Retirement Watch Lighthouse Logo

Best Ways to Avoid Estate Planning Mistakes

Last update on: Aug 07 2020
estate planning

Avoiding taxes is not the most important part of Estate Planning. In coming years, it will be even less important for many people. A more important part of estate planning often is avoiding family fights and disappointment while passing wealth the way you want. Here are the key issues to resolve to avoid problems.

Share the wealth equally? Most children and outsiders assume an inheritance will be shared equally among the children. Yet, not everyone wants to do split the estate equally.

Some people want to give one adult child more than others. One child really might need the money, while the others are financially well off. Or one offspring helped build the family business or served as a caregiver for another family member.

Whatever the reason, the children might not agree. Sometimes the needier offspring is offended at being treated as a charity case. In other families, even well-off adult children want an equal share for symbolic reasons. Leaving unequal shares is interpreted as an expression of personal approval and disapproval.

Sometimes a few of the kids expect unequal inheritances. They believe unequal gifts and assistance were handed out during the parents’ lifetimes. It is not unusual for the parents to lose track of these gifts while the children remember every dime the other siblings got. They expect the inheritance to be adjusted for those gifts.

These are the most common potential disputes about the division of an estate.

There is no right or wrong estate planinig decision regarding how to divide your estate. Divide the estate how you wish. The key to making your estate planning work is to communicate the decision to the children. Let them know what you decided and why. That will avoid surprises and let everyone get used to it. The children also have an opportunity to express their thoughts and perhaps bring up facts you overlooked or forgot. If these conversations are too difficult, consider leaving a videotape explaining the decision. If you fail to explain the decision, the children will wonder exactly why you took the action and the siblings will take their disappointment out on each other.

Another route is to consider a more creative division of the estate.

For example, divide equally the bulk of the estate, say 80%. Have the remaining 20% set aside in an emergency fund to be distributed as the children need it. You can decide who distributes the money and the standards for distributions. That way, the child who needs the extra money is likely to get it.

Life insurance is another option. This can be a key when the bulk of the estate is a single asset such as a business. Life insurance allows you to leave the business to the child who works in it and helped build it and also leave the others an equal inheritance. The kids who aren’t in the business receive the insurance benefits.

What about a “bad seed?” Many families have a child who is irresponsible, has problems such as substance abuse or gambling, or is estranged due to personal conflicts. Most estate planning specialists advise against simply disinheriting a child. Instead, leave the individual enough to be meaningful. Then add a will clause stating that any beneficiary who contests the will loses all of his or her inheritance. The child would get no inheritance unless he or she won the contest.

The blended family. It is fairly common these days for families to have second spouses, stepchildren, and other complications. Additional complications might arise after your death, for example if your spouse re-marries. Without careful estate planning for these situations, the final destination of your wealth is in doubt.

Ideally, you leave wealth to the beneficiary of choice, usually your spouse. You also agree how the wealth will be bequeathed in his or her will. Unfortunately, things could change after your death. The wealth could end up in the hands of a second spouse or beneficiaries other than your children.

A frequent solution is a trust, such as a QTIP trust, that provides for your spouse for life, and then directs the rest of the money to your children.

Sometimes this approach has its own problems. Your spouse obviously wants to maintain his or her standard of living, while the children want the wealth preserved and invested for growth. Also, the children have to wait for your spouse to die before they get anything. It is a no-win situation for your spouse, especially a second spouse who is not the children’s parent. Putting a trustee in the middle helps a bit, but it still is a difficult situation.

An alternative if you can afford it is to give the children a big chunk of their inheritance early. Let them know there might or might not be more later. Another option is to buy life insurance with the children as beneficiaries.

If one or each spouse has children from each marriage, all of these issues are brought into play plus there is the complication of older and younger children. Perhaps you paid for the education and weddings of your older children, but the younger children haven’t yet reached those stages of life. In that case, should everyone get an equal inheritance? Or should the younger children get a bit more to cover the upcoming expenses? One solution is to set aside a fund to pay for contingencies such as weddings and education, then divide the rest equally.

The key here is to decide what you want to do. Your estate planning provess should implement a plan that will achieve the goals and communicate thatplan to everyone involved.

Leave only money? You might have valuable or sentimental assets other than money and investments. These could include papers, photos, collections or art you created. These items might even have value outside the family, such as to a library or museum. Unfortunately, no one knows these items as well as you do. Do what you can to get the items catalogued, organized, and described now. Ask around, both inside and outside the family, to see if anyone has an interest. Then decide who will be the caretaker. Don’t leave the items disorganized with the thought that somebody might become interested someday.

Personal and household items also can cause big controversies in estate. I’ve covered ways to deal with these in past issues, most recently in April 2002.

All in the family? You might consider leaving part of the estate to a charity or other outside organization because you generally are interested in the cause and perhaps don’t want to spoil your heirs too much.

There is no reason wealth should cause individuals not to be productive members of society. You simply have to get them involved early doing productive things and keep them at it. Involve the children in managing assets, running the business, or doing other productive activities. Often, a family limited partnership is a good way to do that. If you want to give a lot to charity, consider a family foundation and have the kids help manage that.

When a cause is important to you, the important step again is communication. Explain to the children your interest and that the charity will get part of the estate. Don’t let the kids think they are going to inherit something, only to learn after you’re gone that it never was going to happen.

Give something of yourself. There is an old tradition known as the ethical will. This is a non-legal document in which the deceased makes a personal statement. The statement can be an individual or family history, lessons learned, principles, or guidelines for living. Some even leave humorous statements to establish the kind of memory they want people to retain. The ethical will is making something of a comeback and can be enhanced now with videotape and other technology. Consider developing your own ethical will as a special gift for loved ones.

bob-carlson-signature

Retirement-Watch-Sitewide-Promo

Log In

Forgot Password

Search