I have recently been engaged by the families of several decedents to help with the probate of their loved one’s estate. In each of these cases, I will spend many months and thousands of dollars in administrative fees to complete probate. While I am not complaining about the fees I will earn, it is sad that money that could have been left as a legacy will get spent in administration of the estates. This make me think of 5 common mistakes which could have resulted in savings of tens of thousands of dollars!
1) NOT HAVING A PLAN. (The biggest mistake!)
Every state has laws for distributing the property of someone who dies without an estate plan—but not very many people would be pleased with the results. State laws vary, but generally they leave a percentage of the deceased’s assets to family members. (Non-family members, like an unmarried partner, will not receive any assets.) It is common for the surviving spouse and children to each receive a share, which often means the surviving spouse will not have enough money to live on. If the children are minors, the court will control their inheritances until they reach legal age (usually 18), at which time they will receive the full amount. (Most parents prefer their children inherit later, when they are more mature.)
2) FAILURE TO NAME A GUARDIAN FOR MINOR CHILDREN.
A guardian for minor children can only be named through a will. If the parents have not done this, and both die before the children reach legal age, the court will have to name someone to raise them without knowing whom the parents would have chosen. This may also cause a huge expensive Court battle as family members may fight over the guardianship appointment.
3) IMPROPER TITLING OF ASSETS.
Many people add an adult child(ren) to the title of their assets (their home, their bank accounts, etc.), to avoid probate. However, this can create all kinds of unintended consequences. When you add a co-owner, you lose control. Jointly-owned assets are now exposed to the co-owner’s creditors, divorce proceedings and possible misuse of the assets. I recently had a client who added her four adult children to the title to her home. One of the children had severe credit problems with multiple judgments. Upon learning of the transfer, the judgment creditors attached the property and attempted to foreclose. It became a very expensive way to avoid probate!
4) FAILURE TO PLAN FOR INCAPACITY.
Most people think of the need for a Will as their estate planning. While a Will (or a Trust) is a very critical document upon death, what happens if someone becomes incapacitated? If someone cannot conduct business due to mental or physical incapacity, a Durable Power of Attorney will allow someone to act on behalf of the incapacitated party. However, if a valid power of attorney does not exist, the Probate Court will appoint a guardian to handle one’s financial affairs—even if a valid will exists. (A will only goes into effect after death.) The court usually stays involved until the person recovers or dies and the court, not the family, will control how their assets are used to provide for their care. The process is public and can become expensive, time consuming and difficult to end.
Someone also needs to be given the power to make health care decisions for you (including life and death decisions) if you are unable to make them for yourself. Without a designated health care agent, you could be kept alive by artificial means for an indefinite period of time. The exorbitant costs of long term care, most of which are not covered by health insurance or Medicare, must also be part of incapacity planning. Consider long term care insurance to protect your assets.
5) NOT KEEPING YOUR ESTATE PLAN UP-TO-DATE.
Every estate plan is based on the personal, family and financial situations, and tax laws, in effect at the time it was created. All of these will change over time, and your plan needs to change with them. It’s a good idea to review your plan every couple of years or so and make sure it still does what you want it to do. Your attorney will let you know when a tax law change might affect your plan, but you need to let your attorney know about other changes that could affect it.
I hope these 5 Common Mistakes can help you or a family member or friend avoid a costly headache.