Top 25 Mistakes People Make with Estate Planning

The following is the first part in a series of articles about common mistakes that people made within Estate Planning. This is by no means a cumulative list, and the best option for you is always to contact an experienced Estate Planning Attorney (in Chandler if you are around us) to set up a plan for you, or to review your current plan. As Estate Planning attorneys who offer a free review of your trust plan, you might imagine that we have read a few trusts in our day. We have seen the good, the bad, and the ugliest of ugly. Note that we used the term “people” in the title of this article and not clients. This was done purposefully as many of the mistakes that have made this list are perpetrated by attorneys, whether experienced in estate planning or not. At the end of the day, your Estate Plan needs to achieve three goals:

1. Avoid Probate;

2. Ensure assets go where you want them to; and

3. Provide incapacity protection.

The following list of the Top 25 Mistakes People Make with Estate Planning includes many mistakes that will cause you to fail to achieve one of more of the goals listed above. As always, if you would like to have your trust reviewed by an experienced attorney at our firm, we recommend that you reach out and schedule a free consultation / trust review at your convenience (click here).

With that, please find The Top 25 Mistakes People Make with Estate Planning, in no particular order.

Mistake #1 - Failing to have an Estate Plan

Above are my three listed goals for every estate plan. If you don’t have an estate plan, then you cannot achieve all of those goals. There are many situations in which your next of kin will need to have legal authority to act on your behalf or on behalf of your estate. Without an Estate Plan, your next of kin will be subject to Arizona probate laws or they may have to seek out a guardianship or conservatorship for you. This is a costly mistake to make and is entirely avoidable.

Mistake #2 - Failing to have a complete Comprehensive Estate Plan

A comprehensive estate plan includes either a Last Will and Testament or a Living trust, and state level ancillary documents generally including a Living Will, Financial Power of Attorney, and Medical Power of Attorney, and HIPAA releases among other items. While a trust or a will is generally meant to kick in after you pass away, the other documents are meant to protect you during life should you become incapacitated or should you need long term care. Without them, your next of kin may be forced to file in court for a guardianship or conservatorship. This can get expensive.

Mistake #3 - Hiring a Non-Attorney or an Inexperienced Attorney

Nowadays, there are the legal zooms of the world, and there are unlicensed document preparers that will promise you the world and complete estate planning protection for about a third or a quarter of the cost of an attorney. Ultimately, you get what you pay for. Non-attorneys, by law, are not allowed to provide you with legal advice. This would be the unauthorized practice of law and is a criminal violation. The law is there to protect the public and to ensure that only those with law licenses are giving law-related advice. The law was created because of the need to protect those that are not professionals in this area of the law, and because this area is ripe for fraudsters to take your money and provide you with less than adequate legal representation. Unfortunately, there are many attorneys that will also fall into this category. You might meet the best criminal defense attorney in Arizona, and he might try to sell you on a will-based estate plan. The truth of the matter is that you likely have a better understanding of this process than he does because you took the time to read articles like this one. That attorney may be a fantastic defense attorney, but he does not have experience in estate planning, and you deserve someone that does. This area of law is an amalgamation of Arizona Probate Law, Real Estate Law, Contract Law, Corporate Law, and Federal Taxation Law. You deserve better than to trust your wishes to someone that only dabbles in this field.

Mistake #4 - Failing to Fund your Trust

Many people that end up hiring non attorneys and attorneys that don’t have experience end up with a trust that is worthless. That’s because they fail to fund their trust. You could spend lots of money on the best possible trust and it could still fail if you forget to move your assets to the trust. When I mention Trust Funding, this is the act of transferring your assets to your trust. This is how a trust can avoid probate. If you fail to put assets in your trust, or to fund them to your trust, then we will most certainly be going to Probate court when you pass away. A good comprehensive plan provides you with assistance on funding. At Citadel Law Firm, we always include explicit instructions on how to get your accounts and assets into your trust. We are here in your corner if you have issues at the banks. We also include the execution of a deed along with your plan to ensure that your primary home is put in trust, so that the trust rules will apply and so that we will not end up in court when you pass away.

Mistake #5 - Failing to Account for Step Up in Basis

There is a lot of myth and poor advice floating around about gift and estate taxes. We often hear things such as “my financial planner told me to put my name on Mom’s account, so that I can own it when she passes”, or “Aunt Becky told me to execute a new warranty deed and put my name as joint tenant so that I inherit it when Mom passes away”. This type of advice is wholly detrimental to everyone involved. First, if you put your name on accounts or deeds, there is a high likelihood that you could be accused of exploiting an elderly adult for financial gain. Second, as soon as you put your name as co-owner of these assets, a gift was made from Mom to you. This would require that you file a form 709 with the IRS, and if you fail to do so, then there are penalties and other consequences. Not to mention, if you are ever in a car accident or are sued for something and lose, now Mom’s assets are at risk because you are a joint owner. Finally, by doing the above, you are losing out on the best tax loophole available, Stepped-up Basis. You receive a step up in basis when you inherit property. This makes your basis in the property equal to the date of death value of Mom’s property. If the property is valued at $400,000.00 on date of death, and you sell it the month after for $400,000.00, then you will owe no income tax or capital gains on the sale. Conversely, if you transfer the asset to yourself during life, you get the same basis that mom had. If mom’s basis is $150,000.00, and you sell the asset for $400,000.00 the month after death, and the asset was gifted to you and not inherited, then you are stuck paying the tax bill on $250,000.00 in gain. This will literally cost you tens of thousands of dollars. There are other perfectly viable ways of planning for taxes and still having control over assets, and the best estate planning attorney near you can help you to make this plan.

Mistake #6 - Being Overly Detailed

At the end of the day, we want our plan to ensure that your assets go where you want them to go. But we also need to ensure that our successor trustee can administer our plan and we want to try to make that job as easy for them as possible. There is absolutely no need to have algebraic formulas or the like in our trust. I once reviewed a trust where the TrustMaker had a formula in which we needed to multiply trust income by the Applicable Federal Rate, then divide by 12, then multiply by the number of beneficiaries, and ultimately distribute this amount, but only if it was less than XX amount of dollars, and then put the rest of the income into principal. Or something like that. The point is that this is overly complicated. A good trust package is simple, understandable, and meets all of your needs. You should also try to limit the amount of If….then statements in your trust. For example, avoid “if I should die before October 31, 2022 then ….. This is just unnecessary. Be straightforward and make sure that your wishes are known.

Mistake #7 - Being Not Detailed Enough

It’s one thing to make things harder for your successors by forcing them to jump through a bunch of hoops, but you can also make their life harder by not being detailed enough. For example, leaving out clauses such as special needs provisions, or failing to have a Power of Attorney with gifting provisions will cause your successors nothing but heartache, time, and money. Inexperienced drafters will often fail to provide contingent beneficiaries, or remote beneficiaries, which will cause their estate to be claimed by the State of Arizona. They may also have clauses that contradict themselves because they don’t understand the full template they are using. Experienced drafting assistance is a must.

Mistake #8 - Failing to List Contingent Beneficiaries

If everyone in your family passes away in the correct order, then contingent beneficiaries would not be necessary. Unfortunately, no one has a crystal ball so we try to plan for alternative scenarios. One such planning tool is to list contingent beneficiaries. The contingent beneficiary only takes from your estate if the primary beneficiary has passed away before you pass away. For example, you have 3 children, and one of them passes away before you do. What then happens? Do your other children split the deceased child’s share? Does the share go to your child’s heirs (your grandchildren or daughter/son in-law)? Leaving ambiguities like this will cause your heirs to be in court. Naming contingent beneficiaries is your way of ensuring that your items go where you want them to go in the simplest fashion.

Mistake #9 - Failing to Plan for Medicaid

Medicaid and taxes are the two big ticket items for future planning right now. If your plan fails to accommodate Medicaid planning, then you are failing your future self. Further, sometimes it is our beneficiaries that need help with the Medicaid planning. If you have a Power of Attorney that does not allow for gifting, or if you have a trust that mandatorily pays out your beneficiaries at certain times, then you are setting yourself up for failure.

Check our blog in a few weeks to learn more the other 16 estate planning mistakes.

Citadel Law Firm will be pleased to help you with your estate planning. Our estate planning attorney Chandler, AZ will be pleased to help. Call (480) 565-8020 to schedule your free estate planning consultation, or click here.