I’ve reviewed many estate plans in my 30+ years of practice. It is not uncommon for a new client to say that another attorney assured him that his plan is fine, when in fact, after a meaningful discussion, it’s apparent that the plan fails to achieve his goals. Here I’ll detail some of the common missing (or inappropriate) estate planning elements I find:
Florida law. Every state has different laws affecting estate plans. Florida is no different. Laws surrounding the proper execution of testamentary documents, what can or cannot be included in those documents, taxes, marital property rights, disinheriting children, distribution to minor beneficiaries, Florida homestead disposition and how principal and income are determined are a few examples. Each one could result in unintended consequence if not properly addressed. Many lawyers licensed in Florida miss spotting these issues.
IRA and 401k plans. Normally the bequest of IRA and 401k accounts are not governed by a will or trust, but instead are distributed in accordance with a beneficiary form. I’ve seen estate plans where the will or trust calls for specific distributions that are over and above the amounts that the will or trust governs. In other words, the estate or trust will not have enough money to satisfy the bequests because the client mistakenly believed her will or trust would satisfy those distributions from her IRA or 401k accounts. Also, many estate plans miss income planning opportunities for their beneficiaries with these accounts.
Income Tax Planning. An inordinate amount of estate plans that I review are designed to minimize estate taxes, when those taxes won’t be a problem given the current high federal exemptions. The provisions commonly used to limit estate taxes work against the provisions used to reduce the income tax burden to a client’s beneficiaries. If you’re in a first marriage with children of that marriage, for example, have under $11 million of net worth, and have two trusts rather than a joint trust, chances are your plan is constructed to minimize the wrong type of tax.
Estate Tax Planning. For those estates that will suffer an estate tax, or for those clients who own real property in a state that has a state level tax, the laws have changed over the past several years, as have the strategies (see below). It’s easy to spot these simply by looking at the tax formula language or the date the plan was signed.
Disability Provisions. Here’s another common miss, and that’s the failure to define disability, and when you shouldn’t act as your own trustee any longer. Moreover, if you’re in the habit of giving gifts, or if you financially support a beneficiary, these provisions need to be present in your trust. Should gifts or unrepaid loans to a child count against his inheritance? That’s one question. Should the support continue? What about supporting a spouse who is not the mother or father of your children, the ultimate beneficiaries? How far should that go? Is your spouse the primary concern or are the children? A simple distribution calling for “health, maintenance and support” fails to provide enough direction.
Failure to Protect Inheritance. The old school thought was to distribute the inheritance outright to your beneficiaries. The thinking is to not “rule from the grave,” and let them decide how to use the assets and where to leave them. Outright distributions, however, may subject the inheritance you leave your loved ones to creditors, predators, estate taxes, and divorcing spouses. What if I told you that you can leave an inheritance to a loved one, give them control over the investment and distribution decisions, and let them decide who receives the assets upon their deaths and still shield the assets from those dangers? Consider yourself told. I’m also here to tell you that the ability to protect the assets for your loved ones dies with you. Your beneficiaries can’t easily create a trust that will do so for themselves.
Failure to Sign Prenuptial with New Spouse. Along those lines, your revocable trust won’t protect you from a divorcing spouse or limit that spouse’s rights to your estate when you die. This issue is common in second marriages where each spouse has different beneficiaries. Even if you and your spouse agree that what’s yours is yours and what’s his/hers is his/hers, you should reduce that understanding to a written document, otherwise called a nuptial agreement. Absent a nuptial agreement, a surviving spouse (or someone on his or her behalf) can exercise those rights and thwart your estate plan.
Failure to Use Today’s Strategies. Keeping up with the ever-changing estate, trust and tax laws can be daunting. That’s why my law partners and I each attend more than 40 hours of high-level continuing education annually. I happen to also serve on a highly regarded trade journal’s (Trusts & Estates Magazine) editorial advisory board. Each month the publication details strategies that could help clients achieve their goals. You’d be surprised at the number of attorneys who don’t keep up with the times. Further, it’s unwise for you to let your estate plan sit in a drawer for several years without dusting it off and taking a look at it. Clients often feel that their plans are boiler plate because they are! A carefully thought out plan is anything but.
Failure to Align Assets with the Estate Plan. This is perhaps one of the biggest issues that I find. Even if you have a revocable trust, your estate won’t avoid probate if your assets aren’t properly titled in the trust. As mentioned above, if your baskets of assets (such as the IRA and 401k) aren’t all coordinated with your intent, your plan may fail. Many clients do take the time to align their assets with the plan but fail to keep it up when they sign amendments, or when they purchase a new property or open a new account.
These are just a few of the common areas of concern that arise during my initial conversations with clients. If any sound like you, it’s time to review with a competent attorney.
©2021 Craig R. Hersch. Learn more at floridaestateplanning.com