Estate planning is crucial, yet most people delay the process as it's commonly viewed as an impossible task. Even worse, most come ill-equipped with poor estate planning documents that will never work in their best interests. To help prevent any unwelcome surprises down the road, there are five common estate planning errors that you can help your clients avoid.
#1: Not having a plan at all
Most of your clients will have done no estate planning at all. The truth is, if they don't take the time to put together a plan for themselves and their loved ones, the state and the IRS will do it for them. This plan will definitely not be in their best interest. To put it simply, individuals cannot afford not to have an estate plan.
The state plan is called "probate," a court process where the courts oversee the estate of a deceased person. It is designed to ensure that all creditors are paid and that the proper heirs receive what remains of the estate. The process usually takes a long time, often between one to two years, during which time the assets are essentially frozen and unavailable to the heirs. Probate is also very expensive, costing approximately 3 percent of the estate (approximately $15,000 for a $500,000 estate).
What people see as the most negative aspect of probate is that it is public. Understandably, most clients do not want their private affairs open for their neighbors and friends to peruse.
Besides the probate process, the IRS also has a plan for those who haven't done any planning on their own. Their plan is called "the estate tax." If no advanced planning is done, especially between married couples, estate tax exemptions may be lost.
#2: Having "I love you" wills
Many married couples already have "I love you" wills in place. These types of wills basically provide for the passage of assets as follows: If the husband dies first, all his assets are given to his wife. If the wife dies first, then all her assets are given to her husband. And if both pass away at the same time, then all assets are passed down to their children.
There are several problems with these types of wills. First, having a will-based estate plan guarantees probate and all the problems associated with it. If the husband passes first, the wife must go through the harsh probate process; and then, when the wife passes, the children will have to go through the same time-consuming and expensive procedure. Secondly, "I love you" wills do not integrate tax planning that can avoid or reduce estate taxes upon the death of both spouses. This is no way to leave assets to loved ones.
#3: Giving property outright to beneficiaries
It is very common for individuals to leave all of their assets to a beneficiary outright. This means that if a client leaves behind a million dollars, his son is going to get a big fat check for that amount. The son can do whatever he wants with it.
Besides the fact that beneficiaries may (and probably will) spend their inheritance unwisely, leaving property outright to beneficiaries may subject them to divorces, lawsuits, or taxes.
#4: Not having a trust
Many people often say they just want an estate plan that is "simple." What they really mean is that they want something cheap. Unfortunately, you do get what you pay for. When a client says this to you, keep in mind that having a will alone guarantees probate, and probate may be far more expensive than a comprehensive plan that can avoid probate and protect beneficiaries.
A properly drafted and funded trust-based plan can avoid probate and protect beneficiaries from predators and creditors. It can also incorporate sophisticated tax planning so that clients can avoid or reduce estate tax liability.
#5: Not having documents reviewed and updated regularly
While preparing an estate plan can give your clients great peace of mind, it is a mistake to think that it can be put away in a safe deposit box and never thought of again. Laws change all the time, and planning documents need to be updated to accommodate those changes. Family circumstances are also constantly in flux, and few clients are at the same point they were five to 10 years ago. Trustees get older; sometimes they die. Children mature, and perhaps they can take over the family finances. As life changes, so too should estate planning documents. At the very least, it is best that estate plans be reviewed a minimum of every five years.
When starting the planning process, it is important to work with an attorney who concentrates in this area of law. Tax laws are complicated, technical, and ever-changing. Also, because this is a very personal and emotional process, it is also important to have a competent attorney with whom you and your clients feel comfortable.
Rima D. Ports is partner at Beermann Swerdlove and specializes in estate, corporate, and business planning. She can be reached at 312-621-9700 or rports@beermannlaw.com.
