From time to time, we like to go over why having a complete, up-to-date estate plan is so important. We hope this article and provide you with valuable information to for yourself and your family and information that you can pass along to friends and family who, for whatever reasons, haven’t created an estate plan yet. So, here are five common estate planning mistakes to avoid.
1. Not having a plan. Every state has laws for distributing the property of someone who dies without an estate plan—but not very many people would be pleased with the results. These are called the laws of intestate succession. State laws vary, but generally they leave a percentage of the deceased’s assets to family members. Non-family members, like an unmarried partner, will not receive any assets. Step-children will also not receive any assets. It is common for the surviving spouse and children to each receive a share, which often means the surviving spouse will not have enough money to live on. This is especially an issue with blended families. Learn more about Arizona’s laws of intestate succession. If the children are minors, the court will control their inheritances until they reach legal age (usually 18), at which time they will receive the full amount. Most parents prefer their children inherit later, when they are more mature. Most parents also want to have assets available to children for specific purposes like college, getting married or starting a business. This is why a revocable living trust is generally the vehicle of choice for asset distribution.
2. Not naming a guardian for minor children. A guardian for minor children can only be named in a last will and testament. If the parents have not created wills, and both die before the children reach legal age, the court will have to name someone to raise them without knowing whom the parents would have chosen. This can also cause family infighting about who should care for the children. None of this is in the children’s best interest.
3. Relying on joint ownership. Many older people add an adult child to the title of their assets (especially their home), often to avoid probate. But this can create all kinds of problems. When you add a co-owner, you lose control. Jointly-owned assets are now exposed to the co-owner’s creditors, divorce proceedings and possible misuse of the assets, and the co-owner must agree to all business transactions. You are also subjecting the co-owner to any potential liability claims that could arise from the property. There could be gift and/or income tax issues. And if you have more than one child but only name one to be co-owner with you, fluctuating values could cause your children to receive unbalanced/unintended inheritances.
4. Not planning for incapacity. If someone cannot conduct business due to mental or physical incapacity, only a court appointee can sign for this person—even if a valid will exists. (A will only goes into effect after death.) This person is called a conservator. The court usually stays involved until the person recovers or dies and the court, not the family, will control how their assets are used to provide for their care. The process is public and can become expensive, embarrassing, time consuming and difficult to end. A better option is to create a trust or special needs trust that can have the person you choose and trust to manage the assets on behalf of the incapacitated beneficiary.
Giving someone power of attorney as a way to avoid the court process can be risky because that person can do anything they want with your assets with no real restrictions. For this reason, a living trust is often preferred for incapacity planning. With a trust, the person(s) you choose to act for you can do so without court interference, yet they are held to a higher standard as a trustee; if they misuse their power, they can be held accountable.
Someone also needs to be given the power to make health care decisions for you (including life and death decisions) if you are unable to make them for yourself. Without a designated health care agent, you could be kept alive by artificial means for an indefinite period of time. (Remember Terri Schiavo? Terri’s story and information about the Terri Schiavo Foundation can be found at http://www.terrisfight.org/.) The exorbitant costs of long term care, most of which are not covered by health insurance or Medicare, must also be part of incapacity planning. Consider long term care insurance to protect your assets.
5. Not keeping your plan up to date. Every estate plan is based on the personal, family and financial situations, and tax laws in effect at the time it was created. All of these will change over time and your plan needs to change with them. It’s a good idea to review your plan every couple of years or so and make sure it still does what you want it to do. Your attorney will let you know when a tax law change might affect your plan, but you need to let your attorney know about other changes that could affect it. It is also critical to review and amend your estate plan after major life occurrences like having more children or a divorce. If you have more children, you want to be sure that they are included in your estate plan. If you divorce, you probably want to change your estate plan to exclude your former spouse.
An attorney prepared custom drafted estate plan can help you avoid all of the issues mentioned above. We prepare flat fee estate plans designed to fit any budget. Please call Abigail Neal at (480) 699-7992 today to get started.
Learn more about estate planning.