Believing that a Will alone is an estate plan. Laws concerning probate, real estate, income taxes (including capital gains) and gift and estate taxes, beneficiary designations, how title is held, changes in family circumstances (including births and deaths), all have an impact as to how (and to whom) your assets pass. For some estates, holding assets jointly or having only a Will is a disastrous “estate plan” if saving taxes and protecting family members are your goals.
Erroneous expectations and failure to plan. Many people believe that they have plenty of time to effectively manage their affairs despite constant life changes. In earlier adulthood, guardianship for dependents and having retirement savings seem paramount. In later years, long-term care, medical and pharmaceutical costs, and not outliving your assets takes precedence. Regular routine review of how your assets are titled and how they are to be distributed is the only way to fulfill your goals and to minimize the costs and expenses associated with death. The key focuses of estate planning are to determine if your assets are titled properly, to consider how you wish these assets to pass at death, to review all beneficiary assets like life insurance policies, to assess how to pay for long-term care at end-of-life, and to ensure that your standard of living does not decrease over time or after the loss of a spouse. Asset protection, tax minimization and business succession planning also require periodic review.
Failing to plan for Incapacity. A medical directive (called Advanced Health-Care Directive in Connecticut) is an essential part of one’s estate plan. Incapacity may befall any of us at any time. For this reason I advise my clients to have each of their children sign medical directives when he or she attains eighteen years of age. This simple document may avoid family strife, as well as the costs and court involvement of a conservatorship action, through your appointment of a person to make medical decisions for you when you cannot do so for yourself. One also should sign a durable power of attorney (“POA”) in order to appoint a person to maintain your financial matters if you become incapacitated. Carefully review of the powers granted to the appointed agent is essential. Furthermore, as our lives change, these powers may need to be changed. For example, should the POA include powers regarding a business? Should the POA include gifting powers, and if so, should there be a limit? Does the POA allow your agent to communicate with doctors, hospitals and continuing care facilities in order to pay for such expenses? Finally, have laws changed that require changes to these documents?
Not evaluating (and updating if necessary) your life insurance needs. In the life insurance industry, products are continually improving and providing additional options to reflect changing times. A policy obtained today may provide greater flexibility and more coverage at less cost than a similar type of policy issued even five years ago. Given this constant industry evolution, it is as important to periodically review your life insurance and your designated beneficiaries – including contingent beneficiaries – as it is to review your estate plan.
Failing to plan for long-term care costs. Long-term care provides assistance with activities of daily living – eating, medication, toileting, ambulation, dressing, etc. Many people do not realize that neither private health insurance nor Medicare covers the costs of long-term care. There are three ways to pay for long-term care: 1) Self payment; 2) A spend down to qualify for Medicaid; or 3) Long-term care insurance. Average monthly long-term care costs in the home range from $4,000 to $6,500, depending upon the type of care needed. Average monthly nursing home care costs in Connecticut range from $12,000-15,000. In order to qualify for Medicaid, an applicant must reduce his or her assets to below $1,600, and his or her spouse may not have assets in excess of a yearly adjustable amount, currently a bit over $126,000 (excluding a home that is solely in the spouse’s name).
Improperly titling your assets. Depending upon your wealth and contrary to common belief, holding an asset jointly with a spouse may be the worst plan. Giving one’s home to children can likewise prove problematic, for tax and other reasons. No matter what our wealth is, how we hold assets impacts capital gains taxes, gift taxes (which in turn impact estate taxes), separation of assets due to a divorce decree, bankruptcy claims, creditor claims (yours or your spouses), etc. A good estate planner does not create an estate plan for you by simply filling in blanks in form documents. Instead, s/he first reviews your situation, follows it with an analysis as to whether your assets are protected, and considers other concerns (such as Medicaid eligibility and other family issues) and finally integrates these asset protection issues into the best estate plan for you. Remember, as your life changes, your estate plan and how you title your assets within that plan may also need to change, thus making regular review essential to asset protection and maintaining your objectives.
Failing to review the designations for qualified investments or not having a contingent beneficiary appointed. Too many people only check off “spouse” as the beneficiary of their IRA, 401(k), 403(b) or other qualified retirement funds. Always designate a successor beneficiary. This is critical because if one dies without a beneficiary, the qualified fund becomes part of one’s probate estate and thereby subject to creditors’ claims, divestment, additional taxes, etc. Furthermore, such funds could pass to persons you might not have selected to receive them. Choosing a successor beneficiary or beneficiaries may force you to consider other matters such as whether the successor beneficiaries are capable and responsible enough to inherit such funds outright in their name. An overwhelming majority of beneficiaries choose to cash in such funds, incurring penalties and taxes, instead of using the benefits of holding the asset as a component of their own investment strategy, and deferring income taxes. Also, do not assume that a beneficiary’s creditors may not attach such funds, even if these funds are protected against creditors in your state. The state laws where the beneficiary lives or moves to will control whether the inherited qualified funds are protected against creditors, bankruptcy, spousal claims, etc. Sometimes a trust for a beneficiary’s benefit is a better plan in order to protect both the beneficiary and the funds. This too should be discussed with both your financial planner and estate planner.
Having the wrong financial planner. After the events of 2007-2008, people are skeptical of financial planners, sometimes with good reason. This makes finding a good financial planner whom you trust and who truly knows the investment business (and has your best interest at heart), is essential. Ask for referrals from other knowledgeable professionals whom you trust and then interview recommended financial planners for their knowledge, investment philosophy and trustworthiness. Know what you want in a financial planner. Is he too institutional or too independent? Does he manage money or choose investments with money managers? How wide is his scope of investments? What are the total costs of his suggested investments and has he thoroughly and candidly explained these costs to you? Very few of us can adequately manage (and maximize) alone our investments over the changing course of our lives. A good financial planner will take the time to ascertain your investment risk tolerance, your goals and objectives and your life-time needs. Ask for a projection of income and net worth past your life expectancy under both your present investment plan and the one the financial planner proposes. Be completely honest about the person you wish to be and how you wish to live. The right investment strategy, together with the necessary time to implement it makes all the difference in reaching your goals. The right financial planner will help get you there.
Believing the family will “work it out”. Family dynamics change over time and with the passing of a patriarch or matriarch, particularly if he or she favored (or was perceived to favor) one child over other children. Do not leave the many aspects of wealth transfer to chance or base it on an attitude of “leave it to the kids to work it out”. Such an “estate plan” erodes family harmony and benefits no one except the lawyers hired to litigate their disagreements, which quite often are routed in unresolved family issues. Take the time to discuss the transfer of your estate, no matter what its value, with a knowledgeable estate planning lawyer and create a real plan that considers all issues, including family dynamics.
Having the wrong lawyer to create your estate plan. Knowing how your assets will pass at death, how the laws and rules of probate affect the transfer of these assets, as well as all tax facets associated with this transfer requires a lawyer that concentrates his or her practice on estate planning and probate matters. A knowledge of real estate, business and even family law (especially divorce decrees and prenuptial agreements) may also be necessary given the circumstances of one’s estate. Choose a lawyer knowledgeable with these areas of the law, not just any lawyer, no matter how nice he or she may be!