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Avoiding the Worst Estate Planning Mistakes

By Bob Carlson on May 9, 2012

Taxes no longer are the main focus of estate planning, and they really never should have been. The broad goals of an estate plan should be to avoid chaos and discord among beneficiaries; to avoid or minimize probate; to protect assets from mismanagement by the children; and to protect assets from creditors and others.

Many estate plans, sadly, don’t achieve these goals. Often, estate plans fail to meet goals because the estate owner fails to take into account family dynamics. A good estate planner will learn about not only the financial profile of a client but also the family profile and maybe even rummage through some dirty laundry and the closet with a skeleton or two in it.

When an estate planner knows about these things, strategies can be implemented to reach the broad goals despite the family and personal issues. When an estate owner doesn’t disclose the family concerns or chooses not to deal with them, the plan usually makes one or more of the four worst estate planning mistakes.

Giving too soon. Many estate owners allow heirs full access to their inheritances when they become adults or shortly thereafter. Some give even sooner. The parents or grandparents reason that the heirs are adults. They can drive, vote, and join the military, so they should be trusted with inheritances. Others believe the heirs have shown themselves to be responsible and will be able to handle the inheritance.

Being mature and responsible is not the same thing as being able to handle a relatively large sum of money. Young adults, even mature ones, rarely think long term, or they might treat something given to them differently from the way they treat something they earned.

Some parents and grandparents say they aren’t concerned about what happens to their wealth. They are going to give the money to the people they want to have it. Whatever happens to the wealth is not their concern.

Yet, giving an inheritance too soon can be bad for the young person. The heir might believe that the money will last forever and neglect career opportunities or engage in some personally destructive behavior.

Damage from giving money too soon is highly probable when the young person has not been involved in discussions about money with the older generations and has not learned how to handle money. Parents and grandparents should realize that managing an allowance is not similar to investing an inheritance and establishing a long-term spending policy. Estate owners need to take care before giving a young person unrestricted access to wealth.

Giving too late. Some estate owners go to the opposite extreme. They won’t make lifetime gifts, no matter how financially comfortable they are, or discuss wealth or money management with the youngsters. This can create several problems. One problem is children or grand-children might not receive anything until they are nearing their own retirement ages. Receiving the wealth earlier, or at least being certain of receiving it, might have changed life decisions such as career choices, savings, and standard of living. More importantly, giving only through the will leaves the children to figure out the estate and what to do with it at the same time they are coping with their grief.

At a minimum, parents and grandparents should discuss their plans with the heirs. The heirs should be given some idea of what they will inherit, when they will receive it, and suggestions about how to handle it.

Too many controls. Some people like to give and retain control at the same time. The classic way is to leave wealth to a trust with controls and incentives. These trusts can be beneficial. They encourage young people to stay in school or hold jobs in order to benefit from the wealth. They also spread out distributions, so people get used to the wealth and how to manage it.

But the trusts also can go too far. An incentive trust might penalize an accomplished, diligent person whose passions do not include higher education or a high-paying job. Or the trust might be written so narrowly that it does not take into account a number of situations that might arise. Restrictive trusts also can breed hostility and frustration among the heirs as they get older and realize their parents or grandparents did not trust them to act responsibly at any age or until late in life.

Incentive trusts can be useful in some situations. But their creators must carefully consider the incentives and how the trust will be administered. An incentive trust generally should be a way of safeguarding assets until the heirs are likely to be mature enough to manage the money. It should not be a way to control people for life or be a substitute for imparting values during life.

Giving too much. Warren Buffett has said that his goal was to give his children enough money that they can do anything but not so much that they can do nothing. In some estates, the children receive the entire estate without real consideration of other options, including other family members or entities outside the family, such as charities.

If the children have done well on their own, it might be better not to give them everything. Or if the children simply are not responsible, they might be better off with a relatively small inheritance or one with controls.

When beneficiaries outside the family are considered and planning is done early enough, even the family members can benefit. For example, charitable contributions can be structured in ways that involve the heirs in the giving and teach them about philanthropy. Or heirs and a charity both can benefit from the same gift, as with charitable annuities and trusts.

Giving unequal amounts. There can be good reasons to give unequal amounts to children. Perhaps a child has done very well financially or one child might have demonstrated that he or she cannot be trusted with an inheritance. But unequal inheritances can create hard feelings toward the parents. They also can create animosity and jealously among the siblings. The situation can be more inflamed when there is a family business. Often, one or more siblings are not qualified to have a significant role in the business, or the parents believe that one person needs to be in control.

The problems in most of these cases can be minimized through communication and planning. Parents and grandparents need to make their plans known ahead of time. This gives everyone a chance to become familiar with the plan and allows for questions and discussion. It also gives a child or grandchild the opportunity to demonstrate that the plan is wrong.

Some estate planners recommend having social workers or psychologists help with the discussion, having the discussion moderated by the estate planner, and even videotaping the discussions.

Family dynamics are as important to an estate plan as taxes and any of the financial aspects. A good estate plan takes family issues into account and actually can benefit family members in non-financial ways.

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