Common Estate Planning Mistakes and How to Avoid Them

Every family has one: the brother-in-law or aunt who knows everything about, well, everything. When the information is wrong, expensive problems are created, especially when it comes to estate planning. Estate planning attorneys devote a good deal of time to education to help prevent unnecessary and costly mistakes, as described in the article “Misinformation, poor assumptions result in major planning mistakes” from The News-Enterprise.

The most common is the idea of a “simple” estate plan. What does “simple” mean? For most people, the idea of “simple” is appealing—they don’t want to deal with long and complicated documents with legal phrases they don’t understand. However, those complex phrases are necessary, if the estate plan is to protect your interests and loved ones.

Another mistake is thinking an estate plan is a one-and-done affair. Just as people’s lives and fortunes change over time, so should their estate plan. An estate plan created for a young family with small children won’t work for a mature couple with grown children and significant savings.

Change also comes to family dynamics. The same cousin who was like a sister during your teen years may not be as close in values or geography, when you both have elementary school children. Do you still want her to be your child’s guardian? An updated estate plan takes into account the changing relationships within the family, as well as the changing members of the family. A beloved brother-in-law isn’t so beloved, if he divorces your favorite sister. When families change, estate plans need to be updated.

Here is a huge mistake rarely articulated: somehow not thinking about death or incapacity might prevent either event from happening. We know that death is inevitable, and incapacity is statistically probable. Planning for both events in no way increases or decreases their likelihood of occurring. What planning does, is provide peace of mind in knowing you have prepared for both events.

No one wants to be in a nursing home but telling loved ones you want to remain at home “no matter what happens” is not a plan for the future. It is devastating to move a loved one into a nursing home. However, people with medical needs need to be there to receive proper care and treatment. Planning for the possibility is better than a family making arrangements, financial and otherwise, on an emergency basis.

Do you remember that all-knowing family member described in the start of this article? Their advice, however well-intentioned, can be disastrous. Alternatives to estate planning take many shapes: putting the house in the adult child’s name or adding the adult child’s name to the parent’s investment accounts. If the beneficiary has a future tax liability, debt or divorce, the parent’s assets are there for the taking.

Properly done, with the guidance of an experienced estate planning attorney, your estate plan protects you and those you love, as well as the assets you’ve gained over a lifetime. Don’t fall for the idea of “simple” or back-door alternatives. Formalize your goals, so your plans and wishes will be followed.

Reference: The News-Enterprise (Aug. 24, 2021) “Misinformation, poor assumptions result in major planning mistakes”

How Do I Stop Heirs from Foolishly Wasting Inheritance?
Conceptual image expressing the value of money decreasing or a metaphor for throwing your money away. A trashcan is full of wadded up $100 and $50 bills. Another $100 is in motion toward the trashcan. A small amount of grain has been added to the background in post processing.

How Do I Stop Heirs from Foolishly Wasting Inheritance?

This is a problem solved by a trust—a “spendthrift” trust. With a spendthrift provision in a testamentary trust created under a will or an inheritance trust created under a revocable living trust, the trustee makes all decisions about distributions. This can be an effective means of controlling the flow of money.

A spendthrift trust, according to the article “Possible to spendthrift-proof a trust” from Record Courier, is created for the benefit and protection of a financially irresponsible person.

For a spendthrift trust, it may be better not to choose a family member or trusted friend to serve as the trustee. Such person might not live long enough or have the capacity to serve as trustee for as long as required, especially if the heir is a young adult. Conflicts among family members are common, when money is involved. An independent and well-established trust company or bank may be a better choice as a trustee. Large estates often go this route, since their services can be expensive. However, some retail banks do have a private wealth division. All options need to be explored.

Another benefit to a spendthrift trust—funds are protected against current or future creditors of the beneficiary. Let’s say a parent wants to leave money to a child, but knows the child has credit card debt already. Unless they are co-signers, the parent and their estate do not have a duty to pay an adult child’s debts. The spendthrift trust will not be accessible to the credit card company.

It is difficult to set up a spendthrift trust to protect one’s own money from creditors. This is something that must be approached only with an experienced estate planning attorney. This is because the rules are complex and there are significant limitations. If you wanted to create a spendthrift trust for yourself, you would have to completely give over control of assets to the trustee. There is no way to predict whether a court will consider the person to have relinquished enough control to make the trust valid.

This type of spendthrift trust may not be created with an intent to defraud, delay or hinder creditors. Doing so may make the trust invalid and any possible protection will be lost.

A spendthrift provision in a will is a clause used to protect a beneficiary from a creditor attaching prior debts against the beneficiary’s future inheritance. This means that the creditor may not force an heir or the estate’s executor to pay the beneficiary’s inheritance to the creditor, instead of the beneficiary. It also prevents the beneficiary from procuring a debt based on a future inheritance.

It is important to be aware that a spendthrift provision in a will or a spendthrift trust has limitations. The assets are only protected when they are in the trust or in the estate. Once a distribution is received, creditors can seek payment from the assets owned by the beneficiary.

Another qualifying factor: the spendthrift provision in the will must prevent both the voluntary and involuntary transfer of a beneficiary’s interest. The beneficiary may not transfer their interest to someone else.

The spendthrift trust and clause are mainly intended to protect a beneficiary’s interests from present and future creditors. They are not valid if their intent is to defraud others and may not be created to avoid paying any IRS debts.

Reference: Record Courier (July 10, 2021) “Possible to spendthrift-proof a trust”

Do You have to Go through Probate when Someone Dies?

Probate involves assets, debts and distribution. The administration of a probate estate involves gathering all assets owned by the decedent, all claims owed to the decedent and the payments of all liabilities owed by the decedent or the estate of the decedent and the distribution of remaining assets to beneficiaries. If this sounds complicated, that’s because it is, according to the article “The probate talk: Administrators, creditors and beneficiaries need to know” from The Dallas Morning News.

The admission of a decedent’s will to probate may be challenged for up to two years from the date it was admitted to probate. Many people dismiss this concern, because they believe they have done everything they could to avoid probate, from assigning beneficiary designations to creating trusts. Those are necessary steps in estate planning, but there are some possibilities that executors and beneficiaries need to know.

Any creditor can open a probate estate and sue to pull assets back into the estate. A disappointed heir can sue the executor/administrator and claim that designations and transfers were made when the decedent was incapacitated, unduly influenced or the victim of fraud.

It’s very important that the administrator handles estate matters with meticulous attention to detail, documenting every transaction, maintaining scrupulous records and steering clear of anything that might even appear to be self-dealing. The administrator has a fiduciary duty to keep the beneficiaries of the estate reasonably informed of the process, act promptly and diligently administer and settle the estate.

The administrator must also be in a position to account for all revenue received, money spent and assets sold. The estate’s property must not be mixed in any way with the administrator’s own property or funds or business interests.

The administrator may not engage in any self-dealing. No matter how easily it may be to justify making a transaction, buying any of the estate’s assets for their own benefit or using their own accounts to temporarily hold money, is not permitted.

The administrator must obtain a separate tax identification number from the IRS, known as an EIN, for the probate estate. This is the identification number used to open an estate bank account to hold the estate’s cash and any investment grade assets. The account has to be properly named, on behalf of the probate estate. Anything that is cash must pass through the estate account, and every single receipt and disbursement should be documented. There’s no room for fuzzy accounting in an estate administration, as any estate planning lawyer will advise.

Distributions don’t get made, until all creditors are paid. This may not win the administrator any popularity contests, but it is required. No creditors are paid until the taxes are paid—the last year’s taxes for the last year the decedent was alive, and the estate taxes. The administrator may be held personally liable, if money is paid out to creditors or beneficiaries and there’s not enough money in the estate to pay taxes.

If the estate contains multiple properties in different states, probate must be done in all of those different states. If it is a large complex estate, an estate planning attorney will be a valuable resource in helping to avoid pitfalls, minor or major.

Reference: The Dallas Morning News (May 16, 2021) “The probate talk: Administrators, creditors and beneficiaries need to know”

Will I Get A Bill as My Inheritance?
Inheritance paper note on hundred dollar bills

Will I Get A Bill as My Inheritance?

When someone dies and leaves debts, you may ask if you have any personal liability to pay them. The answer is typically no, even though those debts don’t automatically disappear. However, there are situations in which you may have to address issues with a loved one’s creditors after they are gone, says KAKE’s recent article entitled “Can I Inherit Debt?”

The responsibility for ensuring the estate’s debts are paid, is typically that of the executor. An executor performs several tasks to wrap up a person’s estate after death. They include:

  • Obtaining a copy of the deceased’s will, if they had one, and filing it with the probate court
  • Notifying creditors and other entities of the person’s death (like the Social Security Administration to stop benefits)
  • Creating an inventory of the deceased’s assets and their value
  • Liquidating assets to pay off any debts owed by the estate; and
  • Distributing the remaining property to the individuals or organizations named in the deceased’s will (if they had one) or according to inheritance laws, if they didn’t.

In terms of debt repayment, executors must notify creditors who may have a claim against the estate. Creditors are given a set period of time to make a financial claim against the estate’s assets for repayment of debts. It’s not that uncommon for a disreputable creditor to attempt to get paid by the deceased’s relatives.

Any assets in the estate that have a named beneficiary, such as a life insurance policy, a 401(k), individual retirement account, payable on death accounts or annuity, would be transferred to that beneficiary automatically and cannot be touched by creditors.

You typically don’t inherit debts of another like you might inherit property or other assets from them. Thus, if a debt collector tries get money from you, you’re under no legal obligation to pay.

However, if you cosigned a loan with the deceased or opened a joint credit card account or line of credit, those debts are legally yours, just as much as they are the person who died. If they pass away, you’d be solely responsible for repaying them.

You should also know that you may be liable for long-term care costs incurred by your parents, while they were alive. Many states require children to cover nursing home bills, although they aren’t always enforced.

As for spouses, the same rules of debt responsibility apply. However, for debts that are in one spouse’s name only, it’s important to understand how living in a community property state can impact your liability for marital debts. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), debts incurred after the marriage by one spouse can be treated as a shared financial obligation.

Reference: KAKE (December 2, 2020) “Can I Inherit Debt?”