Imagine you are one of five children, and you learn you’re receiving an inheritance. You find out there were five CD’s, each worth $50,000—except for one, that’s worth $25,000. Your late father decided to assign each CD one beneficiary, as that seemed equal and fair. But you ended up being the one who received the CD worth $25,000. If your father's intention was to give an equal share to all five of you, then you’re going to be upset at what happened here.
Unfortunately, situations like this are all too common. A lot of planning like this is do-it-yourself planning, where we cook up these master plans in our minds, but fail to execute them properly. At best, in a situation like the one above, the beneficiaries can come together and voluntarily equalize the distributions. At worst, there could be a prolonged conflict with the courts involved for years.
The best advice in general is to get your plan reviewed and completed by an estate planning attorney like myself. Don’t chance it. Here are a few other mistakes to beware of:
Not planning for special needs properly: This is a confusing topic. What is “special needs” exactly and when does someone meet that criteria? The key test is whether the person is on or will be on either Medicaid (MA or Medical Assistance in Pennsylvania) or SSI (not the same as SSDI). If that is the case, and you want to leave assets to that beneficiary, you have to use a special needs trust that’s carefully crafted. You can do this in your will, but the better way to do this is through a standalone third party special needs trust. The worst mistake here? Leaving the money to another person and letting them decide when to give it to the special needs beneficiary.
Not having a Power of Attorney ready to go: You finally did it—you have your Last Will & Testament! You can rest easy at night. Right? Most folks think a will is all they need. However, two other fundamental planning documents are a Health Care Power of Attorney and Financial Power of Attorney. The reason? If you’re sick or incapacitated, you need someone to take over your affairs and speak on your behalf. This is established through a Power of Attorney. Without POAs, someone may need to go to court to get guardianship over you. Involving the courts is never a good idea. Worse, this could lead to a contested guardianship that can drain an estate.
Waiting until it’s too late: A notary will not notarize a document of an incompetent or incapacitated individual. If you are in a hospital bed, barely coherent, without a will or power of attorney, it’s possible your children or other loved ones who think they know what you want will try to write something up and have you sign it. This is simply a disaster and should be avoided at all costs. Best idea: Write your plan with an attorney while you’re still healthy—like, today!
Failing to update your plan: Change is constant. Your life has changed from 10 years ago, and will continue to change. Bottom line here is that a 30 year old will may be worse than having no will at all. It’s going to be outdated and simply do things that make no sense today. It will likely put your family in a bad position. It's a good idea to get your plan reviewed with an attorney every three to five years.
Not taking advantage of estate planning tools: Consider trusts, Roth IRAs, life insurance and other “next step” planning tools. Life insurance in particular, if purchased at the right time, can offer several benefits—a tax free inheritance, a secure place for part of your “never” money, and certain policies can be used towards your long-term care if you ever need it.
Failing to be realistic: The best advice I can give you is to have an open mind when you see an attorney for estate planning advice. Don’t rely on what your parents did for their estate plan, as times have changed. Your situation will be different. Your assets are different, your family is different and the laws are different.
In the next edition of the newsletter, I will be writing about long-term care planning mistakes that many folks make. Stay tuned!