Estate Planning Nuts and Bolts

Every Estate Planning strategy is different. Even your next door neighbor or colleague at work is going to have some issues that are different from yours. Yet, there are key principles and strategies that apply to almost every estate plan. There also are common estate planning mistakes you should avoid. Since this is the time of year when many people write or review their estate plans, let’s take a look at these important issues.

Organize and simplify. When I review an investment portfolio, the most common mistake is that the portfolio is too complicated. There are too many investments with no real purpose. The same is true of many estates. The more assets you have, the more complicated and expensive the estate process is. Numerous assets also increase the likelihood that there will be conflicts among your heirs.

I recommend simplifying and streamlining. If there are items you should have sold or disposed of years ago, do so now. Maintain a list of your assets and liabilities. Keep this list updated. Be sure your executor and key heirs know about the list and where it is kept. This simple step saves heirs a great deal of time, grief, and money.

Also, decide how any complicated or unique assets should be handled. Many people have collections, personal mementos, and similar items. Heirs often don’t have as much interest in such items as the owner and also have no idea of their true value and how to handle them. If you want to retain the items for life, be clear about what happens to them later. It is best to make a specific plan. Find out who would really like the items, even if they go outside the family. Either determine a value or leave instructions to the executor about how a fair value should be determined.

Make the key decisions. Too often, estate owners don’t want to decide some issues. Their thinking is, “Leave it to the kids and let them decide.” Unfortunately, that non-decision leads to family strife and can cause disaster. Estate lawyers always are amazed at the things adult children and other heirs choose to fight about. Long suppressed issues and conflicts come to the surface. Seemingly meaningless items can have great symbolic value to someone.

The conflicts are most likely to arise regarding personal property or the family home or vacation home. I’ve discussed numerous options for dealing with these types of properties in past issues, and the articles are in the Estate Watch section of the web site Archive. You need to decide which strategies are likely to work for your family.

When a family business or a substantial piece of real estate is involved, you really need to hammer out all the issues early. With a business, decide who will run it, who will have voting ownership rights, and who will receive income. Failure to decide these and other issues in advance almost guarantees that the business or the family or both won’t survive many years.

Be on conflict alert. Thoroughly consider the issues that could possibly cause conflicts between your heirs. Develop a plan that will reduce or eliminate those conflicts. If you can, go a step further and provide an alternative disposition. Some wills, for example, provide that if the heirs cannot come up with a satisfactory way of dividing personal property, then all the property will be sold and the cash proceeds distributed.

Don’t wait for the perfect plan. Recognize early that estate planning involves trade offs. You are unlikely to find the perfect combination of tax reduction, cash flow, protecting wealth from your heirs’ mistakes, fair distribution, and other factors. Be assured that very bad things will happen if you do not have an estate plan in place while you wait for the perfect plan. Estate planning is a continuous process. An estate plan always can be changed in full or in part. When you are unable to resolve some key issues, put a flexible estate plan in place and take time to work on another plan that satisfies you.

Go easy on control and favor flexibility. Things will change. The economy and markets, your family, the law and everything else will change. You cannot foresee all the possible changes. While the key mistake in many estate plans is not making enough decisions, some plans have the opposite problem. The owner locks in many decisions with clear directions. Nothing can be changed even in the face of unanticipated new circumstances. This is especially a problem with long-term trusts but can be a problem with other issues.

Too much control always has been an estate planning problem. Many widows lived well below the standard of living they should have had because of terms in the trusts that were supposed to benefit them. The problems are likely to be worse in the future as life spans increase and lock in the effects of bad decisions. Don’t make estate planning decisions solely on the basis of today’s circumstances. Leave some room for growth, change, and unanticipated events.

Choose executors and trustees with care. These people implement your estate plan and can determine its ultimate success or failure. Few people give these assignments the consideration they deserve. Don’t automatically name your lawyer or oldest child as executor. Don’t reflexively latch on to the bank recommended by your lawyer as trustee. These might turn out to be the best choices, but consider other options.

In fact, often the best decision is to have these jobs shared by people with different backgrounds and perspectives. In past issues I’ve given detailed advice on selecting executors and trustees. These articles are available on the Estate Watch section of the web site Archive. Take some time to consider my suggestions before making a decision.

Minimize surprises. You don’t want to circulate a copy of your will to heirs and potential heirs. There’s no reason for them to know every detail ahead of time, and it obligates you to re-circulate the will every time you amend it. It also suggests the will is open for discussion.

Major surprises, however, are a common reason estate plans fail and families fall apart. A surprised and unhappy heir often resorts to litigation or to having disputes with family members. You are not around to question or confront. Disrupting your estate plan or attacking those who weren’t surprised often seem the logical ways for the unhappy heir to vent his or her disappointment.

To avoid this unpleasantness, let everyone know generally what is in the estate plan. If you are leaving a significant contribution to charity, tell people. Otherwise, they might decide to argue in court that you were incompetent and the charity duped you. If children will get unequal shares, tell them so and why. Let them be mad at you now, when you have a chance to explain and reconcile.

Taxes still get the most attention in estate planning. Yet, estate taxes are fairly easy to reduce for most estates. The other issues are more likely to cause problems after you are gone, and these should get more attention when the plan is developed.