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.

Estate Planning in Second Marriages

Estate planning by both spouses in a second marriage can be difficult. Divided loyalties may exist between providing for the surviving spouse and providing for the children of a prior marriage. In addition, various state laws made interfere with each spouse’s intended estate plan.

This article will point out both the pitfalls of having no or an outdated estate plan following a second marriage and the importance of taking the right steps both before and after the new marriage to avoid these pitfalls. Let’s start by looking at the pitfalls or what the law entitles every surviving spouse to receive—whether at the end of a 50-year first marriage or 50-day second marriage:

HOMESTEAD PROPERTY

In many second marriages, the husband and wife establish their marital residence in the former home of one or the other. No intention may exist between the spouses to make a gift of the home and the non-owner spouse may be expected to vacate the home if the owner spouse dies first.. The Florida Constitution provides a very different result. In Florida, every surviving spouse is provided a “life interest” in the marital residence, whether or not the surviving spouse chooses to live there. While this right to a life interest can be released voluntarily, a surviving spouse may be unable due to poor health or unwilling due to poor relations with other family members to provide such a release.

ELECTIVE SHARE

As a matter of public policy, every state provides surviving spouses with some minimum inheritance which they can “elect” to receive instead of the inheritance that may or may not have been provided them by their deceased spouse. Florida law refers to this amount as the “Elective Share” and Florida has one of the most generous elective share laws in the country. While there are exceptions to the Elective Share beyond the scope of this article, a surviving spouse in Florida may be entitled to receive a share of 30% of most probate and non-probate assets.

JOINT MARITAL PROPERTY

Bank accounts, real estate and other assets titled jointly in the names of both the husband and the wife are commonly referred to as “Marital” property or “Tenancy by the Entirety” property. For inheritance purposes, all such Marital property automatically and completely passes to the surviving spouse. Contrary instructions in the Will or Trust Agreement of a deceased spouse will not change this result.

RETIREMENT PLAN BENEFITS

Retirement plans governed by the federal law known as “ERISA” and certain other types of plans require that the surviving spouse automatically be beneficiary of any death benefits. While a spouse can voluntarily waive all or part of these death benefits, such a waiver can only be exercised after marriage and according to the specific procedures and forms provided by the employee’s Plan Administrator.

LIFE INSURANCE AND ANNUITY BENEFITS

The distribution of life insurance and annuity benefits is generally governed by the specific beneficiary designation forms on file with each insurance company. Typically, such an important decision is only made once when the application form is first filled out and with little thought to other estate planning documents. If a spouse is designated on the beneficiary form, the insurance company will follow those instructions regardless of any intent or other documents to the contrary. Even worse, some courts have ruled that such the designation of a spouse continues even after divorce and until new a new beneficiary forms is filed.

To summarize these pitfalls, Florida law will do more to protect the surviving spouse of a short term second marriage than the surviving children of a long term first marriage.

Let’s look now at how to avoid these pitfalls:

PRE-NUPTIAL AND POST NUPTIAL AGREEMENTS

Written agreements entered into either before or after marriage are not just for movie stars. Most second marriages (and many first marriages) would benefit from a signed agreement that provides for both the financial protection of the surviving spouse (if needed) while assuring the current or future inheritance of assets by the original family. Don’t look at such agreements as adversarial, but rather as the mutual desire of both parties to protect each other from the pitfalls described above.

To make such agreements valid and enforceable, the following steps should be followed:

1) Hire legal counsel with experience in preparing and enforcing such agreements. Both parties should also be represented by separate counsel.

2) Each party should make full financial disclosure of all their assets and income in order that any waivers to future income or assets are made by the other party with full knowledge and understanding.

3) Avoid the “last minute” preparation and negotiation of such agreements on the eve of the marriage. Such hasty agreements could later be challenged as signed under “duress.” If circumstances and budget permit, consider videotaping the meeting at which the final agreement is discussed and executed

4) Be sure any specific waivers of homestead, retirement benefits or elective share rights are clearly spelled out and the impact of such waivers understood by both parties.

5) While the marriage itself may qualify as sufficient “legal consideration”, the party with the greatest financial means should be careful to provide adequate consideration to the other party, often measured by the length of the future marriage.

6) Last, but not least, leave the children and other family members out of it. Rely on the advice of your legal counsel and tell the family you intend to treat every one fairly. They will find out when the time comes.

After the marriage, follow up immediately on any necessary changes to your previous estate planning documents, beneficiary designations and property titles. Don’t forget to address the right of the surviving spouse to continue using any automobiles, household furnishings or other personal property that has been shared during the marriage. Also update your previous Living Wills and Designation of Health Care Surrogates ( Medical Power of Attorney) to either designate the new spouse or confirm your other choices.

Estate Planning Lessons from the Rich and Famous

Despite the jokes on late night TV, the continuing saga of Anna Nicole Smith and the pending birth of Vice President Cheney’s sixth grandchild by a lesbian daughter point out that “Paternity” can affect any family and any estate plan. Without passing judgment on some modern beliefs or lifestyles, estate planning must now take into account such future family possibilities as gay unions, cross culture or same sex adoptions, sperm banks, stem cell research and children born or raised outside conventional marriages.

“Paternity” means the acknowledgment of a parental relationship. Paternity can be a very serious estate planning matter when that acknowledgment is disputed or when it involves an heir that is not what the parents or grandparents may have expected.

Following are some general rules of paternity that apply in most states:

1. A husband is presumed to be the father of the children born to their wife;

2. Children are provided certain limited inheritance and support rights, but only until they attain the age of majority;

3. Both biological and adoptive parents are free to exclude or disinherit all or some of their children (subject to Rule # 2 above);

4. If a written and valid estate plan does not exist, the state law of a decedent’s legal residence governs the order of inheritance (known as “intestate succession”). The intestate succession laws of most states provide that all born or adopted lineal descendants are the rightful heirs of the decedent; and

5. A written and valid estate plan can exclude or place conditions on inheritance by both known and unknown heirs, provided no law is broken and the estate plan does not violate “public policy”. Your guess is as good as mine as to what laws may exist or what public policy will be in the future.

Following are examples of circumstances that exist in many families and where ignoring paternity or the difference among heirs could have unintended results:

FAMILY BELIEFS:

John and Mary are active members of their church and have bestowed the same beliefs on their only child, Jim. John and Mary’s estate plan provides for outright distribution to Jim, or if deceased, to three grandchildren born during son’s Jim’s prior marriage. One of the grandchildren has recently renounced the family and joined a satanic cult. To make matters worse, son Jim has been diagnosed with a terminal illness.

THE “MISSING” GRANDCHILD:

Walt and Sarah have three sons and six grandchildren. Unfortunately, the oldest son’s marriage ended when he was sent to prison for stock fraud and the daughter in law was awarded sole custody of their only child. The daughter in law has since moved out of state and refuses to allow Walt and Sarah any contact with this grandchild. Walt and Sarah has typical Wills that divide their estate equally among their three sons, “per stirpes” (which means to the surviving children of any deceased son).

THE “IMPAIRED” HEIR:

Thanks to the family business, Widow Sally and both of her daughters (see Mary and Sarah above) are very wealthy. On the advice of her estate planning attorney, Sarah has created “generation skipping” trusts that provide for some direct distributions to each of her current or after born grandchildren in order to reduce or at least delay the amount of estate taxes to be paid in the future. Besides the one great grandchild who has recently joined the satanic cult and another great grandchild who is estranged from the family, there is a family history of substance abuse and mental disorders.

As these examples show, parents and especially grandparents may need to create special safeguards such some heirs need to be treated differently than other heirs. In addition to dealing with known circumstances, parents and grandchildren may need to also address the possibility of unknown circumstances as both scientific and social changes continue in our society.

Following are some of various recommendations that the families described above may want to consider in their estate plans:

1. Rather than providing for equal division and outright distribution, some heirs are better protected by extended trust arrangements managed by am independent Trustee. If circumstances later change and the same heirs gain maturity or stability in their lives, then the Trustee can be authorized to “loosen the reins”.

2. Despite instructions to make distribution at a certain age, it may be appropriate to permit a Trustee to delay or modify the form of that distribution should an heir then be afflicted with a medical condition or be under threat of a legal attachment by creditors.

3. Some future heirs may benefit from a “carrot and stick” form of distribution that ties the amount they will receive to the amount fair earning through gainful employment.

4. In those cases where an independent Trustee has been designated, one or more “Trust Protectors” should also be designated. Such Trust Protectors are typically family members or close friends not burdened with the duties of Trustees but who have the authority to mediate disputes, approve or disapprove distributions or select a substitute independent Trustee in the future.

5. As a final recommendation, grandparent should consider giving their own children the limited ability to modify those shares of an estate that will be or maybe payable to grandchildren. If properly drafted, this limited power has no tax consequences, but does enable a family to look further into the future.

On final bit of advice – if you intent to exclude someone as a beneficiary of a Will or Trust, language along the following lines is appropriate: In providing for the foregoing division and distribution of my estate, I have in mind my son, Harry, but for whom I expressly chose to make no provision under this Will. Leaving a token $1 can create headaches for those responsible to administer the estate, by the same token, failing to mention a person who has been listed as a previous beneficiary or would normally be a beneficiary could raise concerns about over sight, competence, or undue influence.