3 Common Pitfalls in Estate Planning—and What You Can Do To Avoid Them
Prepared by: Lisa Bianculli Hutter, Regional Wealth Planning Manager Mark Peterson, Senior Wealth Planning Strategist Monica Safapour, Wealth Planner
This Wealth Planning Update examines two public figures and their estate plans to discuss three common pitfalls in estate planning—and what you can do to help avoid a similar fate.
Unfortunately, not all estate plans are created equal and often poor planning can prove to be worse than no planning at all.
A Tale of Two Godfathers
Two examples from the entertainment industry: James Gandolfini and James Brown. Both men died with an estate plan in place, but one person’s plan resulted in a significant tax burden (for Gandolfini) while the other person’s plan led to a six-year court battle (for Brown). Despite significant resources and access to estate attorneys, these successful entertainers still died with estates that may not have transferred as well as they may have wished.
How can you help avoid a similar fate? The key is to recognize the pitfalls that are most common in estate planning and proactively address them as your plans are built.
Pitfall #1: Planning as a series of one-time events leads to a plan that is additive over time rather than holistic.
It would seem that James Gandolfini made a lot of great choices. He created and implemented an estate plan, and then amended it upon the birth of his daughter—both wise decisions to help secure his legacy. However, despite his planning, he still had two major issues.
First, his estate paid additional taxes that might have been saved. Tax clauses in wills are technical in nature and interpreted best by tax specialists. The tax clause in his will specified that estate taxes be paid from the estate prior to distributions to beneficiaries, including his spouse. Transfers to his spouse would ordinarily be tax-free, but since he specified taxes had to be paid prior to distribution, the amount his spouse received was reduced by the taxes to be paid. Therefore, the estate paid tax on transfers made to pay those taxes, causing a double or circular tax calculation. A significant portion of estate tax may have been avoided if the tax clause had been properly drafted. Ultimately all of the beneficiaries wound up with less money than what was likely intended. In fact, it’s possible that just one additional sentence could have made all the difference and saved Gandolfini’s estate significant tax dollars. He could have benefitted from a second set of eyes to review all of his documents with a tax and estate planning focus.
Gandolfini’s second oversight was in how his bequests were structured. This led not only to significant additional taxes being paid, but ultimately less protection for his heirs. He left multiple bequests outright to his friends and family, but segregated these gifts into trusts that were severely limited in duration. Perhaps he would have been better served by setting up long-term multigenerational trusts for beneficiaries. Such “legacy” trusts can extend transfer tax savings to the beneficiaries’ estates and are designed to leave more assets for their families in the long run. Leaving assets in trust, as opposed to transferring them outright, also provides asset protection against creditors, divorce, and even a beneficiary’s own spendthrift nature. Additionally, trusts can be drafted with flexibility to allow for an element of control by family members in many different ways.
Potential solution: Review your plans and make sure you have a solid grasp of all of your documents. A qualified second set of eyes to review your plan can prove invaluable. This holistic review is helpful in confirming that the totality of your planning aligns with your goals and objectives,and that your plan is free from inaccuracies while providing maximum protection from creditors and taxes.
Pitfall #2: Estate planning that fails to adapt to present realities, including changes to your family and life circumstance or tax law changes, can hinder your ability to meet your financial goals.
James Brown signed his estate plan prior to the birth of his last child and most recent marriage. This document was never amended, leading his widow to contest the will, and resulting in a lengthy and expensive six-year court battle (in addition to other allegations of undue influence brought by his other children).1
It is always important to periodically review your estate plan, but it is especially important in the event of marriage, birth, death or divorce to ensure your loved ones are covered. Perhaps Brown assumed his wife would receive distributions according to law but because the marriage itself turned out to be invalid, the law’s protections didn’t apply. Had he revisited his will, he could have added his new son and wife as beneficiaries or made clear his intent to omit them by executing a codicil. Confirming his intent would have made it very difficult for his widow to contest his will, potentially avoiding a public court battle, hundreds of thousands of dollars in court and attorney’s fees, and family unrest.
Potential solution: Your goals, objectives, and life circumstances change. Planning is not a one-time event; your estate plan should be revisited over time to make sure it continues to meet your evolving needs and reflects the latest tax changes.
Pitfall #3: Planning that is never implemented or followed is not a plan; a paper-based plan remains on paper.
Despite the pitfalls listed above, perhaps the worst estate plan is the one that is never implemented or not properly maintained. For example, too many people pass away believing they have a proper estate plan but without funding the trusts they spent time and money to put in place. This does not make their estate plan invalid, but creates significant additional work, incurs attorneys’ and court fees, and delays the administration of their estates. One of the major advantages of using revocable or living trusts is avoiding probate—a lengthy and public process in some states. Failing to transfer assets into your revocable trusts during your life will necessitate state-governed processes to transfer those assets.
Another potential misstep occurs when clients implement trusts and their corresponding transfers, but don’t comply with the trust structure over time. An example of this may include trusts that are irrevocable and include a home, installment note payments or terminating transfers at a certain date. Failing to abide by the form of ownership or structure of distributions can result in additional tax burdens or even the loss of a tax benefit.
Potential solution: Check to see that your written estate plan is fully implemented and respected over time. This involves coordinating the work of your estate attorney, accountant, and other advisors. A financial planner can help by reviewing your current plan, identifying unfinished tasks, working with you to close gaps, and helping you to maintain a complete and accurate ongoing plan.
Conclusion
The biggest factor to estate planning is proactively taking action. Building and maintaining a plan to transition your assets after you are gone can give you piece of mind that your assets are transferred in a way that is consistent with your goals and wishes. Failing to write up an estate plan, implement that plan or revisit that plan over time are pitfalls that can and should be avoided.
Learn from the mistakes of the two James; talk to your estate planning attorney, relationship manager and wealth planner to discuss your plan so that you don’t encounter any pitfalls.
Click here to get the complete report, Estate Planning Failures: A Tale of Two Godfathers
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