Estate Planning Law

Common Estate Planning Oversights

By H. Bryan Doane, J.D., LL.M., C.P.A., published in the Palm Beach Daily News, January 16, 2022

Various factors are considered in developing an estate plan. What are the client’s goals? What is the family situation like? Which types of assets does the client hold, and what is the value of each asset? While there are many ways to structure an estate plan, a number of oversights are commonplace. Below are some estate planning considerations that are oftentimes overlooked.

Mandatory Pay-Outs

One common oversight is when trusts have staged, mandatory pay-out provisions. A typical example is as follows: Single dad sets up a revocable trust directing, upon his passing, a distribution of assets equally to separate trusts for daughters. When a daughter reaches age 25, distribute one-third of her trust. When she turns 30, give her one-half of what is left. Finally, when she reaches 35, give her the remainder. The rationale is reasonable enough: if a daughter squanders the first third, she will be more responsible with the later distributions. The downside is that these mandatory pay­ outs defeat the significant protections and estate tax benefits trusts provide. Oftentimes, children will already be 35 when parents pass away, meaning their entire inheritance is received outright. If a child is later sued due to an automobile accident, for example, or if he or she gets a divorce, the inheritance maybe at risk. When a child later passes away, what is left will likely pass to his or her spouse, rather than grand­ children as intended by the settlor. If instead, each child’s inheritance continues in trust throughout his or her lifetime, with discretionary payments made as needed, a better outcome is oftentimes achieved. If there is a subsequent lawsuit or divorce, the inheritance will be protected. When a child later passes away, what is left will pass to grandchildren in accordance with the terms of the trust, free of estate and generation-skipping tax in most cases. Some worry that a continuing trust will be burden­ some for their children, but that does not have to be the case. Each child can be his or her own trustee, providing the best of all worlds. They can spend as needed and invest their inheritance how they wish, while retaining the protection from law­ suits, divorces, and transfer taxes.

Clients as Sole Trustee

One significant benefit of a revocable trust is that it makes it much easier for someone else to manage your business affairs in your old age or incapacity. Many name themselves to be trustee and provide that during their lifetime, if they are ever incapacitated, their spouse or children step in. This is a good set-up for younger clients. For older clients, this trustee succession may work smoothly if, for instance, the client falls into a coma. A doctor normally will declare incapacity in such situations, allowing the successor trustee to take over. Many people, however, experience a slow cognitive decline as they get older. They may have some good days, where they appear fully competent, and some not so good days, where perhaps they write a $10,000 check to the paper boy. Doctors are hesitant to declare patients incapacitated in such situations, which can cause significant difficulties for loved ones. Older clients suffering from beginning stages of dementia tend to become paranoid and can be resistant to relinquishing the trusteeship, even when it clearly becomes necessary. If, at that point, they are unwilling to resign, there is no easy resolution for concerned family members. A good solution to this issue is to add a co-trustee to serve from the get-go, well before any cognitive issues begin. If their faculties begin to decline, their loved ones avoid the struggles of replacing them as trustee, as there is already a co-trustee with authority to act. Often, this co-trustee will be the spouse, one or more children or a trusted advisor. In some situations, a trust company is the best solution.

Unfunded Trusts

The main benefit of a revocable trust is avoiding probate: the expensive, time-consuming, and publicly noticed court process whereby assets are dispersed from the decedent to the beneficiaries. Many clients are led to believe that simply setting up a revocable trust allows loved ones to avoid such hassles. In fact, this is only the first step. Probate avoidance is only achieved if you follow through and completely fund the trust during your lifetime. For real estate, that means executing a new deed. For bank and brokerage ac­ counts, that means re-titling accounts into the trust. For annuities, retirement plans, and life insurance, that means updating beneficiary designations. For LLC interests and other closely held entities, that means executing transfer documents such as assignments or stock powers. Each asset should be properly dealt with, otherwise probate will likely be required.

Final Thoughts

The foregoing is only some of the more commonly encountered estate planning oversights. These are by no means the only oversights. Every estate plan should be reviewed every few years (or more frequently) to assure that the best possible plan is in place.