Editor's Note: This is a partial listing of special tips on estate planning from Cocheco Elder Law Associates, PLLC.
1. Failure to understand how your assets will pass on your death.
Many people think their wills control how their assets will pass upon their death, yet most assets today pass outside of wills.
For instance, joint tenancy assets pass to the surviving joint tenant. If there is a surviving named beneficiary (such as on life insurance, annuities, or IRAs), then such assets pass to the surviving named beneficiary. It is only the other assets (sometimes called your "probate estate") that will pass pursuant to your will.
Example: Bill named his oldest son as the beneficiary on his life insurance. His will left his estate equally to his three children. The oldest son gets all of the life insurance and 1/3 of the remainder of the estate.
Another example: While still single, Don named his brother as the beneficiary on his retirement plan and his life insurance. Don purchased his first home in joint tenancy with his brother who shared the house with Don. Don later had a falling out with his brother and still later got married. Don changed his will to leave everything to his wife.
But because Don never changed his beneficiary designations and joint tenancy, the bulk of his estate passed to his brother on Don's death and not to Don's wife.
This problem can be avoided by having a Living Trust to be the focal point of your estate plan. All or at least most assets can be titled in the name of your Living Trust or with the trust as the named beneficiary. That way, your trust will control how your assets will be distributed. If you ever want to change your estate plan, you do it only in one place.
2. Trying to plan an estate around specific assets.
Unless there are compelling reasons why a specific asset should go to a specific person, we strongly discourage our clients from trying to plan around specific assets.
Example: Bill had three children and wanted to treat them equally. His will even confirmed this. Several years before he died, he put his home in joint tenancy with his older son, added his daughter as a signer on his savings account, and named his younger son as the beneficiary on his life insurance policy.
When he did this, all three assets were about equal in value. But between when he did this and his death, he sold the home, put the proceeds in the savings account, and let the life insurance policy lapse. The savings account, of course, passed to the surviving owner, and not pursuant to his will. By planning around specific assets, he actually disinherited two of his children!
By the way, this problem often surfaces in a will as well. If an asset is no longer owned, the bequest lapses. Let's say your will leaves rental home 1 to your son and rental home 2 to your daughter and the balance equally to both children. If you sell rental home 2, and then die, your son still gets rental home 1 plus he gets a full 50 percent of your other assets and your daughter gets the other 50 percent.
A good attorney will discuss this "ademption" aspect with the client, even if the client insists that the rentals will never be sold. For instance, in some of our trusts we provide that the estate will be divided equally, with the son having the right to take house #1 at fair market value as part of his share, and the daughter having the right to take house #2 as part of her share. We may, as appropriate, include such wording in your Living Trust Estate Plan.
3. Failure to minimize estate taxes.
The estate tax exemption, which was $600,000 for many years, was increased in 2001 and has gradually increased. As of 2007 the exemption is $2,000,000. The exemption is scheduled to increase to $3.5 Million in 2009.
Many of my clients in the 1980's said things like, "My estate is only about $750,000 - I don't think I will even have a taxable estate at my death."
Perhaps they didn't want to pay the extra fee for estate tax planning. And our mistake was agreeing with them. Since then, there has been considerable appreciation in real estate in Southern New Hampshire and Maine as well as in the stock market in general. These same clients have seen their assets double twice over since we did their estate plans.
If the surviving spouse died in 2008, the estate taxes would be $450,000! This estate tax could have been totally avoided if they had had a properly-drafted Living Trust Estate Plan with tax planning in place before the first death.
4. Failure to avoid probate
Probate is the court procedure for proving a will, paying the bills, and distributing the estate.
Probate can be expensive, time consuming, and frustrating. Probate often runs 2-5% even on small estates, and can take 9 to 24 months.
Probate is a matter of public record. Once probate is opened, anyone can examine your file, even make a copy of your will and get a list of your family members and their addresses.
Probate gives disgruntled heirs a low-cost opportunity to challenge your will. A simple letter to a probate judge by a disgruntled heir can tie up probate for a year or more.
If you own real estate in other states, your family may have to open probate in each of those states. Probate can be totally avoided by creating a Living Trust during your lifetime and then transferring record title of your assets to that trust.
5. Relying on joint tenancy to avoid probate
Many married couples own their home and other assets in joint tenancy so as to avoid probate. Yet, joint tenancy avoids probate only on the first death. Everything usually ends up in the probate estate when the survivor dies. Worse yet, all family assets are usually included in the survivor's taxable estate when he or she dies.
If the couple dies in a common disaster in which we cannot tell who died first, there will be TWO probates: half of the assets will be subject to the husband's probate, and half subject to the wife's probate.
By creating a Living Trust and transferring their assets to that trust, a married couple can avoid probate on both deaths, and, with proper drafting, reduce or totally eliminate estate taxes.
6. Loss of control by adding someone else's name to your account.
In the early 1990's, Jill Goodacre, a famous model from Boulder, Colorado, and who was engaged to Harry Connick, Jr., lost her checking account to her father's creditors. As reported in both Denver newspapers, here is what happened: She put her father on her checking account so he could pay her bills while she was traveling. He had several creditors, however, and one of them filed a lien on the account. The bank was forced to pay the creditor $80,000 of Jill's money. When he was added as a signer, he legally became a co owner of the account. He had a legal right to withdraw the entire account, and the creditor "steps into the debtor's shoes."
In addition, Jill was deemed to have made a taxable gift to her father at such time as the creditors withdrew money from the account! Don't you just love our tax laws!
Interestingly, if Jill had had a Living Trust, she could have had her father as a co-trustee with herself. As such, he still could have paid her bills from the account, but his creditors could not have attached the account. He would have been only a trustee and not an actual owner of the account.
When you simply add someone's name to your account, you are subjecting that account to his or her creditors. You don't have to be a bad person to be sued these days or to be subject to a tax lien.
A Living Trust can protect your assets while still allowing another person to pay your bills.
The problems discussed above are only a sampling of the estate planning mistakes which are frequently made. Many times we are able to make changes to estate plans to avoid these problems. Other times, it is too late to solve the problem, especially if the person is then disabled or deceased. We hope these examples of common estate planning mistakes have helped you better appreciate the complexities of estate planning and the role that an experienced estate planning professional can have in creating and updating your estate plan.
Attorney Thomas F. Torr is a founding partner of Cocheco Elder Law Associates, P.L.L.C., and a native of the New Hampshire Seacoast area. Tom is a member of both the New Hampshire and Maine Bars. Tom's practice includes elder law, complex estate planning, business succession planning, estate and trust administration.
