Common Mistakes in Estate Planning (Part One)

This is the first part of a two-part article which will alert readers to changes they may need to make to their own estate plans. While not having any estate plan in the first place is the greatest mistake, this article assumes the reader has already adopted some form of Will or Trust Agreement. While the mistakes described below and in the next article can result in added financial costs, their impact on the lives of children can be even greater.

MISTAKE #1 – PARENTS WHO FAIL TO ESTABLISH TRUST PROTECTION FOR THEIR CHILDREN

Most people adopt their first Wills in order to designate legal guardians for their minor children. Unfortunately, the authority of a legal guardian terminates when a child attains age 18. At that same age, a child may also gain unrestricted control of their inheritance despite their lack of maturity or the wrongful influence of outside parties at that time. Parents can and should prevent this mistake by providing in their estate plan for the continued trust control of a child’s inheritance until the child’s education is completed and the child has attained a more mature age.
MISTAKE #2 –GRANDPARENTS WHO FAIL TO ESTABLISH STANDBY TRUST PROTECTION FOR THEIR GRANDCHILDREN

The typical Will or Trust Agreement provides that the inheritance due a deceased child shall instead be distributed to the surviving issue of that child. In the event one of their children later dies, grandparents often fail to provide the same trust protection for their grandchildren as recommended above. This mistake by the grandparents often involves an even larger inheritance than the grandchild may receive from their deceased parent and could also result in the control of a grandchild’s inheritance being managed by inlaws or non-family members.

MISTAKE #3 – CREATING UNEQUAL TREATMENT BY PROVIDING EQUAL SHARES TO CHILDREN

The age spread between the oldest and youngest children in a family often ranges from 5 to 15 years. Even when trust protection is provided to prevent a child from inheriting at age 18, an even worse result can occur if each child’s share is made equal without regard to each child’s age. For example, the three surviving children of the Jones family are ages 23, 18 and 12 at the time of their parents’ death. The estate plan of Mr. and Mrs. Jones provides for equal division among the children at their death, followed by distribution as each child attains age 23. Until distribution, each child’s separate share can be used in the discretion of the Trustee toward that child’s support, education and medical care. While Mr. and Mrs. Jones never intended such a result, the older child (whose college education has already been provided by the parents) will receive a full one-third share, the middle child will likely spend all or most of their share in order to complete college, while the youngest child may exhaust their share and never go to college due to lack of funds. This mistake can be prevented by providing trust protection and equal division of assets only after the youngest child has received the same opportunities as each other child (e.g., until the youngest child attains age 22). Until that time, the Trustee can provide support to each of the children according to their needs from time to time (not necessarily in equal amounts) and as the parents would do themselves if living. Once the remaining assets are divided after the youngest child attains the designated age, distribution of each child’s remaining share will occur at such later age of maturity as designated by the parents.

MISTAKE #4 – PARENTS WHO FAIL TO TREAT DIFFERENT CHILDREN DIFFERENTLY

Most parents love their children equally and treat their children equally in their estate plans. The reality in many cases is that once all of the children have reached adulthood, they have achieved different levels of maturity, career and marital success. While parents with a disabled child usually provide special trust protection for that child, the same parents often fail to protect the inheritance of those children threatened by creditors, broken marriages or bad lifestyles. Many options exist for parents to provide all or some of their children with added trust protection and should be discussed with their advisors.

MISTAKE #5 – PICKING THE WRONG TRUSTEE

In selecting a legal guardian who may become the caregiver, mentor and substitute parent for a minor child, my advice has always been to “let your heart rule your head.” In selecting a trustee to manage a child’s inheritance, make investment decisions and say “no” when necessary, you should instead “let your head rule your heart.” The family member or friend, who may be best choice as legal guardian, may be unqualified or overwhelmed with the responsibility of also being trustee. Parents and grandparents alike should consider designating an independent and qualified investment firm or other financial institution to serve as trustee or trust advisor and made responsible for investment management, bill paying and recordkeeping. This is especially important in trust protection arrangements that may last for many years and beyond the lifetimes of friends or family members. When an independent and qualified trustee is designated, I recommend a friend or family member be provided the authority to replace that trustee with another investment firm or financial institution if circumstances or personnel later change. The second part of this article will cover other common estate planning mistakes, including, purchasing life insurance, designating beneficiaries and using joint ownership.