I have been drafting and reviewing wills, trusts, powers of attorney and other estate planning documents for more than 32 years. This week, we will be discussing the top six estate planning mistakes that I have seen while drafting and/or reviewing thousands of estate plans over that time period.
Mistake No. 1: Failure to make or to update your estate plan.
If you are like the majority of Americans and Michiganders, you have done no estate planning. However, with proper planning, you can stay in control of your assets while you’re alive and well, provide for you and your loved ones in the event of your mental disability, and when you’re gone, give what you have to whom you want when you want the way you want, all at the lowest overall cost to you and your loved ones.
Once you have an estate plan in place, it should be kept updated on a regular basis. I generally recommend that your estate plan be reviewed on at least an annual basis, to accommodate changes. There may be changes in your personal and family situation like births, deaths, marriages, divorces, illness, injury or disability of you or a loved one. There can also be changes in your financial situation, such as changing jobs, retiring or if you receive an inheritance. There are also regular tax and non-tax changes in both state and federal laws. Lastly, there may be changes in your estate planner’s knowledge and experience. All of these changes can affect your estate plan.
Mistake No. 2: Failure to properly plan for retirement.
I regularly see individuals who do not start thinking about planning for retirement until they are about to retire. The time to be thinking about retiring is in your twenties when you have the advantage of time to properly invest your retirement savings.
Some financial advisors recommend the old rule of 100; you subtract your age from 100, and that’s the percentage of your retirement savings that you should have in stocks, and the rest in income producing assets. With Americans living longer, some financial advisors are now recommending that the rule should be closer to 110 or 120 minus your age. This will allow your money to last longer from the extra growth that stocks can provide.
Other advisers are recommending an investment strategy that I and my wife Emily use. You put one to two years’ living expenses in money market funds, an additional five to ten years’ living expenses in low risk income producing assets for which a portion matures annually, and the rest in equities. In good times, you just use the income from the entire portfolio, and in down markets, use the cash and the income producing assets as they mature and be able ride out the down market without touching the equities. The longest down market in the last 100 years was the Great Depression, and it only lasted 34 months. When the market comes back, replenish the money market funds and income producing assets from sales of the higher growth equities.
I have seen many retirees unfortunately purchase annuities for their retirement. Fisher Investments advises that annuities are inappropriate investment vehicles for most retirees. They say “Some investors choose annuities in an effort to avoid risk. They may be attracted to ‘guaranteed withdrawals’ or ‘minimum returns’ that seem to take the risk out of investing. In reality, annuities are complex investment vehicles that don’t always provide the simple ‘safety net’ they often promise. They typically have high costs, complex restrictions and other risks that could offset the potential benefits. While annuities may not seem risky at first glance, they may not be the best way to limit the risk of losing money.” See their annuity guide at https://www.fisherinvestments.com/en-us/annuities/guides/annuity-insights.
Mistake No 3: Failure to fund your trust.
If you have a trust, to make it work, it has to be funded. Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust. The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.
Funding your trust can be a long and tedious process. You have to retitle bank and investment accounts, real estate, life insurance and other assets. You also need to change beneficiaries on IRA’s, retirement plans, annuities and life insurance. And then your trusts have to be added as additional insureds on homeowners and vehicle policies. Everything then has to be verified with written confirmations. I have not seen any trustmaker come into our offices with a completely and correctly funded trust from another estate planner, nor have I seen a single trustmaker yet who has been able to completely and correctly fund his or her trust on his or her own without professional assistance.
Mistake No. 4: Failure to discuss with your successors where to find your estate planning and other important documents.
To help your successor financial and health care agents, make your medical directives and other estate planning documents readily accessible 24 hours a day/7 days a week/365 days a year. Regularly speak with your successor financial and health care agents. You want to make sure not only that they are still willing to handle your finances or medical directives when you cannot, but also where they can find your financial and health care powers of attorney, trust and financial records and information. Provide them with access to your online user names and passwords.
Mistake No. 5: Failure to make arrangements for bill paying and financial matters for when you are unable.
Studies have shown that after age 60 your financial abilities decrease about 1% per year. So at some point in time, you will likely need assistance with financial matters. If you have an estate plan in place, you have appointed a successor financial agent, but do they know what to do.
I regularly see individuals in their 70’s or 80’s, come into our office after their record-keeping spouse becomes mentally disabled. They now not only have to care for their disabled spouse, they have to learn how to pay bills, write checks and reconcile bank accounts. If you are the bill-payor, cross-train your spouse or other successor financial agent before a health crisis, so that they know what to do and where to find things if the need arises.
You may want to make arrangements for a 3rd party bill paying service. Many accountants and tax preparers will offer this service for a modest monthly fee. Whatever you do, do not just add your successor financial agent as a joint owner on your accounts, unless you do not mind their creditors seizing your hard-earned funds.
Mistake No. 6: Failure to discuss with your successors your wishes upon your mental disability, including caregiving options.
If you are over 65, you have a 1 in 2 chance of spending some time in a nursing home, a 1 in 4 chance of spending at least a year there, and a 1 in 10 chance of being in a nursing home more than five years. Shouldn’t you make contingency plans in case of such an event? And do not just plan on your spouse to take care of you when you need it; studies have shown that 60% to 70% of the time, the caregiving spouse in their 70’s or 80’s dies before their disabled spouse.
If you would like your hard-earned assets to go to loved ones instead of the nursing home, make sure that your financial power of attorney has the appropriate gifting language in it, your assets are titled properly, and your successor financial agents know about the plan you have made. If you have a long-term care policy, make sure the premiums get paid and that your successors know about it.
Since many long-term care policies have increasingly unaffordable premiums, you may want to consider a fixed premium life insurance policy with an accelerated benefit rider, like I and my wife Emily have. The policy allows you to access the life insurance death benefits early during your lifetime to pay for long-term care expenses at home or wherever you are living.
By Matthew M. Wallace, CPA, JD
Published edited December 16, 2018 in The Times Herald newspaper Port Huron, Michigan as: Top six estate planning mistakes