A key to a successful estate plan is to learn from the mistakes of others. Unlike many other areas, you don’t have a second chance with an estate plan. The major estate planning mistakes are committed often, because so many people don’t learn from the mistakes of others who went before them. There would be very few problem estates if we learned from others’ errors. So, try to avoid these pitfalls that have snared others many times.
Selecting the wrong executors and trustees. Your plan is only as good as the people who implement it. When they aren’t competent, don’t pay attention to details, or decide to pursue their own interests, disaster can ensue.
The latest case involves the Walt Disney estate. Disney passed in 1966, and his youngest daughter died in 1993. He left his wealth primarily in trusts. The share for his older daughter and her children hasn’t had problems. But the younger daughter’s trust has had numerous problems and litigation.
The principal was to be held in trust for the grandchildren and dispensed to them in stages as they reached certain ages. But the trust gave the trustees discretion to withhold the principal distributions and continue to make only income distributions to any of the grandchildren who don’t demonstrate “maturity and financial ability to manage and utilize such funds in a prudent and responsible manner.” This is a standard clause and usually is valuable.
The trustees made the principal distributions as scheduled to one of the grandchildren (now deceased) who had a history of substance abuse and other problems. The other two grandchildren were said by the trustees to have learning disabilities that made them unable to manage the money and also were suspected of being overly influenced by one of their stepfathers, long divorced from their mother. The grandchildren allege that the trustees didn’t make principal distributions because they don’t want to lose their $1 million annual salaries and that at least one was influenced by the grandchildren’s unwillingness to keep their money at his financial firm so he could reap continuing fees. It’s an expensive mess.
Football great Johnny Unitas’ estate is a similar story. Unitas and his son, John, Jr., ran a company together that basically licensed Unitas’ name and likeness. They had a shareholder agreement under which the executors of Unitas’ estate were to sell the company to the son in return for the proceeds of a life insurance policy. Unitas’ second wife and the other executors of the estate refused to make the sale, saying Unitas, Jr. took improper payments from the company and committed other deceitful acts. A court eventually awarded the company to Unitas, Jr., but the litigation continued after that.
This is a small sample of the problems caused by having the wrong people in charge of your estate or trusts. Don’t automatically default to the common selections of surviving spouse, oldest child, or estate planning attorney and accountant. Make the decisions very carefully or the rest of your plan won’t matter. Seek people who are honest, lack conflicts of interest, understand your objectives, and are competent. In many cases, having a group instead of one person can be better, although that didn’t help in these cases.
Failing to update beneficiary forms. Your will and trusts don’t control all your assets. IRAs, other qualified retirement plans, annuities, and life insurance all are controlled by the beneficiary designation forms you completed. Many people make a beneficiary choice when first opening these accounts or policies. Then, they don’t review it. Often they don’t remember clearly when they made the choice or who it was.
Cases abound in which someone was divorced or widowed, yet the former spouse still is named as beneficiary of a substantial IRA or other asset. In general, the IRA administrator and the courts are going to follow the beneficiary designation, regardless of what your will says or what the other facts are. On occasion, the children or the current surviving spouse convince a court to overlook the beneficiary designation, but that costs a lot of time and money. Be sure to keep a record of all your beneficiary designations and be sure they are updated.
Not having alternate beneficiaries. This is more important with IRAs and similar assets but also applies to your will. Something could happen to a beneficiary before he or she inherits. Or circumstances might be such that everyone agrees it would be best if someone else inherited the asset.
That’s when you need contingent beneficiaries. These are the people who inherit when the primary beneficiary (or beneficiaries) aren’t able to or choose to disclaim their inheritances. Without a contingent beneficiary, the asset could be thrown into the residuary estate. That would cause adverse tax consequences for IRAs and other qualified retirement plans. It also could cause heirs to argue over who was your intended contingent beneficiary, change the balance among your beneficiaries, and cause other problems.
Keeping the beneficiary designation up to date and naming contingent beneficiaries are especially important for people who have had two or more marriages or children from more than one relationship.
Appointing the wrong agents for powers of attorney. The late Casey Kasem, well-known as the voice of the syndicated American Top 40 program and of Shaggy in the animated television series Scooby Doo, Where Are You?, was in the news recently, and not in a good way. Before his passing, Kasem was infirm due to age and a degenerative illness. The children from his first marriage accused his second wife (now his widow) of isolating him.
Headlines were made when the children went to court and accused Kasem’s wife of having him transported out of state to an unknown location so they couldn’t have contact with him. The children apparently snuck into Kasem’s nursing home for an unannounced visit, and 48 hours later their stepmom moved him about 1,800 miles away. The children had been trying for about a year to have a court take away the stepmom’s power to make medical decisions, and the stepmom said the kids were a “toxic influence.”
The bottom line dispute seemed to be Kasem’s estate. Each side believed the other was trying to influence Kasem to cut the other out of his will.
When deciding who will exercise your powers of attorney, whether medical or financial, consider all the angles. Appointing someone who will be in conflict with others or who might pursue his or her own agenda likely will result in ugly court battles such as those involving Kasem. You might want to appoint a group of people who aren’t likely to collude against others.
Not telling others of your plans. You don’t want to pass around your will or other documents, because they’re likely to be revised. It’s not a good idea to have several versions floating around in different people’s hands. But it is a good idea to let your loved ones know in general what your plans are.
One reason is that this prevents surprises. A major cause of estate disputes is that someone was surprised about how assets were distributed or other decisions.
Another reason is that the more people know your general plans the less credible it is for someone to say that the will doesn’t reflect your intentions.
A third reason is that heirs need to take action after your passing. For example, beneficiaries must begin required minimum distributions from IRAs by Dec. 30 of the year after the year in which the original owner died. If they don’t, the penalty is 50% of the amount they should have distributed but didn’t. In a recent case, a man’s children were named beneficiaries of his retirement accounts but weren’t made aware of that until after the deadline for the first distribution passed. The IRS said it wouldn’t extend the deadline but would allow them to apply for a waiver of the penalty.
Not updating your plan. Every estate planner has stories of clients who failed to revise plans that obviously needed to be updated. People fail to update plans despite divorces, deaths of key beneficiaries, significant changes in their net worth, changes in the tax law, and other major life events.
An out-of-date estate plan often is worse than no plan at all. An obsolete plan could leave valuable assets to someone with whom you have no little or no connection.
Your estate plan doesn’t have to be perfect. But it is likely to be effective in meeting your goals if you avoid these frequent mistakes.