Basic Misconceptions About Estate Planning

You can’t plan properly if your basic assumptions about estate planning are
wrong. You will never really hear what your professionals are telling you if
you are filtering their advice through faulty misconceptions. The following are
some common misconceptions:

I want to avoid probate Many people become so focused
(obsessed) about avoiding probate that real planning isn’t done. Avoiding
probate makes sense in some circumstances, but rarely will it be your most
important goal.  Many people assume
their revocable living trust accomplishes all they need. Reality check: it
doesn’t. Solution: Take a broad and holistic approach to planning that
addresses all your goals. Be sure your plan addresses all relevant goals
including sufficient funds for an emergency and retirement, asset protection,
proper insurance coverage (not just life, but property and liability),
management of your assets in the event of disability, and so on. If you have a
rental property in another state, transferring it to a living trust may avoid
probate, but not liability issues. Using an LLC to own the property may
accomplish both. There are issues besides probate that are extremely important
to consider, but unfortunately many people do not.

I signed my documents

Signing documents does not complete your planning. Almost every planning
document will require regular follow through for it to be effective. Trusts
need assets transferred to them (what good is an insurance trust if it
doesn’t own insurance?). Documents need to be kept current (property and
other laws change frequently, not just tax laws), and the Power of Attorney you
signed in 1986 is outdated!  The
will you signed before your grandchildren were born probably doesn’t reflect
the way you want your probate assets distributed on your death anymore. All
documents need to be reviewed at least every few years and especially when
there are major changes in tax and probate laws.

The ownership of assets (title to assets) needs to be adjusted to conform to
all your plans, corporations should have annual minutes, and so on. Solution:
Make up a “To Do” list with your estate and financial planner and be sure you
don’t stop until each item is checked off. Then meet once a year and get a
quick review and update to be sure all issues are addressed and new ones tended
to. It is a lot cheaper heading problems off at the pass then leaving them to
fester. Just because you signed all of your documents does not mean that they
can be discarded forever.

Remember: as you get older and your planning goals change, your estate
planning needs to change as well. 
The goals you have in your 40’s may not be the same as the goals you have in
your 60’s! 

I have a will and life insurance- Planning is not only
about dying. Estate planning should address retirement, disability, lawsuits
and lots of other things that “go bump in the night”. Failing to do so will
give you a one dimensional plan, which is never enough. If you have the worlds
greatest will, but you run out of money before you die because your investment
planning is off base, the will is useless. Solution: Involve all your advisers
in your planning process. The best way to do this is to have a big board
meeting of key family members and advisers. A more cost effective way to keep
your plan current is to meet with your key planner and have him or her
conference call other advisers as needed. This will assure that your
accountant, attorney, financial planner, insurance consultant all weigh in so
that your plan addresses all aspects of your life, not just death.

My Uncle Joe will handle everything- Assuming friends and
family are reliable and trustworthy can be true, but not every uncle is a Jim
Anderson (Father Knows Best). Relationships change, the pressure people are
under can change, so caution is important. Just because you feel comfortable
trusting a certain person now, does not mean that you will trust him in years
to come. Solution: Name co-trustees to have a check and balance. Consider
naming an institution in appropriate situations. Provide detailed parameters as
to what the various fiduciaries can do. Another example, make the guardian of
your children a co-trustee so they can have input, but name another independent
person as co-trustee with the guardian to have a check and balance. Instead of
relying on a power of attorney, fund a living trust with successor co-trustees.
For more sophisticated trust planning, name a Trust Protector, who can be
authorized to replace trustees and take other actions to provide another
safeguard.

We have planned for the estate tax- Estate tax is not the
only tax you have to plan for. Income tax issues are a significant factor in
estate planning. If you avoid the estate tax on mom’s house through a gift
plan, but you end up with a large capital gains tax when you eventually sell,
you may be better off than had you done no planning, but you haven’t really
achieved the goal of reducing all taxes. Solution: Involve all your advisers,
especially your accountant. Be sure your estate planner talks about income
taxes, not just estate taxes. Remember assets given away during life will be
subject to the same tax as the donor (carry over basis), whereas assets
retained until death will avoid capital gains tax (stepped up basis). Only
discussing estate tax with you financial planner is not the best idea.