Common Mistakes in Estate Planning (Part Two)

The first part of this article described five common mistakes made in estate planning and the kinds of trust protection that should be provided children. This second part will list other common mistakes in estate planning.

MISTAKE #6 – PARENTS WHO FAIL TO HAVE ENOUGH LIFE INSURANCE

I don’t sell life insurance, so readers with minor children should not view the following advice as self-serving. The average amount of life insurance provided by employers is two or three times annual salary. Additional accidental death insurance may be provided, but most people don’t die as a result of an accident and never collect on this type of life insurance. Two or three times annual salary sounds like a lot of money, unless the primary wage earner has just died and you are raising two or three minor children. Unless financial sacrifices are made or there is a surviving spouse willing and able to work, the typical amount of employer life insurance won’t last five years or provide nearly enough for the college education of each child. Additional funds in retirement plans should not be considered “life insurance” because it will be heavily taxed if withdrawn and may be needed for the future support of a surviving spouse. Until the youngest child has completed their education, most families need and should purchase additional life insurance protection to replace lost income and fund each child’s college education. Term life insurance is available from numerous companies and in most cases at an annual premium cost of 1/10th of 1% of the coverage provided. Parents with minor children should review their options with a life insurance advisor.

MISTAKE #7 - FAILING TO MATCH OLD BENEFICIARY DESIGNATIONS WITH NEW ESTATE PLANS

For many families with minor children, the parents’ life insurance and retirement plan accounts equal most of what their children may inherit. Only the most recent beneficiary designation forms on file with each life insurance company and retirement plan administrator will control these funds, even if the parents have adopted new estate plans with trust protection for their children. Most married persons know (or assume) their spouse is designated as primary beneficiary of all life insurance and retirement funds, but few persons are certain who is designated as secondary beneficiary. If there is no surviving spouse and the children have been designated secondary beneficiaries, each child will receive their share of the life insurance and retirement funds when they reach age 18, regardless of any different estate plan with trust protection adopted by the parents. To prevent this mistake, new beneficiary designation forms on all life insurance and retirement accounts should be updated at the same time new estate plans are adopted.

While it may be appropriate for the surviving spouse to remain designated as primary beneficiary, the new Will or Trust Agreement established to provide the children with standby trust protection should be specifically designated as contingent beneficiary. This action is critically important and due to privacy laws, cannot always be handled by the attorney who has assisted with the new estate plan.

MISTAKE #8 - DEFEATING AN ESTATE PLAN BY JOINT OWNERSHIP

An estate plan is not worth the paper it is written on, if the Will or Trust Agreement does not solely control the assets. Just as outdated beneficiary designation forms may still control the distribution of life insurance or retirement funds, an asset titled in joint names with one or more other persons may defeat the intent of an estate plan, result in additional taxes and risk loss of the asset itself. For example, joint ownership by a husband and wife typically results in the surviving spouse being the automatic and sole owner upon the death of the other spouse. Legal proceedings are usually not required and any contrary instructions in the Will or Trust Agreement of the first spouse to die will be disregarded. The same and a potentially worse result occurs when joint ownership with right of survivorship is created by a parent and their children in order to avoid probate. For estate tax purposes, such arrangements are often disregarded by the IRS. For asset protection purposes, creditors of a child listed as a joint owner may be able to attach or force the sale of such joint assets in order to collect against the child’s share.

Special care must be taken in creating joint ownership of real estate. Even if only avoiding probate is intended, all joint owners will be required to execute future transfer deeds or loan documents. In addition, the homestead tax and other exemptions available on a residence may be jeopardized.

MISTAKE #9 – DO-IT-YOURSELF ESTATE PLANNING

At the risk of sounding self-serving, this last item is too important to ignore. Because the services of an attorney can be expensive, estate planning is often delayed or attempted through internet or paralegal sources. Unfortunately, single parents and families with limited resources may need estate planning the most, but receive it the least. My recommendations are:

DO locate a qualified estate planning advisor by asking friends, tax or financial advisors or free legal referral services for one or more recommendations;

DO obtain an estimate of fees and any costs up front. Many attorneys charge only a nominal consultation fee and should be expected to discuss their fee and payment arrangement at that time. If the fee sounds too high, keep looking;

DO provide your advisor with a complete list of current assets and how titled, life insurance coverage and the current beneficiaries, copies of any existing wills or divorce decrees and information about family members, intended legal guardians and possible trustees;

DON’T rely on internet or other sources of legal forms that are not current, that are not specifically prepared for Florida residents or that you do not fully understand. The execution requirements for Florida documents is complicated, is different than some other states and should be supervised by some one familiar with these requirements; and

DON’T put off until tomorrow what you should do for your family today.