Avoid These Estate Planning Mistakes

I have an estate plan! What could possibly go wrong?

It is quite an achievement to execute a living trust. Weeks or maybe months of planning and consideration come together in a document’s signing ceremony that culminates in a properly prepared estate plan. However, the execution of a living trust is not the end of the process.

Many planners meet with their attorney and financial adviser to prepare an estate plan. For high net worth individuals, many have living trusts prepared to take advantage of probate avoidance, post-death control of assets and to achieve estate tax savings. They meet with their attorney a few times and usually, at the end of the process, they leave the attorney’s office with an impressive binder of documents. This is where, unfortunately, many planners stop the process. They do not fully fund their trust. An unfunded trust is like buying a house but never getting the keys.

Here are some estate planning mistakes you won't want to make

An estate plan is only as good as the job the planner does in funding the trust. Without proper funding, many of the benefits of a proper plan may be diminished, limited or lost altogether. Failing to fund a trust is a common and potentially costly or maybe even disastrous estate planning mistake. So, how can trust funding go awry? Here are a few ways.

A trust is a vessel. It needs to be filled up to work. Once a trust is established, the planner needs to re-title assets into the name of the trust.

  • For bank accounts, this can be as simple as signing a new signature card and delivering a copy of the trust to the bank.
  • Real estate should be titled into the trust by way of a deed-in-trust.
  • Insurance policies or annuities can be re-titled or, in some cases, it may be more prudent to make the trust a beneficiary or contingent beneficiary.

If the planner’s assets do not make their way into the trust, the trust terms will not have any effect.

Take, for example, a couple who are students in our Financial Matters class. We’ll refer to them as John and Sue. They have a large estate and two minor children. They just executed living trusts with credit shelter trusts so they can avoid probate, save estate taxes and provide for the care of their minor children upon the death of the second of them. John owns a parcel of real estate in his individual name. John should re-title the property into the name of his trust so that Sue can receive the benefits of the trust. If John fails to do this, the asset may pass according to intestacy or John’s will may create a result different from John and Sue’s goals.

Many attorneys will pair a living trust with a “pour over” will. This type of will transfers all of a deceased person’s probate estate into an already set up living trust. It is “insurance” against the failure to place probate property into a living trust. If John forgets to re-title his real estate into the living trust, the pour over will makes sure that the probate real estate makes its way into the trust. The only problem is that now Sue has to open a probate estate for John which means time and money they could have saved by properly funding the trust in the first place.

Smart planners will take a look at their current beneficiary designations and the way the property they own is titled and make sure it gets funded into the living trust. Planners who do not undertake this exercise or their loved ones, may be in store for a surprise down the line. In John’s case, he forgot that he and his father owned that real estate together when his father co-signed on the loan before John was married. When they took title, John and his dad were co-owners as joint tenants with the right of survivorship. If John dies, even if he has a pour-over will, the real estate will pass automatically to his father instead of to his trust, cutting out John’s wife and children.

Estate planning is more than just simple forms and documents. In our Financial Matters XLT sessions we dig deep into proper estate planning which requires a planner to think through many of the possible scenarios and to devise a plan that addresses the most common procedural traps. Anyone planning their estate should make sure to get the help from appropriate professionals to make sure that the job gets done right.

Over 100,000 Lessons from the Pros readers. Check out last week's issue.

Free Class