could specify that the trust will pay for college expenses, or they could receive money for the purchase of their first home or birth of a child. You could have 25% distributed at age 21, another 25% distributed at age 25, and the remaining 50% at age 30, so they don’t blow through all the money when they’re young.
Be proactive in creating an estate plan that maximizes your children’s financial and emotional success.
6. Healthcare Directives
A healthcare directive is part of your estate plan that you put together for worst-case scenarios, when you can longer speak for yourself in a hospital. Most people don’t want to stay alive if they become completely incapacitated, so they often put in their healthcare directive that they don’t want any food, water, artificial respiration, or pain medication because they would rather pass quickly if brain-dead.
Unfortunately, there are stories of people taken off life support and expected to die right away, who instead suffer in pain and agony, sometimes for days, because their healthcare directive clearly states no water or medicines of any kind.
Keep in mind, a healthcare directive supersedes your medical power of attorney, so your spouse or other designee can’t intervene on your behalf. Please put in the measure to have pain medication and water administered as necessary.
In Conclusion
Get in touch with a retirement fiduciary and an estate attorney. Both have different perspectives and can help you avoid estate planning mistakes.