Four years of undergraduate study. Three years of law school. Pass the bar exam.
That's what it takes to become an attorney. But even with all that education, mistakes happen.
Estate planning attorneys are tasked with helping clients protect their assets after death. Clients trust lawyers to give sound advice and guide them through the process.
But estate planning can be complicated -- for even the most seasoned attorneys. Understanding the pitfalls can help you avoid estate planning mistakes and gain client trust and confidence.
Keep reading to learn five of the most common estate planning errors attorney's make and how to avoid them.
1. Uncoordinated or Unqualified Beneficiaries
The purpose of an estate plan is to ensure a person's loved ones get exactly what the deceased wants. It also protects the person's assets from certain taxes and losses (more on that later).
The biggest estate planning mistake people make is not organizing their beneficiaries properly. As the attorney, it's your job to make sure all beneficiaries qualify and are appointed correctly.
One mistake people make is updating their will without also updating their beneficiaries. Clients need to update inheritances for the following accounts (if applicable):
- IRA/401k
- Life insurance
- Annuities
Clients also need to understand that updating their will isn't the same as updating their beneficiaries. Beneficiary forms are legal, binding documents that supersede anything written in a will.
Revisit your client's beneficiary documents following death, divorce, or other major life changes. These are usually the times when someone wants to change their beneficiaries but fails to do so.
2. Not Properly Setting Up Trusts
Trust accounts are an important part of estate planning. And if they're not set up properly, it could be costly for your client.
Before you can advise your client, you need to understand the purpose of trust accounts. Here are the roles they serve:
- Protect assets from creditors
- Keep financial details private (debts, assets, beneficiaries)
- Guarantees the estate is distributed properly within a certain timeframe
The biggest estate planning mistake clients make is failing to move their assets into the appropriate trust accounts. This includes cash, mutual funds, stocks, and even real estate.
By moving these assets into a trust, clients can avoid the long, painful process of probate. During probate, the will goes before the court and assets are subject to extreme scrutiny.
Not only is this process time-consuming but it makes the will a public record. That means anyone not included as a beneficiary or even a nosey co-worker have access to the client's private finances and wishes.
Not everyone needs a trust but for those that do, it's worth the time and attention of setting one up properly.
3. Choose the Wrong Executor
When you think of choosing an executor for your will, who comes to mind? For most people, it's their spouse, children, or siblings. While these are all fine choices, it's your job to explain all executor options to your client.
Sometimes, the best choice for an executor is someone not directly connected to the family. An unbiased third party not named in the will has no stake in the assets. They often make decisions based strictly on the deceased's wishes.
Suggest a neighbor, friend, or even a co-worker act as the executor. Emotions are high when dealing with the death of a loved one. Add money to the mix and things can get ugly. Fast.
Although your client may be resistant to the idea of anyone other than family handling their estate, it's your job to at least mention it as an option.
4. Allow Joint Owners of Assets
Another common estate planning mistake is clients putting their children's names on their assets. While people think this will make things easier, it actually complicates them quite a bit.
Now, creditors have access to the parent's assets and savings for their children's financial woes.
Even the most responsible children make mistakes. If the client's adult child runs into major credit card debt or incurs an accident that's their fault, creditors can now come after the client's assets. Leaving little for beneficiaries down the road.
If your client is determined to involve their child directly in their estate, suggest they name them as power of attorney or the payable-upon-death-beneficiary. This guarantees the child receives any money in the client's bank or brokerage funds upon their death.
Another benefit to this approach is that the child has access to these funds in the event that their loved one incurs medical issues or bills.
5. Sloppy Gift-Giving
While your client's heart is in the right place when it comes to gifting assets to their heirs, it's your job to make sure it's done right.
You already learned that creating trusts is the best way for clients to protect their money and assets. But some clients want to use outdated practices.
Property
It was once common practice for individuals owning property to sell it to a loved one for $1.00 prior to their death. This was popular when land appreciation was on the upswing.
The concept was to sell the property for dirt cheap and avoid paying taxes on the gain. Here's the problem. When you sell a property for less than market value, the IRS deems it a gift.
Let's say the beneficiary buys the property for $1.00 and then sells it years later for $500,000. Now, they're stuck paying taxes on a $499,999 gain. What was meant to be a financial gift quickly turns into a financial burden.
Stocks
Another practice to steer clients away from is gifting stocks to their beneficiaries. All specific bequests are handled first when it comes to dividing the estate. If your client no longer owns the stock upon their death, it creates a big problem for all heirs left behind.
The stock market is constantly fluctuating. Let's say your client once owned 1,000 shares in Verizon that were worth $10,000 at the time of death. Depending on the time frame (and the market) those shares might now be worth $1 million!
The rest of the beneficiaries are now responsible for getting those 1,000 shares back and gifting them to the person named in the will. This could eat up all of the assets, leaving nothing for the other heirs.
This is a recipe for family drama! Aside from property and stocks, its recommended never to include specific requests or strict guidelines in a will or estate plan. It only complicates things later down the line if family can't (or won't) adhere to these requests.
Avoid These Estate Planning Mistakes
No one likes to think about their own mortality. As an estate planning attorney, you need to be sensitive to this while also providing clients valuable advice.
Now that you know some of the most common estate planning mistakes, you can guide your client through a simple process.
If you're looking to streamline the estate planning process, our software can help. We offer flexible pricing to help you better serve your clients with confidence and ease.
