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10 Avoidable Estate Planning Mistakes

Did you know that 2 out of 3 Americans don’t have a will or a trust and the majority of plans in place are outdated? If your estate plan had holes in it or was outdated for the state in which you reside, would you want to address it? Do you want your estate to be settled with or without probate and do you want to avoid potential family disputes between heirs? Do you have a financial power of attorney and medical power of attorney in place so that someone can make decisions for you if you are incapacitated or in a coma and not expected to recover?

Mistake #1: Not Having an Estate Plan At All!

Estate planning can help avoid family arguments and heartache if wills and trusts are properly set up and beneficiary designations are verified. Without proper planning, the assets may or may not pass to their heirs without legal proceedings.

If you don’t have an estate plan, your state government will provide one for you, which some refer to as “the government plan.” The majority of people die without an estate plan; this is called: dying intestate. In such cases, the probate courts follow state law to determine how assets, subject to probate, would be distributed and the way the state distributes assets may not be what was intended or imagined by the decedent.  Certain assets and property require probate court to facilitate the transfer of such to heirs.

Mistake #2: Failure to Have a Living Will or Medical Power of Attorney

A Living Will relays a person’s medical wishes, but does not appoint someone to make medical decisions. A Medical Power of Attorney is used to appoint someone to make medical decisions and an Advance Directive both communicates medical wishes and appoints someone to make medical decisions while incapacitated. In essence, an Advanced Directive is a Living Will and Medical POA rolled into one document.

It is commonly understood and accepted that a person’s spouse can make medical decisions for their husband or wife without having anything in writing. However, I have heard stories where certain hospitals would not allow next of kin to make medical decisions because they were not legally appointed in writing. I am of the belief that it is better have your documents in place and not need them than to need them and not have them.  If you are to delay or decline putting an Advance Directive or Medical POA in place, I suggest checking with your personal physician and your local hospital and getting an understanding of what they will require in emergency situations. There would be some comfort in verifying whether or not your local hospital will receive instructions from your next of kin. Often times, a hospital will give you a living will or advance directive at no charge to fill out and keep on file.  If you do nothing else but fill out a living will, medical power of attorney or advance directive, you have taken a big step which some day could prove to have been a really important step. 

I was recently speaking with a head nurse from one of the hospitals in Knoxville, TN and I asked him what happens at their hospital if the patient does not have an Advance Directive or Medical Power of Attorney.  He said they prefer to have written documents in place but do not require it in most instances when next of kin is present. The next of kin is always the legally married spouse first.  He went on to elaborate that if their domestic partner was not their legally married spouse, then they will not accept medical decisions from them unless they had the proper agent appointment in writing.  In such cases where there is no legally married spouse, the oldest living child, if any, is next of kin.  So I asked the head nurse, “What happens if someone comes in by ambulance, and there is no next of kin present and the patient has nothing in writing on record with the hospital regarding their medical wishes?  “Full Code!!!” he announced. Full code means they have to do everything possible to save or prolong the life even if they think the effort will be futile. He went on to explain that CPR, if done properly, will break the ribs due to the magnitude of pressure required during the chest compressions to properly massage the heart through the rib cage.  With a look on his face that I will not soon forget, he said, “you never forget the first time you break someone’s ribs.”   Breaking of the ribs during resuscitation is something, which is more of an issue with the elderly, who may have more brittle and thinner bones.  This is the reason why some people do not want to be resuscitated but fail to put it in writing could prove to be regrettable. Your preference, whether to refuse life support, blood transfusions, vaccinations or pain killing drugs near the end of life should be your choice. Making these choices known in writing is considered part of a basic estate plan.

There are various family scenarios where people have been living together for decades, consider themselves married and have committed their lives to each other, but never paid for a marriage license from the state in which they live. As far as the hospitals are concerned, a boyfriend, girlfriend or domestic partner, which are not legally married to the patient, are not considered next of kin.  In other cases where a parent is estranged from their child, it could be that this child, the one that hasn’t called home in several years, may be the one that the doctor has to look to in order to decide when to “pull the plug” or whether or not to attempt a potentially lifesaving medical procedure which may or may not have the best odds of success. The nurse that I spoke to told me they deal with these sorts of issues literally every single day at the hospital because people did not get things in writing.

Mistake #3: Failure to Have a Financial Power of Attorney

We think of estate planning as how to control how our assets are distributed after our death. However, what if we need help making financial decisions while we are still alive but unable to do so, whether temporarily or not?? A Financial Power of Attorney is considered part of a basic estate plan and is used to appoint someone to make financial decisions while someone is still living but unable to make their own decisions. There are several financial transactions that may need to take place when one is incapacitated such as, signing tax forms or a submitting a Medicaid application. On that note, assets may need to be spent down, transferred or sold to pay for the cost of long-term-care or to qualify for Medicaid. It could be that claims may need to be filed with a health insurance provider or denied health insurance claims may need to be disputed. Failure to have appointed someone with a power of attorney may result in the assets being frozen when there isn’t a person that has the legal right to transact business on behalf of the incapacitated person. In such cases, petitioning the court to appoint a conservator or guardian may be required in order to transact business on behalf of the incapacitated person.  A court appointed conservator is generally not considered the first choice for most people and this can be avoided if a proper financial power of attorney is in place and the person appointed as agent is still willing, able and trustworthy to handle one’s finances.

Mistake #4: Misunderstanding How Your Assets Will Pass upon Your Death

Many people think their last will and testament somehow magically transfers their assets to their heirs upon their death without probate. However, a will is the document that is used communicate the decedent’s wished to probate court.  Yet because many people hold much of their wealth in the form of retirement plan accounts or life insurance, many assets today are transferred irrespective of the will or probate as long as there is a properly named beneficiary. These assets will pass to the beneficiaries you name in a beneficiary designation form despite what might be stated in the will.

Example: While still single, Bob named his brother as the beneficiary on his retirement plan and his life insurance. Bob later got married. After his marriage, Bob changed his will to leave everything to his wife. But because Bob never changed his beneficiary designations on his retirement account and life insurance, the bulk of his estate passed to his brother on his death and not to his wife.

This problem can be avoided by reviewing your beneficiary designations for life insurance policies and retirement plans when major life changes happen to make sure they fit your current situation and your estate planning goals.

Living trusts are used to pass certain assets to beneficiaries without probate that otherwise could be subject to probate. Often times, a living trust would be the named beneficiary of financial accounts or life insurance policies so that the trust can control the distribution of the assets.

Mistake #5: Failure to Have Proper Beneficiary Designations on Financial Accounts

Life insurance policies, and financial accounts such as bank accounts, broker accounts mutual funds and other retirement accounts, all come with the ability to designate a named beneficiary. Since some of these accounts are held over several decades, the person named as the beneficiary could be an ex-spouse or someone that has predeceased the account owner. If there is no named beneficiary, then typically the estate is the default beneficiary which means the account would go through probate to determine who the heirs are. Therefore, it is very important to verify your beneficiary designations and not depend on your memory, or the state to determine the outcome.

Mistake #6: Relying On Beneficiary Designations for Contingencies

A beneficiary designation is a very simple form of estate planning which does not handle contingencies very well. For example, if one of your named beneficiaries predeceases you, who do you want that beneficiary’s share to go to, the other beneficiaries, or to the deceased beneficiary’s children?

Most of us would like to think the latter, but most of the beneficiary forms say just the opposite: the forms usually say “Unless otherwise indicated, we, the insurance company, will pay to the surviving named beneficiaries.”

By naming a trust as the beneficiary of your life insurance, your trust can control exactly how the proceeds will be distributed, including such contingencies. The trust can also name a person who will manage and distribute the money for minor children or grandchildren.

Mistake #7: Adding Someone to Your Financial Accounts or Real Estate.

When you add someone’s name to your accounts or real estate, the asset or account may be subject to your joint owner’s creditors, tax liens or divorce settlement. You may also be inadvertently giving that person an ownership interest in your account, in which case, they may be able to withdrawal funds without your permission. In many jurisdictions, creditors can foreclose on (force the sale of) your home to get at your child’s fractional share.

If you need help managing your finances, you can appoint an agent using a Durable Power of Attorney and give them authority to manage your affairs upon your incapacity without exposing your assets to their creditors. You can also use a revocable living trust to achieve the same result by transferring your bank accounts to your trust and listing the person you want to help manage the accounts as either the current trustee of your trust or as a co-trustee with you.

Mistake #8: Failure to Fund Your Living Trust

Once a living trust is established, you want to be sure to properly and fully fund your trust. This means re-titling assets to the name of the trust, or naming the trust as the beneficiary of financial accounts and life insurance policies.  Failure to transfer assets into the trust may result in certain assets being subject to probate court. 

Mistake #9: Failure to Protect a Disabled Beneficiary

If you have a disabled beneficiary, perhaps a handicapped child, you might consider establishing a specially-drafted trust to protect your child and keep them eligible for public assistance. Without public assistance, many such children would have to spend their entire inheritance within a few years on medical and other needs. If you leave the inheritance to them outright, they may be ineligible for public assistance until they spend the inheritance down to the statutory limit.

Mistake #10: Failure to Consider the Income Tax Aspects of Your Assets

John had a large life insurance policy and a traditional IRA, and they were of equal value. So he named his son as the beneficiary on the life insurance and named his daughter as the beneficiary on her IRA. John didn’t take into consideration that the proceeds of life insurance were tax-free and the IRA was 100% taxable. The son who inherited the life insurance policy had no taxes due, while the daughter with the IRA, had a huge tax bill.  In this case, if John wanted them to share equally, he should have named them equal beneficiaries on both the IRA and the life policy.

Here at ONTRACK FINANCIAL GROUP, we can help you review the best estate plan options for your family. Schedule a complimentary no-obligation Estate Plan Review.

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