Estate Planning gaps pose big risks.
Is your estate plan good enough to avoid estate planning gaps? Odds are it isn’t.
Widespread problems with estate planning gaps exist even for wealthy people who consult with high-priced lawyers and other experts. When you’ve taken the time and gone to the expense of working on an estate plan, you don’t want a plan that isn’t going to meet your goals, preserve your assets and pass them to the intended loved ones and charities.
Even sophisticated individuals, such as those with $3 million or more in investable assets, may have estate planning gaps, according to a survey conducted a few years ago for U.S. Trust. Fortunately, estate planning gaps are fairly easy to identify and fix.
Let’s take a look at the most widespread estate planning gaps.
Incomplete Understanding of Estate Planning Gaps
Perhaps as many as half the people with some kind of estate plan don’t fully understand it, according to the survey. In other surveys of attorneys, many say they believe most of their clients don’t understand their plans.
Both parties cause the problem, I think. Clients often don’t ask enough questions. Some don’t want to appear uninformed. Others take a somewhat passive role, believing the attorney is the expert and must be relied on to do the right thing. Some estate planners encourage these views and aren’t willing to patiently explain the details and answer questions. Others simply aren’t good at explaining the legal concepts so that non-lawyers can understand them.
You need to ask questions about anything you don’t understand and make the estate planner take the time to explain it. Take notes, because you aren’t likely to remember all the explanations. Ask questions until you believe you understand the plan. If the estate planner can’t explain things adequately, consider another estate planner.
A Partial Plan Can Lead to Estate Planning Gaps
Often people bring the estate planning process to a close or suspend it before the plan is complete. Too often, people believe that an estate plan consists only of a will and perhaps the beneficiary designations on insurance contracts and retirement accounts. An estate plan should have much more, as we’ve discussed in the past.
Only about 30% of estates have a power of attorney, according to the survey. You should have both a financial power of attorney and medical power of attorney. You also need to document your personal property and leave instructions for the distribution of the property. Distributions of personal property are a frequent cause of disputes about an estate and trigger splintering among families. The documentation of assets serves two purposes. It makes processing the estate faster, less expensive, and less painful for your executor and heirs. The documentation also ensures your plan covers everything.
There are a number of other strategies and tools that aren’t in many plans. You should consider avoiding probate, such as by using revocable living trusts. Disability planning is absent from many plans. Irrevocable trusts can reduce taxes and also protect assets from mismanagement. If you’re so inclined, charitable giving strategies should be part of your estate plan.
Financial Liquidity Issues Can Cause Estate Planning Gaps
A surprising oversight in many plans is liquidity. An estate often needs cash. The expenses of maintaining your house and other assets and supporting dependents continue after you pass and before the estate is settled. In addition, debts must be paid before an estate can be settled. There also could be expenses related to settling the estate, such as fees for probate, appraisals, attorney and executor fees, and more. Of course, there also could be federal and state taxes on the estate. Your estate needs cash or assets that quickly can be converted to cash, including life insurance to cover these needs.
The most valuable estates often have the largest liquidity problems. Wealth often is tied up in assets that aren’t easy to sell, such as real estate, collections, and small businesses. A good estate plan estimates the expenses that will be incurred before the estate is settled and identifies the potential sources of cash to pay those expenses.
No Business Succession Plan Creates an Estate Planning Gap
Small business owners often are slow to plan for who might succeed them. In fact, less than 5% of business owners have succession plans in place, according to many surveys. Unfortunately, not having a succession plan essentially is a plan to almost guarantee the business won’t survive long. The probability is low that the owner’s loved ones will receive maximum value and benefit from the business without a clear succession plan.
A succession plan covers two key questions: Who will own and benefit from the business, and who will run the business? They don’t have to be the same people. It’s not enough to think ?the kids will figure it out? or ?one of the kids will run it.? Too often, someone who doesn’t know much about the business is thrust into a position of deciding what to do about it or there are disputes among survivors over what to do with the business.
Succession experts say it takes about five years to develop and execute a succession plan that will work. A business without knowledgeable leadership loses value quickly. If you expect the business to provide some wealth to your survivors, you need to have a succession or exit plan in place and revisit it often.
Leaving Children in the Dark Is Another Estate Planning Gap
Parents generally plan to leave wealth and assets to their children when they can. Many parents, however, worry what will become of the wealth and don’t explain their plans to their children. Only about a third of parents in the U.S. Trust survey strongly agreed their children would be able to manage their inheritances. Almost half believed their children wouldn’t be able to handle the wealth until at least age 35. And two-thirds said their desires for dividing personal property aren’t understood by their children.
As the survey showed, most parents seem hesitant to discuss details of their wealth with their children. There can be good reasons for that, but it also means the children don’t learn from the parents how to create and manage wealth, the value parents place on it, and how the parents plan to distribute it.
There are two main solutions to this situation. One approach is to distribute wealth to trusts and other vehicles instead of directly to the children. This allows the children to benefit from the property without managing it. You select professionals to manage the money and trusts. The trust terms also determine the distributions and the rate at which the money can be spent.
The other solution is to increase communication. Have regular meetings (or retreats for wealthier families) to discuss the amount of the wealth, the parents’ plans for it, and methods for managing it. The discussions can start with relatively minor topics, such as how to distribute personal possessions, and progress to other matters over time. Parents can increase communication indirectly by introducing the children to their legal and financial advisors and having the advisors explain a lot of the details to the children. The earlier these discussions begin, the better the results will be. Some parents have waited so long to begin this process, that it might not be a viable option.
Reducing Family Conflicts Can Avoid Estate Planning Gaps
The settling of an estate and transfer of assets often results in conflicts among surviving family members. The conflicts can occur in any family but often are more likely when there have been multiple marriages. They also are likely when one adult child (usually the oldest) is put in charge of the estate and any trusts. Then, the younger siblings are more likely to question the actions of the oldest.
These conflicts often are best reduced or eliminated as part of the estate planning process. They are much harder to deal with while the estate is being processed. While many people don’t like to deal with these issues, when they are neglected the rest of the estate plan can go for naught.
Lack of Sharing Between Spouses Can Trigger Estate Planning Gaps
Spouses don’t always fully inform each other about their financial situation and plans. Several surveys over the years found that spouses aren’t likely to have discussed factors such as retirement income needs, where retirement income will come from, debts, details of estate plans, and plans for long-term care. Since it is likely that at some point one spouse will be alone to handle the wealth and finish the estate plan, it is important for spouses to discuss these issues and come to an understanding about them.
Sometimes these gaps occur because the client didn’t place a priority on finishing the plan. This work is easy to defer, and I advised in the past that doing a plan in stages is a good idea, especially when parts of the plan require hard decisions. But it’s also important that you place a priority on completing the stages. A partial plan is better than no plan. But being satisfied with a partial estate plan makes about as much sense as mowing half the lawn or painting half the house. Completing the plan, and then updating it every couple of years, needs to be a priority.