Flagstone Financial Management is a fee-only “planning first” firm so we spend as much time on financial planning and holistic advice as we do on investments. One of the main areas we review with many of our clients is their estate plan. An estate plan can be relatively simple for most clients and relatively complex for a handful of our clients. Under current law, you need over $20 million for a married couple to worry much about estate tax ($10+ million if single, and the law is set to change back to $10+ million for married couples and $5+ million for single couples in 2025). Accordingly, most clients do not need complex planning, but rather, need things like proper beneficiary designations for investment accounts and insurance products, a Will, Durable Power of Attorney and Healthcare Power of Attorney documents. Some clients may also choose to add the flexibility, probate avoidance and privacy benefits of a revocable living trust. Listed below are the four main estate planning mistakes we see in our practice.
1. Failure to Act
The biggest and most prevalent issue confronting people today is not giving attention to the issue. For example, they either don’t have the documents, or they drafted them when their kids were young and haven’t pulled out their Will and other estate planning documents for the last 20 years. It isn’t a fun thing to do, and let’s face it - we don’t like to think about our own mortality. However, I can say from personal experience (my father’s death at 55 from a brain aneurysm) and many clients’ experiences, now is the time to get your affairs in order if you haven’t done so yet. This is one of those very important, but seemingly not urgent, things you need to check off the list.
2. Failure to Update After a Change
The second issue we see is their personal situation has changed and they haven’t updated their documents to reflect those changes. This would include things like the individual(s) named in your documents as personal representative or Trustee are no longer a good fit to serve in that role. Often, they have passed away or have shown through their time in jail or managing their own situation, that they in fact would not be good at managing the family fortune, making death bed decisions on your behalf or raising your children. Marriage or divorce are other major changes that often don’t get reflected in estate planning documents or beneficiary designations in a timely fashion.
The story in this link details the negative consequences of a married couple that didn’t update their beneficiary designations. The Cliff’s notes version is Anne Friedman started working as a teacher, and eventually a principal, before getting married. She listed her parents and sister as beneficiaries of her school pension. She later met her husband Bruce and got married, but she failed to update her beneficiary forms to list Bruce as her beneficiary. Bruce says he always thought he was the beneficiary, but after Anne’s untimely death, school officials found the original beneficiary form, and award the $900k+ pension to Anne’s sister since Anne’s parents had pre-deceased Anne and Anne’s sister was the sole surviving beneficiary. Bruce filed a lawsuit to recover the pension assets, but the Manhattan Supreme Court ruled that the paperwork on file was clear and granted the pension to Anne’s sister. The Supreme Court decision was subsequently upheld by the Appellate Division . . . Ouch!
3. Improper Titling of Assets
The third issue we often see is the improper titling of assets. During the estate planning process, the attorney will gather all relevant information and listen to the wishes of the client. He or she will then take that information and incorporate it into the estate planning documents. The attorney tends to do a great job explaining the plan to the client, but often that attorney may as well be speaking a foreign language since the client has no clue what he or she is telling them due to the technical nature of the process. When implementing the estate plan, it is generally very important to title assets in the proper way so the estate plan works as the estate planner intended. This may include listing a trust as owner, listing ownership as joint with right of survivorship or including “transfer of death” instructions on the account, depending on the situation and structure of the plan. Clients often don’t understand this and will title assets in the wrong way (often several years down the road when they purchase something new), thus resulting in unwanted probate proceedings, which is one of the main things the estate plan was trying to avoid. A probate proceeding is simply a legal proceeding to determine the validity of a Will. In some states, having to “probate” the estate can take much more time and can result in additional expense to settle the estate.
4. Lack of Asset Disposition Location/Planning
The fourth issue we often see is not thinking about which assets are best for which purposes. For example, things like charitable contributions are often best to be given from a client’s IRA or 401(k). By shifting around beneficiary designations for one of our clients (under prior estate tax exemptions and those that are set to come back in 2025), the client will give the same amount to his favorite charities, but his estate will pay roughly $500,000 less to the IRS in estate taxes. Can you imagine saving $500,000 by revising a couple forms? Another example that is a little more commonplace is carefully choosing who you name as beneficiaries for your Roth IRAs. Roth IRAs are one of the best assets to pass on to young individual beneficiaries due to their potential tax-free compounding benefits. Currently, Roth IRAs don’t have required distributions like other retirement accounts, and distributions can be stretched out over the life expectancy of the beneficiary. If structured properly, this can create a meaningful tax benefit over time. A third example is with highly appreciated capital assets held outside retirement accounts. Highly appreciated non-retirement assets are entitled to a “step-up in basis” upon the owner’s death, which means there may be minimal income tax for the owner’s beneficiaries if the asset is sold after the owner’s death. It may be good to avoid liquidating or gifting these assets in the years prior to death to minimize income taxes. We see the benefits of this with farm land, appreciated stock, some business assets, etc. A final example is retirement account beneficiaries. Retirement account beneficiary designations (think 401(k)s, 403(b)s, IRAs, etc.) not intended for charities, except in very rare circumstances, should list individuals rather than the client’s estate. Naming an estate prevents a beneficiary from stretching out the distributions over their lifetime to allow further tax deferred growth. There are some important steps one must take to preserve your stretch options if you inherit an IRA so make sure to dot all the I's and cross all the T's if you find yourself in the lucky position of inheriting IRA assets.
One important final note is after the passage of the 2017 Tax Act, a lot of old plans contain outdated information, including counter-productive tax formulas. If you drafted your estate planning documents prior to 2017, we would suggest you contact your estate planning attorney to confirm you don’t need to make any updates to conform to the new rules. There is a good chance some of these other common estate planning mistakes need to also be addressed.
I hope these items will help you to make sure you have a proper estate plan in place and you are structuring your plan to take advantage of all the planning opportunities available to you. Please let us know if we can address any of these common estate planning mistakes in your (or those for whom you care about) personal situation.