Checklist: Will Your Old Estate Plan Still Work Today?

Review of an Existing Estate Plan - Top Mistakes and How to Avoid Them

Last Will
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Each time an estate planning attorney sits down with a new client who already has an estate plan, the first thing they usually do is a thorough review of the client's current estate planning documents. From years of experience in doing these reviews, here is a checklist of common problems that estate planning attorneys see time and time again and how to fix them.

Mistake #1 - Personal Effects in Your Pour Over Will

Technically speaking, personal effects, such as jewelry, artwork, and collectibles, distributed through a Last Will and Testament, including a Pour Over Will, need to be probated.

In reality, however, these items tend to disappear on a "first come, first served" basis, before any formal estate or trust settlement with an attorney begins. But if there are any arguments among your beneficiaries over your personal effects and the distribution of this property is listed in your Last Will and Testament, then a probate judge will need to settle these disputes after your will has been admitted to probate. If all of your other property has been properly funded into your Revocable Living Trust, then this defeats one of the main goals of your trust - to avoid probate! Instead, fund your personal effects into your Revocable Living Trust and specify who should get this property, and then give your Successor Trustee the complete discretion to settle any disagreements among your beneficiaries. This should keep your trust beneficiaries out of probate court.

Mistake #2 - Leaving Your Personal Effects Equally to Your Beneficiaries

Personal effects, including jewelry, artwork, and collectibles, are often difficult to value, let alone divide "equally." I once had a client who fought with his brother for nearly three years over how to divide the "stuff" that was left in their mom's house because mom's Will stated that her stuff must be divided equally.

The stuff was worth about $5,000, and yet the brothers spent well over $60,000 in legal fees before a resolution was reached.

The bottom line is that money is easy to divide, but "stuff" isn't. If your Will or Revocable Living Trust states that your personal effects must be divided equally among your beneficiaries, then make a plan for your personal effects.

Ask your estate planning attorney to revise the language to allow your beneficiaries to divvy up things as they agree, and if they can't agree, then give your Personal Representative or Successor Trustee absolute authority to decide who gets what, sell things and divide the cash, or simply donate things to charity. This should keep your loved ones out of court.

Mistake #3 - Estate Plans Without Any Estate Tax Planning

This is what frequently happens: A young couple has their first child and right before their first big vacation without their new baby the couple decides that they need wills. So, they rush out and get one of those last minute vacation estate plans. What they'll typically get is referred to as an "I Love You Will" - it simply leaves everything outright to each other and then if both parents die the balance will go into simple trusts for their new baby and any children born later. This type of plan has no estate tax planning involved in it. Then, twenty-five years later, when their youngest child finally goes off to college, they meet with me and, quite embarrassed, pull out copies of their "I Love You Wills."

Another thing that frequently happens is a couple who has a good estate plan drafted in their state that has no estate taxes but then they move to a new state that has estate taxes, or vice versa.

In their new state, their estate plan won't work as they intended because either their plan was drafted to specifically cover federal estate taxes only, or their plan was specifically drafted to cover both state and federal estate taxes.

Don't let this happen to you. Be sure to upgrade from "I Love You Wills" to a plan that incorporates AB Trust planning and, if applicable, state estate tax planning with ABC Trusts, long before your youngest goes off to college. And be sure that if you move to a new state your estate plan is reviewed by a qualified estate planning attorney in your new state, otherwise your plan may not work the way you intended.

Mistake #4 - Married Couples as Sole Trustees of Their Revocable Trusts

Married couples as sole Trustees of their respective Revocable Living Trusts poses a serious problem if one spouse becomes mentally incapacitated because the other spouse won't have any access to accounts titled in the name of the incapacitated spouse's Revocable Living Trust.

Depending on the terms of the disabled spouse's trust agreement, the well spouse will either need to obtain disability certificates from family members and one or more physicians or both or go to court and have their spouse declared mentally incompetent by a judge. Worse yet, if one spouse is unavailable simply because he or she is across the country visiting family, then the other spouse won't be able to do anything with the accounts titled in the name of the traveling spouse's trust until he or she returns from the trip.

While there will be certain situations when each spouse will want to serve as the sole Trustee, such as in a second or later marriage, generally I've found that these cases are in the minority. And if you're worried about the hassle of Co-Trustees having to act together, don't worry - Revocable Living Trusts can be drafted with a great deal of flexibility, including making spouses Co-Trustees but giving each the ability to act without the consent of the other spouse. If you and your spouse are serving as sole Trustees of your respective Revocable Living Trusts and there is really not any good reason why then ask your estate planning attorney to amend your trusts to make each of you a Co-Trustee of the other spouse's trust and include language allowing each of you to act alone in your capacity as a Trustee. In the long run, this will give you the flexibility that you need to go about your business.

Mistake #5 - Revocable Trusts Without Retirement Plan Language

Today many people have a significant portion of their estates invested in qualified plans such as 401(k)s and IRAs. But if they've designated their Revocable Trust as the beneficiary of these accounts and the trust hasn't been updated in a while, then chances are it doesn't contain the appropriate language to allow the Successor Trustee to deal with retirement accounts that have been left to the trust. If this language is missing, then the Successor Trustee's hands will be tied, and negative income tax consequences will result.

If you've named your Revocable Living Trust as the beneficiary of your retirement plans, then check with your estate planning attorney to make sure that your trust contains the appropriate retirement plan language and, if not, then ask your attorney to amend your trust immediately.

Mistake #6 - Powers of Attorney Without Retirement Plan Language

If you've funded all of your assets into your Revocable Living Trust, then, in general, your Power of Attorney won't be needed since the assets in the trust can be managed by the Trustee. But since 401(k)s and IRAs can't be funded into your trust (otherwise the assets will be included in your taxable income for the year of the transfer), you'll need a Power of Attorney with appropriate retirement plan language to allow your Attorney in Fact to manage your 401(k)s and IRAs if you become disabled. This should include the power to establish new accounts; make contributions; rollover benefits; endorse checks and receive distributions; arrange for direct deposit of distributions; elect forms of payment, and borrow money and purchase assets.

If your Power of Attorney hasn't been updated in a while, then chances are it doesn't contain the appropriate language to allow your agent to manage your retirement accounts. Check with your estate planning attorney to make sure that your Power of Attorney contains the appropriate retirement plan language, and, if not, then ask your attorney to draft a new one that has the proper language.

Mistake #7 - Old Advance Medical Directives

In 2001 Congress enacted rules governing the Health Insurance Portability and Accountability Act of 1996 (or HIPAA). Part of the act deals with the privacy of medical records and who can and can't have access to them. Thus, if your Advance Directive was written before 2001, then you'll need a new one that contains the appropriate HIPAA language. And beware - I've also come across Advance Directives signed after 2001 that nonetheless don't contain the necessary HIPAA language.

What will happen if your Advance Directive doesn't contain any references to HIPAA? Then your health care agent may not be able to make informed decisions about your medical treatment because your agent won't have any access to your medical records. This is particularly important if you've named someone other than a close relative as your agent since distant relatives and non-family members will be denied access to your medical records. If it has been a while since you signed your Advance Medical Directive, then check with your estate planning attorney to insure that your document contains the necessary HIPAA language and releases.

Mistake #8 - Taxable Assets Left Outright to Your Spouse

Even if the estate plan of a married couple doesn't commit the third common mistake (an estate plan without any estate tax planning), many plans leave the taxable portion of the deceased spouse's estate outright to the surviving spouse instead of in a Marital Trust. In other words, instead of having a true AB Trust system, the plan only creates a "B Trust," and the taxable portion, or "A" portion, will go outright to the surviving spouse instead of into a Marital Trust.

Why is this a problem? Because there are several benefits to having the taxable portion pass into a Marital Trust for the benefit of the surviving spouse instead of outright. First, the Marital Trust is an irrevocable trust, and, if structured properly, can prevent the trust assets from being snatched by the surviving spouse's creditors. Leaving the taxable assets to the surviving spouse in a Marital Trust will also protect the assets from being divvied up in a divorce or taken as part of an elective share if the surviving spouse remarries. Finally, in a second or later marriage, the use of a Marital Trust can ensure that the assets remaining in the trust when the surviving spouse dies will go to the deceased spouse's children and not those of the surviving spouse.

If you and your spouse think that your estate plan could benefit from a true AB Trust system, not just a "B Trust," then ask your estate planning attorney if your plan includes a true AB Trust set up, and, if not, amend your trusts accordingly.

Mistake #9 - Improperly Signed Estate Planning Documents

There are two areas where this comes into play: (1) When documents are flat out just not signed right; and (2) When documents that were signed properly in the client's previous state of residence need to be signed differently in their new state.

The former problem usually is the result of an attorney who doesn't normally draft estate planning documents and, therefore, doesn't know the formalities required for signing these types of documents. That's why it's important to work with an attorney who has several years of experience drafting estate planning documents because this will ensure that the documents have been tested by banks, hospitals, and the probate court.

On the other hand, estate planning documents that were properly executed in one state can be rendered completely useless in another state. For example, in Florida, a Power of Attorney must be signed with the same formalities as a deed for real estate in order for the Power of Attorney to be used to transfer Florida real estate. That's why it's important not only to have your estate plan reviewed if you move from one state to another but also to have your documents reviewed by a local attorney where you've bought real estate outside of your home state. This will ​ensure that the documents will work in your state as well as the other.

Mistake #10 - Leaving Assets Outright to Your Beneficiaries

Just as mistake #8 pointed out the benefits of holding assets in a Marital Trust for the benefit of your spouse, lifetime trusts can also provide similar benefits to your other beneficiaries. How? Because the use of a lifetime trust will segregate the beneficiary's inheritance from their other assets, including their individual assets as well as marital and other joint assets. Thus, if the beneficiary is sued, the trust assets will be protected. Or, if the beneficiary gets married and later divorces, the trust assets will be protected. Or, if the beneficiary is still a minor or mentally disabled, then the trust assets can be invested and managed by someone else and will be protected. On the other hand, if you leave the beneficiary's inheritance to them outright or even at certain ages (such as 25, 30, or 35), then once it's in their hands their inheritance will become vulnerable to lawsuits, creditors, divorcing spouses, bad investment decisions, and, in the worst case scenario, a court-supervised guardianship if the beneficiary is a minor or mentally disabled.

Instead, consider setting up lifetime trusts for all of your beneficiaries. You can even make the beneficiary the sole Trustee at a certain age (such as 25 or 30). That way, when the beneficiary is younger, their inheritance can be managed by someone else, but when they get older they can take over control of their trust fund and make their own decisions. This will give your beneficiaries a fighting chance to keep their inheritance for their own benefit and not for the benefit of their creditors, divorcing spouses, the government, or guardianship attorneys and courts.

Mistake #11 - Unfunded Revocable Trusts

Probably the most common mistake I run into when reviewing existing estate plans is a Revocable Living Trust that isn't completely funded. This usually comes in two extremes: (1) Trusts that aren't funded at all, and (2) Trusts that are almost but not quite fully funded.

In the former situation, the problem usually stems from an estate planning attorney who simply doesn't provide any assistance or guidance to their clients with funding their trusts. (Yes, unfortunately, there are some attorneys out there who will avoid helping clients fund their trusts so that their clients' assets must go through an attorney-supervised probate.) In the second situation, even if the clients understand the importance of funding their trusts and they manage to get some of their assets into their trusts, many will procrastinate or simply become frustrated or overwhelmed by the entire funding process.

I can't emphasize enough how important it is to get your assets into your Revocable Living Trust and update the beneficiaries of your life insurance and retirement accounts. Without taking this important step, your Revocable Living Trust will simply be an empty bucket waiting for your assets to fill it up after the time-consuming and costly probate process.

Mistake #12 - Unfunded Out of State Real Estate

When reviewing existing estate plans, the most common mistake that I see is #11 - unfunded Revocable Living Trusts. And this common mistake leads right into the final common mistake - out of state real estate that isn't funded into a Revocable Living Trust.

If you don't take the time to fund your out of state real estate into your Revocable Living Trust, then your loved ones will be faced with two or more probate estates. Why? Because the transfer of real estate after death is governed by the laws of the state where the property is located through an "ancillary probate" proceeding. Thus, real estate in your individual name at the time of your death will need to be probated in the state where it's located. And what if you own real estate in two, three, or even four different states? Then your loved ones will be faced with two, three, four or more probate proceedings, and you'll be adding significant time and cost to the settling of your trust because your loved ones will need to pay for multiple probate proceedings and multiple probate attorneys.

Particularly if your out of state property is titled in your individual name or as tenants in common with someone else, get the property into your trust. And don't be fooled into thinking that if you own real estate jointly with someone else that it will pass by right of survivorship to the other owner and avoid probate after you die. Most states default to tenants in common ownership if the deed doesn't specifically provide for rights of survivorship, and so your portion of the property will need to be probated. Check with an attorney in the state where the property is located to make sure that it's titled the way you want it, and, if not, have a new deed prepared and recorded.