Four Common Estate Planning Mistakes and How to Avoid Them
Estate planning is a tricky topic to discuss because it involves facing death. As physicians, you work hard, taking care of patients all day. Then, if you're a parent, you likely work just as hard when you get home. It's tough to carve out the time to focus on estate planning. As a result, many of you who have worked hard your entire lives to protect your family and your wealth, end up putting off the estate planning discussion until "one day." And despite the best of intentions, even those who do create an estate plan end up making some mistakes. In my 25+ years of estate planning experience, here are four of the most common estate planning mistakes I've seen:
1. Outdated or Unsigned Estate Planning Documents:
Countless times, people have walked into my office with documents they thought they had signed but never did. Or they have walked into my office with documents that are 10, 20, 30 or more years old. Typical reasons for their behavior include: inability to face death; denial about the possibility of their own demise; the Scarlett O'Hara defense—"I will worry about it tomorrow"; a lack of desire to pay an attorney to review and/or revise documents; and the inability to decide on a fiduciary such as who will serve as guardian of minor children, executor, or trustee.
But when clients with the undone or outdated estate plans walk into my office, at least they have taken action by coming to see me. The challenge is to motivate people to think about estate planning sooner rather than later. I actually work with a lot of CPAs, since the discussion of tax returns naturally leads into a discussion of financial planning and estate planning. I find that coordinating those efforts among the three parties – CPA, client, and me – works well for everyone. So even if you are reluctant to speak with an estate planning attorney, you have a built-in opportunity every year to discuss some of these issues with your CPA.
2. Lack of Coordination Among the Estate Planning Documents, Titling of Assets, and Apportionment of Estate Taxes:
Twenty five years ago, most clients owned the bulk of their assets in individual names. At death, those assets passed through the terms of the will to the named beneficiaries. Virtually all wills contained a standard clause that mandated that any debts, administration expenses and estate taxes be paid from the residue of the estate. The residue of the estate is the common pool of assets that are not specifically bequeathed and pass as a basket to the beneficiaries.
But times have changed. For many people, a significant amount of their net worth is not held in individual names and does not pass under the terms of the will but rather by contract to their heirs. Assets that pass by contract—and therefore by designation of beneficiary—include life insurance, annuities and retirement planning assets. The assets that pass by contract are not part of the probate court system and most of the time the Will does not have any effect on who will receive them. However, who pays the estate taxes and what assets the estate taxes are paid from is governed by the tax provision in the Will. It is important to make sure that the tax clause in the Will is coordinated with the disposition of the assets. This is particularly important if different beneficiaries receive different assets- for example, a son is named the beneficiary of a retirement planning asset and the daughter receives the house through the terms of the Will.
3. Lack of Understanding That a Transfer of $1.00 is a Gift:
It never ceases to amaze me how many clients believe that "selling" real estate to a child for consideration of one dollar is a sale and not a gift. Not clearly understanding that the transfer was a taxable gift can wreak havoc on the plan and on the composition of the taxable estate.
We now live in a transparent world. It is very easy for any estate tax examiner to access the Registry of Deeds website from the computer in his office and find out the history of land transfers. Today, it is routine for that examiner to do just that. Recently, I was involved with an audit in which the examiner, through a national database, delivered to our office a very thick package of all of the parcels of real estate the client had owned throughout the country during his lifetime. The package included deeds to him and deeds from him. The examiner sent a summary letter asking for the details of each transfer—what was the fair market value, what was the consideration for the transfer, were the parties related and what happened to the proceeds. A transfer for a dollar is not a sale; it is a gift and must be properly accounted for.
4. Life is a Movie, not a Snapshot:
Planning is a process that should never end. It should begin when there are assets and/or young children and should evolve and become more complicated as life progresses. You face different issues as you pass through the stages of life—single, married, divorced, widowed or remarried. In each of these phases, the focus of the plan should be on what is meaningful in that phase. As an estate planning attorney, I work closely with my clients to create an estate plan that is not so complicated that they are paralyzed with such fear that they resist making the necessary changes as life moves forward. And the process should not be so expensive that the client finishes this phase and is reluctant to move to the next one. For most of us, the crystal ball of planning does not go more than five years. Families change; health changes; tax law changes; and the law changes. My goal is to get you on the path and to keep you there through all of the phases of your life.
Patricia M. Annino is a nationally recognized authority on estate planning and taxation. A recipient of the Boston Estate Planning Council's "Estate Planner of the Year" Award in 2007, she chairs the Estate Planning practice at Prince Lobel Tye LLP. Ms. Annino has been voted by her peers as one of the Best Lawyers in America (trust and estates), a SuperLawyer, and a Top 50 female lawyer in Massachusetts. She is a Fellow of the American College of Trust and Estates Counsel (ACTEC).