According to a recent study from the Center on Wealth and Philanthropy at Boston College, an estimated $59 trillion will be transferred from 93.6 million American estates between 2007 and 2061. However, there is far less clarity about where those assets are going since those currently holding them can't be bothered to update their estate planning documents or inform potential beneficiaries about their plans.
Little more than half (56%) of American parents have a will or living trust document, according to a Caring.com survey of adult children. Nearly one-third of parents (27%) do not have estate documents in place and 16% of adult children are unsure if their parents do. Of those that do have a will, only 40% have updated it in the last five years. Almost a quarter of adult children don’t know if their parents' will has ever been updated.
Even when parents do have estate documents in place, adult children are mostly uninformed about where the documents can be found and what is written in them. Over half (52%) of adult children don’t know where their parents store their estate documents, while 58% percent don’t know the contents of the documents.
“Wills and estate documents can be a touchy subject, but they are necessary conversations to have,” said Andy Cohen, CEO of Caring.com. “Too often the surviving family members are left not knowing where to find the documents, or worse, have to go through a lengthy and expensive legal process because no documents were ever created.”
Even when a will or a trust is in place, it isn't a given that the assets in it will be distributed smoothly. Attorneys and financial advisors say that wills and trusts are legal minefields that can keep families in courtrooms and at each other's throats for years if they aren't administered properly. We spoke to a team of financial and legal experts about estate planning and discovered that the following five estate planning mistakes are among the most common. If you want to maintain your legacy, but don't want to implode your family in the process, avoid these grave errors:
1. Not accounting for sibling rivalry
According to Nicholas Wooldridge, a Las Vegas attorney, nine out of ten times, the people fighting over the estate end up in worse financial shape, because they've given their attorneys a chunk of their inheritance. If the deceased's children didn't get along while their parent was alive, there is no reason to believe that parent's death will help patch things up.
“When a parent dies, lingering tension between the kids can rise to the surface,” Wooldridge says. “As a result, the estate’s settlement becomes a battleground for settling old scores.”
Mela Garber, principal at Anchin, Block & Anchin and head of the firm’s trust and estates services group, notes that she's seen numerous examples of sibling beneficiaries taking each other to court when the will or trust distribution is unequal, usually because one of the children was closer to the deceased parent than the other.
“After the parent dies, I see litigation between the siblings saying one pressured the parents to give them more money,” Garber says. “Kids equate money with love, and when the asset distribution is unequal, they feel less loved. That hurts, and that can trigger litigation.”
The easiest way to remedy that situation is to discuss estate plans with your children before you die, but that isn't always desired. Garber notes that most of her clients, out of practicality, avoid that conversation and say, “I'll be gone, it's not my problem.” However even a little explanation goes a long way.
“The ideal situation would be if the creator of the document, whether it be a trust or a will, could have a conversations with the family members to explain what their wishes an desires are,” says Tom Six, a wealth management strategist for RBC Wealth Management. “Sometimes, it makes sense to have distributions among the beneficiaries that are equal, and other times, you want to have the ability to give more to one beneficiary than another if one has financial resources.”
But not every situation is so ideal. In cases where the family dynamic is too dysfunctional to accommodate a family meeting, Garber suggests a letter from the parent explaining any imbalance in distributions. She also recommends creating a list of personal items and indicating specifically who will get jewelry, art or anything else of even sentimental value. If that doesn't work, a will or trust should have contingencies for selling those items and dividing the profits or -- in a plan Garber has implemented before, holding an auction between the competing parties in which the winner gets the item and the loser gets the money bid. However, that somewhat undermines the integrity of the estate plan.
“I tend not to favor situations where, when parties disagree, there's an auction or assets are divided by a certain percentage,” Six says. “I think it's the right of the person who created this legacy to dispose of it the way he or she pleases, and family dynamics shouldn't affect that.”
2 Unexpected surprises.
“One of the big issues I've seen and that is subject to litigation is the way that the estate tax apportionment is either written in the will or omitted,” Garber says. “The will would say, for example, 'I give my house to my daughter, I give this brokerage asset to this person,' and the estate taxes on these items are paid out of revenue. I've seen [situations] where the revenues, the leftovers in the estate, are not enough to cover the estate taxes on the items distributed.”
This is typically an issue for high-income families, but it's a problem that can also crop up if the deceased owned property whose value has increased significantly during his lifespan (such as a brownstone in a suddenly popular neighborhood or farmland in a fast-growing county). If unresolved, the estate may be forced to sell bequeathed assets to cover estate tax. It also doesn't help is the deceased leaves a large gift to someone before he or she dies and either doesn't pay the gift tax or lets it eat away at his lifetime gift allowance.
“From personal experience, I've seen a person who was not a spouse receive a gift from the decedent -- it was his girlfriend,” Garber says. “Of course, the spouse did not know about it, the girlfriend received the gift and the estate ended up paying gift taxes on that gift, so the wife ended up paying the tax on the gift the girlfriend received.”
That's unpleasant, but life is filled with those kind of unpleasantries. It's one thing to find out the deceased has someone on the side, it's quite another to discover that he's had an entire family with that person.
“If somebody has kids, the family doesn't know about out of wedlock, I would highly recommend that provisions be made in the will for that child,” Garber says. “It is very hard emotionally to find out that there is another child in the family and, financially, some wills may not name a child but the child has rights and may sue the estate. If possible, clean it up, and address it before the will is done.”
The answer here is to cut off surprises immediately. Ideally, you'd have a discussion with family members before you die, but realistically this is something you'd likely have to spell out specifically in a letter and certainly in the will or trust. Oh, and make sure your advisor, attorney or trustee has knowledge of it.
“List everyone who is part of your family, list your friends so there is no gray area as to what your intent is so there's a clear understanding of why and non-family member is getting this expression of your appreciation,” Six says. “If the family dynamic is such that it is not conducive to a discussion ahead of time, then it is dependent upon the client and advisors to make sure the document delineates as much as possible why assets are distributed as they are.”
3. Letting your plan lapse
Are you forgetting certain details, like that divorce and remarriage or that son you disinherited? They seem hard to miss, but they're easy to overlook when you don't update your will for half decades at a time.
When those big changes in family life occur, not accounting for them in your estate planning leaves your legacy up for grabs. If you thought a divorce, a remarriage or blending of families was tough during life, the scrum that can follow after your death if you don't address your specific wishes can be infinitely worse. You're going to want to shift everything into a trust in this situation just to shield everyone from potential legal repercussions and to make sure your assets go where you want them to.
“Children, or other successors, left outside the wall of inheritance don’t have anything to lose by challenging their exclusion,” Wooldridge says. “The situation just gets worse in blended families.”
Please don't do this.
Maybe you want your spouse or child to be part of the process. However, if they don't have the time, patience and acumen to handle the responsibility and liability that come with trusteeship, there's no need to name co-trustees and add further stress to an already trying time in people's lives.
The two-headed approach may work in some situations, but there's a reason why most teams only have one head coach or manager. These folks are employed to make swift and decisive decisions. It's tough for a trustee to do so when he is squabbling with a counterpart.
“Even if two people get along on 99.9% of matters, that one-tenth of 1% will lead to a problem,” Wooldridge says.
5. Undue influence
Yes, a personal caregiver can look out for your loved one in their waning days and take some of the responsibility off the family, but some caregivers can also work their way into estate plans though less-than-honest means.
The end of a person's life is an incredibly fragile time for everyone involved, but Wooldridge notes that shifting end-of-life care to one person opens the door to elder abuse for personal gain. The solution to this problem, in Wooldridge's view, is simple: If you care about your parents' assets, care about your parent.
"Undue influence is usually a by-product of apathetic children,” Wooldridge says. “Children with good parental relationships seldom fall into this trap.”