Estate planning can be complicated, and it’s not uncommon for people to make mistakes with their plans. But financial advisors make errors, too, so here are the most common mistakes I have encountered from other financial and estate planners.
1. Improper beneficiary designations
I frequently see advisors improperly completing beneficiary designations. Examples: not changing the beneficiary due to divorce or a death, or listing a special needs child or grandchild directly as a beneficiary, rather than a trust FBO (for benefit of), thereby affecting their eligibility for Social Security disability benefits.
2. Not changing asset titles to trusts
Incorporating revocable living trusts into a client’s estate plan but forgetting to update all the account titling to the name of the trust. Not changing titles creates problems that include having to pay additional probate costs, losing the private nature of settling the estate, etc.
3. Incorrectly assuming clients’ goals
Many advisors assume a client’s main goal is to save estate taxes, for example. However, when really connecting with a client, we might find that taxes are only a small aspect of their objectives. Sometimes, in listening to the client, we realize that their fears are more about their heirs’ ability to manage the inheritance as well as decisions such as trustees, etc.
4. Naming minor children as account beneficiaries
Letting clients name minor children outright as primary or contingent beneficiaries of life insurance or retirement plans. When minor children inherit, a court must appoint a guardian who must be bonded and must file a laborious annual accounting with the local court.
5. Wrong choice of executors and trustees
Naming a financial institution as successor executor/trustee after surviving spouse or instead of surviving spouse. In some cases, this is to the detriment of the spouse and other beneficiaries because large institutions usually follow their fiduciary responsibilities with a less personable approach than another trustee could provide.
6. Failure to address medical directives
Many attorneys will draft a health-care power of attorney (POA) and living will. If the two documents co-exist, they may conflict since the POA allows another to make decisions while the living will already states what is to be done. Absent statutory (or document) direction, health-care providers may experience a conflict in what to do.
7. Ignoring state estate and inheritance taxes
Many states follow the federal $5 million-plus exemption for taxable estates, but the states do not always exempt this larger amount. For example, in Massachusetts, estates over $1,000,000 that are not left to the surviving spouse are subject to a Massachusetts estate tax.
8. Failure to address asset protection
Most couples fear losing their assets to nursing homes. For couples nearing retirement, strategies that protect assets should be explored. Strategies include lifetime credit shelter trusts, life estate deeds, gifting and other techniques that make assets available for use but beyond the reach of creditors.