By Stephen W. Bedikian, Associate Wealth Advisor
Key Takeaways
Estate plans can fail due to outdated or incomplete details. Common issues include naming heirs or executors who have passed away, failing to designate contingent beneficiaries, leaving assets improperly titled outside the trust, and not planning for sufficient estate liquidity during probate.
- Poor structural choices can create tax and administrative problems. Potential missteps such as making charitable gifts from taxable accounts instead of IRAs, naming standard trusts (rather than conduit trusts) as IRA beneficiaries, or selecting trustees/executors without careful consideration can lead to unnecessary taxes, conflicts, or costly legal complications.
- Regular reviews and clear communication are essential. Estate plans should be revisited at least every five years, ensuring instructions are understood, asset titling is correct, heirs and beneficiaries are accurately listed, and your plan remains aligned with your intentions and current law.
You guessed it: A common estate planning mistake is not having a plan at all! According to legal services firm LegalZoom, only about 45% of U.S. adults have created estate planning documents. It seems, many Americans avoid thinking about dying—even though it’s 100% certain to happen to everyone one day.
If you’re among the prudent who do make an estate plan, here are some common missteps we come across when reviewing estate plans with our clients.
1.Predeceased Heirs or Executors are Named.
- Often an estate plan is created and then put in a file or drawer for many years without being reviewed again. When that happens, a successor trustee or heir named in the client’s estate plan documents may have actually pre-deceased the client.
This can be an administrative challenge for an executor, trustee, or remaining heirs, because a death certificate may need to be tracked down to prove that the child, family friend or even family attorney named in the documents is deceased.
Taking the Trustee or Executor Selection Process Too Lightly.
- The person you select to carry out your wishes will carry a fiduciary responsibility—you should first make sure they want the job. Also consider that the executor will control your assets during the probate process and they have a lot of discretion. One way to address misappropriation or mismanagement of your estate is for your heirs to hire a lawyer and potentially engage in a long and expensive legal battle.
The trustee you select could potentially serve for many years beyond any probate period, so choose wisely. Sometimes parents name multiple children as co-trustees without really considering the potential for disagreements that may arise. Many times, this may be avoided if just one child is appointed trustee. Again, this is a selection that should be weighed carefully.
Charitable Bequest Mislocation.
- This can occur when a charitable bequest is made from a taxable account instead of a traditional IRA. If you’re planning on making charitable bequests a part of your estate, a good place to start for tax reasons is with your IRA.
You may have a large traditional IRA balance as well as assets held in taxable accounts. The IRA should have named beneficiaries; because required minimum distributions (RMDs) from IRAs are fully taxable as ordinary income at the recipient’s income tax rates, it may often be better to name charities as beneficiaries of your IRA. This helps eliminate the tax liability on those donated assets that would otherwise be associated with distributions from an Inherited IRA.
Naming Standard Trusts as IRA Beneficiaries.
- This occurs when a person names their trust as a beneficiary, thinking that their IRA assets will go into the trust and then be distributed according to trust instructions. It’s prudent to do this with a specially structured trust referred to as a ‘conduit’ or ‘pass through’ trust, so that the IRS rules governing IRA distributions are preserved.
Otherwise, there is a risk that the IRS may take the view that trust distributions of IRA assets are subject to the five-year accelerated distribution rule—which could push your beneficiaries into a higher tax bracket.
Assets Not Conveyed into a Trust.
- When clients create a trust, there is often language in the documents stating the grantors’ wishes regarding specific assets. It’s easy to think that’s all that is necessary—mission accomplished. However, assets like real estate, investment accounts, and bank accounts have to be correctly titled.
For example, in community property states, if the primary residence is held jointly by the spouses, then it’s likely that the 50% community property interest of a deceased spouse will have to go through probate and incur potentially high probate fees. The property deed may need to be updated to reflect ownership by the trust, or the deed should include ‘with rights of survivorship’ language so that the deceased spouse’s interest transfers directly to the surviving spouse.
When you create an estate plan, make sure you have a list of assets to review with your estate planning attorney so they can instruct you if any changes need to be made to the registration or titling of your assets.
Inadequate Communication.
- Often clients meet with an estate attorney for a couple of hours to express their wishes—and then they receive a document set that can run 100+ pages of dense legalese. They ask a few questions, but may not fully understand the actual distribution process and mechanics.
Our reviews seek to provide clients with clear diagrams so they can visually see all heirs and beneficiaries, to confirm that their wishes will be met. Even just jotting down a diagram yourself while reviewing your estate planning documents can be helpful.
Not Naming Contingent Beneficiaries.
- Often people may have opened financial accounts decades ago—before they were married or before they had children. As a result, they may only have a primary beneficiary designated for the account or none at all. Unfortunately, accidents happen and you don’t want to leave it up to a probate court to sort out ownership of assets if it can be avoided.
Not Planning for Estate Liquidity.
- In many states, the probate process can take months or even years to be completed. During that time, your executor will have to pay expenses for the estate, like the mortgage on your home. If there aren’t liquid funds available, your executor may have to sell private business interests or other illiquid assets to generate cash, potentially at fire-sale prices.
In an effort to avoid this, you could maintain a sufficient cash reserve at all times or purchase an insurance policy intended to provide liquidity to your estate. Typically, a policy death benefit will be paid by the insurer within a short time after the death certificate is provided to them; those funds can be used by the executor to pay necessary estate costs.
Review Your Estate Plan Regularly
As a rule of thumb, you should review your estate planning documents at least once every five years. This is a critical piece to help safeguard the assets you’ve worked hard to earn and invest, and we can help facilitate this periodic estate planning review with clients. We aim to help guide your wealth where you want it to go in a secure and tax-efficient way.
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