March 14, 2023

Estate planning can be filled with many uncertainties. Avoiding these common estate planning mistakes can bring peace-of-mind and can help ensure that your intended beneficiaries are not left with unintended legal complications.

1. Not Having a Will or Revocable Trust

There are many reasons why taxpayers die without a valid Will or Revocable Trust, whether they be cost, unwillingness to address their own mortality, or procrastination. Whatever the reason may be, it is more costly and cumbersome for your estate to be administered under the laws of intestacy (dying without a will).

In the absence of a Will or Revocable Trust, state laws determine who receives your assets, which may not be your desired division of assets. Following the formalities to execute a properly prepared Will or Revocable Trust is essential for a smoother transfer of assets to your intended beneficiaries.

2. Beneficiary Designations Don’t Get Updated Properly

Many individuals are under the impression that their Will or Revocable Trust determines who receives their assets. Although this is true for most assets, certain non-probate assets transfer outside of the Will based on the beneficiary designation form on file.

For example, life insurance death benefits, retirement plans (401k accounts, traditional and Roth IRAs), annuities, and transfer on death (TOD)/payable on death (POD) accounts are assets that transfer at death to the beneficiaries listed with those financial accounts.

The common mistake made is that, when you change or update your Will, you fail to also update these beneficiary forms. Whether it be due to a new marriage, divorce, additional child born, intentional omission of a child, or a trust put in place for a child, these beneficiary designation forms need to be updated right along with any changes to your Will so that the accounts all transfer properly and equitably to your intended beneficiaries.

3. Placing a Child on an Account Title as a Joint Owner/Tenant

Many older individuals will put one of their children on a bank or investment account as a joint owner for them to assist in writing checks or making investment decisions. This sort of ownership is typically done as joint with rights of survivorship (JWROS). There are a few concerns with this structure.

First, it is important to note that upon the account holder’s death, the balance of the account transfers immediately to the surviving joint tenant. This may result in an unintended division of assets, whereby one child receives more than what was intended.

Second, placing a child on a financial account as a co-tenant also subjects the account to the potential creditors of that child.

A better solution to this problem is for the parent to sign a durable financial power of attorney to allow the child to sign checks and assist with financial decisions.

4. Not Considering All Ramifications of Establishing a Trust for a Child

The decision to have your child inherit their share of your estate “in trust” or “outright” is an important one. The decision may be different depending on the child’s age.

If outright is chosen, it is important to note that minor children would receive their share at the age of majority (18 in Washington State). If a trust is chosen, additional decisions need to be made as to who will be the trustee, when distributions are allowed and for what reasons, and when does the trust terminate and the remaining assets distribute outright to the child.

The trust vs. outright decision has many different aspects, including creditor issues, asset protection issues, cost of administration, income tax differences and estate tax planning considerations for the child.

5. Setting Up a Revocable Living Trust and Not Maintaining the Assets in the Trust’s Name

A Revocable Living Trust is a valid, alternative method of transferring your assets to your intended beneficiaries upon your death. Upon initial formation, individuals are good at seeing that all assets owned are re-titled into the name of the trust.

As years go by and assets are bought, sold, or transferred to new accounts, the diligence in maintaining proper titling is forgotten. The end result to this lack of diligence is that the individual dies with some of their assets named in the trust and some named outside the trust. This creates two distinct entities to administer at the person’s death: an estate and a trust. This typically creates additional cost that the individual was intent on avoiding through use of the trust in the first place.

6. Not Having a Plan for Your Significantly Sized Assets

If a single, large asset comprises the bulk of your estate, this can be difficult to divide or share among beneficiaries.

Typically, a single asset of significant size may need to be sold in order to fairly divide among beneficiaries. Either that, or beneficiaries may need to become partners with this asset. Although this may be intended, how this will be dealt with practically moving forward should be thought through in the estate planning process.

7. Married Couples Not Assessing Whether a Bypass Trust is Appropriate

A bypass trust strategy, whereby assets are funded into this trust at the death of the first spouse to provide for the surviving spouse, is an effective means of reducing the overall estate tax burden for a married couple.

On the one hand, a married couple could double the amount of assets that pass to their children free of any estate tax. On the other hand, this trust can create administration costs and be cumbersome and complex for the surviving spouse. Now that spousal portability has been made permanent at the federal level (not for Washington State yet), the need for this bypass trust needs to be evaluated in conjunction with use of the spousal portability. Therefore, if and when this sort of trust arrangement is appropriate should be well thought out.

Additional decisions will be needed relative to making this trust mandatory or discretionary at the death of the first spouse, when distributions will be allowed to the surviving spouse and for what reasons, who will be the trustee, and will the surviving spouse have the ability to appoint the ultimate disposition of the assets to others.

Questions to Consider

To keep you organized when it comes to protecting you and your family’s estate, we encourage you to consider the following set of questions. We can collaborate to ensure the right processes are in place and proper planning is executed to protect your estate and legacy.

1. Who currently has access to see and/or manage your bank accounts or investment portfolios?

2. Are your fundamental family documents current (including Wills, property agreements, long-term care plans, life insurance plans, etc.)?

3. Do we need to address estate tax planning based on newer tax laws?

4. Do we need to address long-term income tax planning based on newer tax laws?

5. Have transfers of wealth or ownership to other family members during your lifetime been documented clearly and executed properly as part of your overall estate plan?

6. Have you considered a philanthropy strategy, such as a private foundation or donor-advised fund, as part of your overall estate plan?

7. Does the next generation need education or communication on the estate plan?