Estate planning is important, no matter the size your estate. Without an estate plan, your wealth may fall under probate law and go before a probate court which can cause a financial burden on you and your family. The Law Office of Bridget Mackay has collected a list of common mistakes to avoid when building your estate plan in California.
We’ve also created short videos below to help explain how to avoid these mistakes. Feel free to share with those you care about most.
Mistake #1: Not Keeping up with Law Changes
In this 8 part series we will be addressing the 8 major mistakes made by individuals who have already created an estate plan. The first mistake is not keeping up with law changes. Law changes are fairly constant, although most changes will not impact your estate plan, some will.
An example of a law change that may affect your plan is the federal estate tax, this tax was created years ago and the rules and estate tax amount have changed many times, most recently in 2017.
Another recent law that has changed estate planning is the SECURE Act, eliminating stretch IRA rules and your plan may need to be updated. Additionally there may be new planning strategies, even if a law doesn’t change attorneys may find better ways to handle particular situations.
While it may be difficult to keep up with ever-changing laws and legal strategies you should make sure to maintain a relationship with your attorney. Consistent trust reviews is key to ensuring that your plan doesn’t run afoul of this mistake. All clients of our firm are invited to take advantage of a trust review every three years, additionally we stay educated so that if there are law changes that will impact our clients we notify them.
If your plan was created years ago and has not been recently reviewed you should take the time to schedule a trust review appointment to ensure your plan still works for you and your loved ones.
Mistake #2: Not updating your plan to reflect family changes
In part 1 we previously discussed how not keeping up with law changes and strategies is something that may ruin your estate plan. Mistake #1 is mostly caused by not having a long term relationship with your attorney and not being aware of changes that may affect your plan. Mistake #2 however focuses on your life changes. When changes within your family and relationships occur, it is up to you to contact your attorney and discuss how this will affect your plan.
As an example, the role of successor trustee is a vital part of your plan. This person is in charge of handling your estate if you become incapacitated or pass away, they will be managing assets, communicating with beneficiaries and handling your affairs. This person needs to be reliable, fair and trustworthy. As years go by it’s important for you to still feel comfortable with this person, do you have a good relationship with them? Are they still in your life? Another important role is your Health Care Agent, it’s important to ask yourself “is this person still a good fit?” If they have moved away or you’re not as close to them as you once were you should take that into consideration.
Other family changes that may impact your plan include births which may lead to additional beneficiary, marriages or divorces, deaths or if someone no longer has the ability to act in the role that you have named them for. When you or someone named in your plan experiences what we call a defining moment you should review your estate plan to ensure that it is still up to date and will carry out your wishes.
Mistake #3: Not Keeping up with Funding
In order for a trust to work properly it must be properly funded and the funding must be maintained. A trust is able to protect your assets from Probate, allow your named trustee to act on your behalf and eventually distribute your assets to your named beneficiaries when it is funded. This means that all of your assets are titled into the name of your trust.
One of the most common mishaps we see is when individuals refinance their homes. When refinancing you take title of your home out of the name of trust and put it into your name as an individual until the process is complete. Once the refinance is done, you should always verify that your property has been retitled back into the name of your trust, if this step is forgotten then your property will go through Probate when you pass away.
You can think of your trust as a treasure chest. Once you create the chest you need to place your treasures or your assets into this chest in order for them to be protected. If you pass away and you have an asset not properly titled it will go through Probate and it’s important to add new assets as you acquire them in addition to ensuring that any current assets are titled in the name of your trust.
Mistake #4: Acquiring Assets that Bypass your Plan
Mistake #4 closely relates to Mistake #3 that was addressed in a previous blog post as it focuses on your assets. Not all of your assets will need to be titled into the name of your trust, some assets have a built-in estate plan and allow you to name direct beneficiaries. Examples of these assets include 401ks, annuities and life insurance plans. With these, asset mistakes occur when you designate beneficiaries without taking into account your estate plan or your beneficiaries situation.
When you name beneficiaries on these kinds of assets they will receive a lump sum of cash when you pass away. Having your beneficiaries receive a lump sum of money may not be your intention. If in your trust you have set up provisions to protect a child who is not good with finances or maybe you set up a divorce protection trust for one of your beneficiaries those provisions will not be followed by assets that bypass your estate plan.
If you have assets that will bypass your trust and you never discussed it with your attorney or if you’ve acquired these kinds of assets since your plan was created you should review your beneficiary designations and your estate plan to ensure that you are not making this mistake.
Mistake #5: Not Planning For Long Term Care
Mistake number 5 addresses the lack of planning for nursing home and other long-term care expenses. Nursing home costs can be catastrophic for a family and unfortunately many of us may face a nursing home stay in the future. These costs can be up to $100,000 each year if there is a serious medical issue such as Alzheimer’s or a stroke.
In California there is a program called Medi-Cal that will step in and pay for a stay in a facility, however there are asset requirements that must be met. In order to qualify for Medi-Cal many people go broke paying for care and then once they’ve spent their life-savings they are then able to meet asset restrictions. This is where Estate Planning comes in, it is possible to build tools into your plan that will allow your successor trustee to conduct Medi-Cal Planning.
At our firm, all of our Living Trust documents come with these tools built in so that if a trustor ever needs to qualify for Medi-Cal their successor trustee will be able to step in and, with the help of an experienced attorney get their loved ones qualified. Additionally, while these tools do simplify the process to a degree, action still needs to be taken. Nothing happens automatically.
Mistake #6: DIY Changes
In part #6 of our 8 Costly Mistakes Series, we are focusing on “do it yourself” changes. While a few of our previous videos in this series are about the mistake of not updating, this mistake focuses on the perils of bad updates.
After putting in time, effort and money to carefully craft an estate plan to protect their loved ones some clients opt to handle their own updates. Over time our families and lives change, your documents should grow with you but clients sometimes opt to make their own changes to their estate planning documents in an attempt to cut cost or save time. These updates can range from crossing out portions of documents to drafting entirely new documents.
The consequences of changing your trust yourself can vary, your changes may not be acknowledged, they can cause confusion for your family when it comes time to administer your plan, and in some cases, it can lead to litigation. You went to an estate planning attorney and created your plan so that your loved ones and assets would be protected, making changes to your documents without the help of a professional puts the goals of your documents at-risk.
Mistake #7: Your Family Isn’t Aware of Your Plan
Have you spoken with your family about your Estate Plan? Does your family know you have a plan at all? No is a common answer to both of these questions which is why not making your family aware of your plan falls in at #7 on our list of 8 Costly Mistakes.
It is important to notify people you name in your trust about their roles, so that they know what their duties are and when to act. Your successor trustee, power of attorney agent and health care agent should all know that they are a part of your trust. It is also important for them to know where they can locate your documents so if there ever is an emergency situation they can act.
For example, if you are rushed to the hospital for any reason your health care agent can show the medical staff a copy of your health care directive and they will immediately be able to start making decisions on your behalf if you are unable to speak for yourself. If your agent is unaware that they are your agent there may be delays especially if they don’t know where to locate your directive and know to show up at the hospital.
Additionally on the financial end of the spectrum will your successor trustee and power of attorney agents know that if you become incapacitated they have been selected to step in and pay your bills and manage your assets for you? Once you pass away your successor trustee is responsible for identifying all of your assets, ensuring debts are paid and eventually distributing assets to your beneficiaries per your instructions. If you have open communication with your successor trustee, their job will be easier when the time comes for them to step in. The more information you share with your agents and successor trustee the better because when it is time for them to act they won’t be able to come to you with questions.
Mistake #8: Plan Does Not Reflect Family Values
This is our 8th and final blog in our series entitled 8 Costly Mistakes. In this final installment I want to address the most important part of estate planning, it’s not your finances, or the documents, it’s you. Your life, your values, your loved ones, those are the reasons you create an estate plan so it seems ironic that oftentimes traditional estate planning makes this mistake.
Traditional estate planning primarily focuses on financials. Minimizing taxes, avoiding the cost of Probate, maximizing income and finally distributing assets to beneficiaries. While these are all good goals that every estate plan should encompass- that focus is too narrow. You are more than your assets and by solely focusing on the financial aspects other important issues are missed.
When it comes to setting up your estate plan you should approach it with a more holistic view, while finances are important so are family, health, relationships, and values. Do you have a plan that addresses what happens if you need long-term care? What about educating your children or grandchildren? Is there anyone in your family who may need extra protection to ensure that their inheritance won’t be squandered? These are just a few questions that address softer estate planning issues and help you ensure that your estate plan is all-encompassing.