7 Critical Estate Planning Mistakes You Must Avoid

Many of the same mistakes seem to recur in one Estate Planning process after another, whether the estate is worth a billion dollars, a few hundred thousand dollars, or something in between.

I’m going to skip the most common mistake of all: Your estate planning is not up to date. If you’re reading this article, you know a plan is needed and it should be reviewed every couple of years and revised as needed.

I’m also going to skip the list of essential documents for every plan. If an estate planning professional prepared your plan, it more than likely includes a will, living trust, power of attorney and other key features.

Every estate planner can tell you about the recurring errors they’ve seen time and again. These slip-ups occur even among people who are financially sophisticated and have access to top advisors. Often, the stories are sad ones because the oversights and shortcomings aren’t apparent until after the person has passed away and the situation can’t be remedied. To avoid that fate, take these steps.

Educate and communicate.

A major reason estate plans don’t reach their goals is the next generation isn’t prepared. They waste or mismanage the assets. They are taken in by scams or bad investments. Or the wealth ruins them.

I discussed some of these problems last month in the context of giving to children. One option, as I said then, is to leave the estate in trusts that give the children limited access to the wealth while trustees manage it.

A better solution is to ensure the children have a basic knowledge of and are comfortable with the wealth. As I’ve said before, sudden wealth is the real problem. Inherited wealth is less likely to cause problems when the children have known for some time how much money they’re likely to inherit and how their parents accumulated the money. Children also benefit from knowing their parents’ philosophy about managing, accumulating, spending and giving money.

This kind of education doesn’t happen overnight or even in a weekend. It’s best to impart this information in small amounts over the years. Some people also enlist their financial advisors or other outside experts to share knowledge with the adult children. Family retreats or meetings every year or so can be effective. Enlisting third parties to lead discussions or make presentations is especially helpful for people who aren’t comfortable discussing money with their children. If the communication and education process doesn’t go well, that will help you conclude that it is best to pass the estate in trusts instead of directly to heirs.

An estate plan isn’t going to be successful unless the heirs understand the property, your intentions for it and how to manage it.

Avoid family conflicts.

Often, conflicts are just below the surface or are kept in check while the parents are alive. These conflicts can erupt after one or both parents pass. Other times, the estate plan itself causes or exacerbates family conflicts or resentments

Clients often frustrate estate planners by not acknowledging family conflicts or simply hoping “they’ll work it out.” Other clients create conflicts by committing classic mistakes, such as having siblings with different personalities and philosophies inherit property together. Don’t be embarrassed by imperfections in your family.

There are tools for dealing with and avoiding family conflicts, but the estate planner needs to know the family history. Each family has imperfections, and an experienced estate planner has heard versions of your story before.

Your estate planning can help provide some cohesion among your heirs for years to come, or it can help shatter family harmony.

Plan before making gifts. Many people give significant gifts to their adult children. Some do it for tax reasons, while others give because they want to help the loved ones now. Gift giving can be a good way for the next generation to be comfortable handling wealth.

Whatever the reason for giving, instead of automatically writing a check, develop a strategy that will maximize the impact of your gifts.

First, decide if it is best to give cash or property. Cash gifts tend to be spent quickly, while property gifts often are kept and held for the future.

Second, consider tax efficiency when deciding which property to give. Often it is best to give property that has appreciated or that you expect to appreciate. We reviewed taxwise giving in the October 2017 issue, and we’ll update that in coming months. Also, review this month’s article on the new Kiddie Tax.

Understand the plan.

Several times in the past, the magazine Private Wealth surveyed estate planners. Each time about 70% of the planners said they believe most of their clients don’t really understand their estate plans and what the plans do. That’s a pretty good start on the road to estate plan failure.

Most estate planning professionals are able and willing to explain a plan so that most people can understand it. You don’t need to know the legal details and why certain terms are used instead of others. But you should know the effects of the plan and whether your goals will be accomplished.

You should enter the estate planning process with a list of the goals you hope to accomplish. The list might change during the process. Take notes when meeting with your estate planning professional. Often, people understand key parts of the plan after it’s been explained but lose the knowledge after the meeting. Don’t hesitate to ask the planner to slow down or explain things in more detail.

Organize, simplify and prepare.

One reason it takes time and money to settle an estate is the owner didn’t make it easy for the executor. More than likely, the owner had a grasp of the assets and liabilities and knew where to find the necessary documents. But it’s also not unusual for someone to forget about long-owned accounts or other assets.

Whatever the owner’s situation, the executor needs to know the details of the estate. If the owner doesn’t do the right groundwork, it could take the executor considerable time before becoming confident all the assets and liabilities have been identified and the estate can be settled.

We should be simplifying and streamlining our estates as we age. That makes our lives easier and compensates for declining energy and cognitive functions. Another reason to streamline is to make the estate settlement process faster and less expensive. Simplification also avoids lost assets.

You also should leave a roadmap to your estate for your executor and heirs. I put together a workbook that can help you get started, titled To My Heirs: A Book of Final Wishes and Instructions. It’s available for $24.99 through the website at www.RetirementWatch.com. Roll your cursor over the “About bob Carlson” tab and click on “Bob’s Library.”

Have a business succession plan.

A business succession plan is a lot more than designating who will inherit the business. Most business owners don’t have a succession plan, and that’s a major reason why few businesses survive into the second generation of owners. The value of a small business declines rapidly when the owner departs without a firm succession plan in place.

A succession plan is a designation of who will run the business and who will own it (they can be separate people or groups of people) and when the transitions will occur. When no one in your family wants to run the business, the succession plan might be for the business to be sold when you retire or pass away. If that’s the case, the business must be managed to make it ready for a sale. Whether the plan is to sell the business or have someone take over, a successful succession plan usually takes five years or longer.

Fund living trusts.

Perhaps the most basic and widespread estate planning mistake is to fail to fund a revocable living trust. These trusts are created to avoid probate and establish a process for managing assets in case of disability or death. Yet, a living trust has no effect unless it is funded with assets.

The estate planner generates the document that creates the living trust, but it doesn’t automatically hold any assets. You fund a living trust by transferring ownership of assets to the trust. This is a step many people overlook or procrastinate about.

You transfer household furnishings and other personal items to the trust simply by attaching a general list of them to the trust document.

Transferring other assets requires more work. Real estate is transferred to the trust by changing the deed. Vehicles need their registration or title changed. Financial accounts need their titles changed, and each financial institution has its own paperwork and process for that. Your estate planner should tell you the steps that need to be taken for each type of asset you own.

Too often, these steps aren’t taken. People spend a lot of money creating living trusts that own only a few of their assets. The rest are outside the trust and have to go through the probate process.