Martin Shenkman, CPA, JD
Martin M. Shenkman, CPA, JD, estate and tax-planning attorney based in New York City. He is coauthor of The Business Owner’s Guide to the Corporate Transparency Act. ShenkmanLaw.com
Having your will done doesn’t mean you’re done with estate planning. While the last will and testament is easily the best-known estate-planning document, it’s not the only important document…and having documents drafted is only one component of estate planning. In fact, some of the most common and potentially costly estate-planning mistakes stem not from procrastinating about having paperwork drafted, but from misunderstandings related to the fundamental question, What is estate planning? Our Bottom Line Personal expert and estate-planning attorney Martin M. Shenkman, CPA, JD, explains the five biggest mistakes to avoid…
When people think about estate planning, they almost inevitably focus on planning to pass their estate to their heirs when they die. But a key component of estate planning—in fact, arguably the most important component—is planning for the remaining years of your life.
If your estate plan fails to adequately protect your assets while you’re still alive, not only might you end up struggling financially in your later years, you might have little or nothing left to give to your heirs when you do die, undermining whatever estate plans you’ve put in place. Unfortunately, people’s estates are at serious risk as they age—scammers, unscrupulous caregivers and other crooks often target this demographic’s savings.
What to do: When you start to get deep into your retirement years, consolidate your investments and savings with just one or two financial companies to reduce the odds that you’ll become a victim of elder financial abuse. Missing money is much more likely to be spotted when there are only a very small number of accounts to track. In addition to doing so yourself, ask your most trusted friend or relative to monitor these accounts for any sign of potential theft or other problems—having this extra set of eyes on your accounts can help keep your money safe even if your financial acumen starts to decline as you age. Your financial companies likely can send account summary statements to this person at your request. If your estate-planning attorney recommends a revocable living trust, select someone whom you deeply trust to serve as the “successor trustee”—this person can step in and manage your financial affairs on your behalf if you become unable to do so for yourself.
Creating estate plans is what estate-planning attorneys do—but they do it best when they don’t do it completely on their own. Your estate plan is inexorably intertwined with your financial plan…and your income tax planning…and potentially with your insurance decisions as well. One way to dramatically improve the odds that all of these elements of your financial life work together as intended is to ask all of your financial pros to work together when they set them up. Example: An estate planner set up a trust for a client…but that client’s financial planner titled the client’s accounts “payable on death” and “joint with right of survivorship,” structures that accidentally bypassed the trust, rendering the trust worthless. That error could easily have been avoided if the estate-planning attorney and the financial planner had been aware of each other’s work.
What to do: Authorize your estate planner, financial planner, tax preparer and your insurance agent to communicate and coordinate on matters related to your financial life…then follow up to confirm that they have done so. You might have to pay for a few extra hours of these pros’ time on occasion due to their interactions, but it’s worth that cost to obtain a cohesive financial plan…and to have financial professionals overseeing each other’s decisions.
Warning: One way to obtain coordinated planning is to work with a company that provides a range of financial services under one roof. But there can be a downside to this—if all of your advisors work for the same company, they might be predisposed to jump to the same conclusions and favor the same options rather than explore all alternatives, a flawed decision-making pattern known as “groupthink.”
If your estate plan is more than a few years old, there’s a good chance it’s no longer ideal even if you and your estate planner did everything right when you originally set it up. That’s because no estate plan can fully account for the changes that the future brings. In the years since your financial plan was created, your financial situation could have substantially changed…your family or your heirs’ families may have substantially changed…income tax or estate-tax laws may have substantially changed…and/or your trustees or executors may have died or experienced major life changes of their own. Result: Your estate plan might no longer be as effective and appropriate as it once was.
What to do: Ask your estate-planning attorney to review your estate plan every three to five years…or potentially sooner if you experience major life or financial changes.
It’s distressingly common for families to accidentally undermine their own carefully constructed estate plans. Some have trusts set up…but never take the steps necessary to put their assets into those trusts. Others fund their trusts properly…but trust beneficiaries fail to carefully follow those trusts’ asset-distribution rules, leaving trust assets unnecessarily vulnerable if an heir is later sued, divorced or burdened with major debts. Example: A couple created a trust with their daughter named as beneficiary. Many years later, long after the parents’ death, that daughter was taking money out of the trust whenever she needed it, rather than according to the trust’s distribution rules. She also was allowing her grown son, who lived in a different state, to drive a car that was titled and insured in her name—very likely in violation of the terms of her insurance policy. If that son had caused an accident with her car, this woman’s assets could have been targeted in the resulting lawsuit—and because she wasn’t following the trust’s distribution rules, the assets in the trust would have been vulnerable.
What to do: When you ask your estate-planning attorney to review your estate plan, also ask him/her to confirm that you and your family are properly using the estate-planning tools that you have in place.
As you’ve probably heard, unless Congress intervenes, the estate-tax exemption is slated to be slashed from its current level of more than $13.6 million down to approximately $7 million after 2025. Perhaps $7 million is still high enough that your estate is not at risk from estate taxes or perhaps it isn’t…but either way, it would be a mistake to create an estate plan based on the assumption that $7 million will be the exemption level. When it comes to Washington tax policies, what’s currently expected to occur isn’t always what will actually occur. The truth is there’s no way to know what estate-tax changes will or won’t occur before your estate passes to your heirs.
What to do: If your estate is of sufficient size that estate taxes could potentially become an issue, tell your estate-planning attorney that your priority is not to select the strategy that offers the optimal results in only one particular estate-tax scenario. Also consider income tax planning. Say that your goal is to create an estate plan that will remain acceptable regardless of what Washington does in the future. Ask if a “spousal access trust” or “self-settled trust” makes sense for you, for example—these provide a compelling balance between estate protection and flexibility.
