Top 10 mistakes in estate planning
- Not having an estate plan at all
- Not planning for disability
- Using online forms for your estate planning
- Not transferring your life insurance policies into a trust
- Failing to fund your trusts
- Underestimating the power of trusts
- Over reliance on one estate planning tool (TOD)
- Not updating your estate plan.
- Putting your child’s name on the deed
- Not planning for business succession
We make mistakes, as people that fact is one of our defining characteristics. The secret to being successful is: (1) learning from your mistakes to ensure you don’t make the same one twice, and (2) learning from other people’s mistakes so you don’t have to make the same one once. Over the next few weeks, we will be looking at the top 10 mistakes that people make with estate planning in the hopes that we can support each other to learn from the mistakes of others, so they stay ONLY the mistakes of others.
Top Estate Planning Mistake #7: Over reliance on one estate planning tool
I often refer to an estate plan as a wall. It is a wall that is used to protect your loved ones and your property, so truthfully, it isn’t all that different from the walls in your house. That means that all of the different tools that we use in an estate plan: different types of wills (yes, there are different types of wills); different types of trusts (yes, so many different types of trusts); Powers of Attorney; forward looking property titling; etc., they are all bricks in that wall. Some bricks are heavier than others, so we use them toward the bottom of the wall, as part of the foundation, and some bricks are lighter and we use them more artfully. The point is, all in all, any given tool is just a brick in the wall.
There may arise a problem if we rely too heavily on any one type of brick. It may cause our wall to lose balance, or our wall may be weaker than it otherwise would because the bricks in the wall don’t tie into each other for mutual support.
Often times people will attempt to use a transfer on death deed/designation (TOD) in an attempt to substitute it for a full estate plan. TOD, when used correctly, can be a STRONG brick. TOD avoids probate entirely, and transfers by operation of law as soon as the original owner passes away. TOD can be accomplished cheaply, often it can be accomplished without the assistance of an attorney. TOD has a lot of drawbacks too, to name a few: TOD doesn’t give you any control over the property being transferred; TOD for multiple pieces of property can become unwieldy quickly leading to a TOD based plan becoming very outdated very quickly; TOD doesn’t provide any forward looking planning tools, especially for tax purposes; TOD doesn’t have any asset protection characteristics.
Let’s take a fairly common example. A fellow we will call Jack decided to use TOD for all of his estate planning needs. He takes and retitles all of his accounts, his cars, and his real estate TOD in favor of his various loved ones. As years go by he trades in his car several times over, he moves from one home to another, he closes accounts at one bank in favor of another with a more favorable interest rate, he has 2 new sons, and unfortunately, some of his loved ones pass away before he does. Quickly, Jack realizes that it is a lot of work keeping all of these TOD properties up to date. He also finds out that changing these TOD titles every so often is more expensive than he had originally thought. He decides to simplify his plan and TOD everything to his sister, Jill. He figures that he can tell Jill what he wants to happen to his property, and that Jill will make those things happen. Jack establishes TOD in favor of Jill for all of the property that can have a TOD. After several years, Jack passes away and Jill collects the TOD property as Jack had arranged.
First, let’s look at the benefits of this transaction. All of Jack’s TOD property transferred without ever touching a probate action. He had never paid for a full estate plan to be drafted, so there were no legal fees for him to pay while he was alive.
But things aren’t all butterflies and sunshine in Jack’s estate. A lot of the property Jack owned didn’t have a title that could support a TOD designation. As a matter of fact, most of his property was personal property and will need to be administered through a probate proceeding, meaning Jack’s estate is going to have to pay WAY more in legal fees than he would have to get an estate plan drafted while he was alive.
Jack has no control over what happens to his property. Sure, he told Jill what he wanted to happen, and sure, she agreed she would do it, but once Jack died the property became Jill’s. Jill has no legal duty to do what she told Jack she would do. Even if Jill legitimately wanted to do what she told Jack she would, if Jill has creditors looking for a way to recover the money that Jill owes them those creditors can take the property she just received from Jack regardless of Jack’s intent.
Finally, If Jack’s estate was sizeable enough to have estate tax liability, the TOD transfers would not have helped him lower the amount he would have to pay to the IRS.
If Jack would have used some other estate planning tools along with his TOD designations, he would have left his loved ones in a much better situation. He could have used certain types of irrevocable trusts to completely eliminate his estate tax bill. He could have used living trusts to avoid probate AND make sure that his property was distributed the way he wanted it to be distributed. He could have used a combination of wills and trusts to transfer all of his property without ever seeing probate, including the property without a title. He could have made sure that his sons would have received the property he wanted as soon as they were old enough to receive it, and he could have protected the property he wanted to leave to Jill to make sure that she got to enjoy it and her creditors would never be able to touch it!
A good wall, like a good estate plan, uses bricks that work together to strengthen the entire structure. Call us today to make sure that your wall is big enough, strong enough, and versatile enough to protect your loved ones.
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