Many estate plans don’t produce the results the owners intended…
Which is too bad — because most of these failures are preventable.
The failures usually don’t spring from the tax strategies or language in the will.
The failures most often result from the human side, or soft side, of estate planning.
There are two main reasons for estate planning failures.
One cause is the heirs aren’t prepared for the financial transition. There are a couple of ways heirs need to be prepared.
Some heirs simply don’t have the skills or knowledge to handle the money or property, or they aren’t emotionally equipped for it.
This is especially common when the estate is very valuable, but the problems occur in estates of any amount.
Often, the parents who accumulated the wealth focused on providing for the children. They weren’t focused on teaching the children their values regarding wealth or their methods for accumulating and managing it.
When heirs aren’t prepared, wealth often disappears. It can be wasted through poor spending decisions, bad investments, neglect, fraud and other causes.
For your estate plan to succeed, your heirs need to know how to manage and spend the wealth. They aren’t going to learn quickly as the estate is distributed.
Teaching them about money before then is important. Some people even have their financial advisors meet with their children or hold family workshops or retreats.
Another way heirs aren’t prepared is they are surprised by the estate details. They first learn of their parents’ wealth and how it will be distributed after the parents pass away.
The latest evidence of this is a report from BMO Wealth Management titled EstatePlanning for Complex Family Dynamics.
The report included a survey, which found:
Heirs need some advance knowledge of the estate plan.
Family disharmony and litigation often result when one or more children are unpleasantly surprised by the estate distribution or other details.
Periodically tell your children the general value of your estate and how you plan to distribute it.
In most cases they don’t need to know the details or read the documents, but they should have a general idea of your estate and plans.
They also should be updated as things change.
The second main reason for estate plan failures is lack of follow through.
You need to implement and then regularly update the plan.
Estate planners have at least one thing in common with doctors.
Doctors know that a number of their patients fail to follow recommendations, such as taking their medications as prescribed.
Likewise, estate planners know from experience that a meaningful percentage of their clients won’t follow through.
A common mistake is not to fund a living trust. The trusts are set up to avoid probate and ensure assets are managed in cases of disability.
But for those goals to be met, assets must be transferred to the trust. The deeds to the family home and other real estate must be put in the trust’s name.
Automobiles must be registered with the trust as the owner. The same holds true for financial accounts and other assets. If those steps aren’t taken, the trust is empty; it owns no assets. All the assets are subject to probate.
Powers of attorney and advance medical directives are other sources of failure. People often walk out of their attorneys’ office with these documents and then put them on a shelf or in a filing cabinet.
They don’t do any good if nobody else knows about them. The documents appoint agents to act on your behalf when needed. The agents need to know about the documents and have access to them.
Not updating plans is another way people don’t follow through. An estate plan isn’t something that can be done once and forgotten. An obsolete plan can be worse than no plan.
Your situation changes, as does the law and other factors that affect your plan. Every few years, and more frequently if there’s a major change in your life or family, review the plan and your situation with the estate planner.
You aren’t likely to know if your plan succeeds or fails, because you’ll be gone. But you should take steps to ensure success.
Update and revise as needed. Like all plans, an estate plan isn’t fixed and unchangeable. It’s a continuing project that needs to be revised and fine-tuned over time. Plan on seeing your estate planner at least every couple of years.