Estate planning can be daunting for clients, often resulting in a reluctance to create a proper estate plan. Financial planners can help clients through this emotional process by ensuring their assets are distributed according to their wishes and secure their legacy. At Cook Tillman, our estate planning experience can help clients avoid common pitfalls.
Common Estate Planning Pitfalls
Not Having An Estate Plan: It’s vital to stress the importance of an estate plan to your clients. People often assume that without a will, their belongings go to their spouse or children should they pass. Intestacy statutes set forth a more complicated distribution regime that often strays far from a client’s wishes. Creating an estate plan protects family members from drawn-out court proceedings and unintended disinheritance.
Not Updating An Estate Plan: Life events can drastically affect a client's finances even if they have an estate plan. Our rule of thumb is that if a client experiences a life event that elicits strong emotion, such as a death, divorce, birth, marriage, or an unexpected financial windfall or inheritance, it is a sign that they should revisit their estate plan. Changes may not be required, but financial advisors should encourage clients to communicate with their estate planners when significant life events occur.
Improper Beneficiary Designations: Parents with multiple children sometimes leave their assets to the eldest child to sort out, assuming they will be fair and honor their parents’ wishes. However, relational issues, influential spouses, and even gift tax laws may interfere with the child’s desire or ability to follow through with such expectations. The beneficiary’s failure or refusal to pay for funeral expenses and to make other distributions causes strain among the remaining family members.
Lacks “What If” Contingencies: Couples often attempt to avoid probate by using joint ownership and naming each other as beneficiaries on their life insurance and retirement accounts. These arrangements work if the spouses pass sequentially but do not address the possibility of a joint death, such as in a plane crash or other concurrent accident, or what happens after the second death. A well-formed plan can accommodate such contingencies and reduce the strain of administration.
Joint Ownership with Adult Child: Naming an adult child as joint owner of a bank account, investment account, and/or primary residence is commonly used to avoid probate. Doing so can elevate the risk of loss and produce undesirable tax results. For example, if the adult child co-owner were to be in a car accident and get sued, the parent’s assets would be subject to liquidation in satisfaction of judgment. Moreover, adding an adult child to the real estate title constitutes a gift, which must be reported to the IRS on a gift tax return. The gift may not be immediately taxable, but will reduce the parent’s remaining federal estate tax exemption by the value of the gift. Encouraging clients to make a thorough estate plan instead of using a makeshift workaround avoids such consequences.
Characteristics of Strong Estate Plans
Proper Documentation: Although estate plans are often tailored to a client’s specific needs, all estate plans share the following four documents in common:
Last Will and Testament: Expresses the clients' wishes on how their property is to be distributed, how expenses and taxes are to be paid, and for minor children, who will be the designated guardians.
Financial Powers of Attorney: Appoints a trusted individual, either a spouse, child, or friend, to handle financial affairs in case of the client’s incapacity.
Healthcare Powers of Attorney: Appoints a trusted individual to make healthcare decisions on the client’s behalf in case of incapacity.
Living Will (Advance Directive): Authorizes the withholding or termination of heroic measures in the event the client is terminally ill or in a persistent vegetative state with no hope of recovery.
Addresses Tax Implications: The federal estate tax is a 40% tax on the value of an individual’s estate that exceeds any remaining amount of tax exemption—currently $13.61 million ($27.22 million for a married couple). Simply paying the tax is costly and can be difficult, as there may not be enough liquid assets to pay when it is due, forcing beneficiaries to sell illiquid assets at an inopportune time. A variety of planning tools may be implemented to address such tax liability.
Proper Trust Funding: The use of revocable living trusts as an alternative to planning with a last will and testament is growing in popularity. In addition to avoiding probate, certain types of trusts provide income tax savings and other benefits for surviving loved ones. Ensuring that assets are either transferred to the trust during the client’s lifetime or coordinated with the trust for transfer at death is crucial for the plan’s operation. An expert estate planning attorney will guide clients and their advisors through this process to ensure the client’s wishes are realized with minimal cost, error, and relational friction.
Our team at Cook Tillman is committed to helping financial planners and their clients achieve sound estate plans that protect their loved ones and leave a lasting legacy. We can be reached through our website and by phone at (615) 370-2444. Please feel free to reach out with your estate planning and administration questions.