Brian Decker has been serving retirees with retirement planning for three decades. In addition to helping address and mitigate dozens of retirement risks, as a true fiduciary, Decker Retirement Planning also helps with estate planning in an advisory capacity. We work in conjunction with our clients’ current attorneys, or we recommend estate attorneys from our network of professionals in many cities.
Here are some of the pitfalls we want to help you avoid.
1. Not Having a Will or Trust in Place
We get it. None of us want to think about our own mortality. But, this isn’t about you; it’s about your loved ones. If you die or become incapacitated, you don’t want to leave them in a terrible situation without the right, final documents.
The first thing you should know is that with no Will or trust in place, an estate always goes through probate, which means a judge decides what happens to all your assets, and it’s all public information. This is a costly, lengthy process for your loved ones to go through, and it can cause a lot of emotional turmoil, stress, and fights between family members.
We recommend most people structure their estate plan by establishing a trust and a pour-over Will to handle any assets not addressed by the trust. (NOTE: A Will is also necessary in order to name guardians for minor children, if that applies.)
The reason we recommend trusts is that most trusts transfer assets privately and immediately without the need for probate court. But, remember, even if you have established a trust, you have to fund it, a lesson publicly learned from Michael Jackson, who left a $600 million estate and an unfunded trust which ended up in probate court due to this avoidable oversight.
2. Living Wills, Healthcare Directives, and Powers of Attorney
Just as funded trusts with pour-over Wills may protect your assets from public probate court, powers of attorney and healthcare directives (also called living Wills) can protect you and your family should a healthcare disaster strike.
We’ve seen some real horror stories. Often, healthcare directives are glossed over because people think they will die quickly. But, sometimes it’s painful, complicated, and you’re so incapacitated that you can’t even talk.
Here is a real example: In Washington, one of our clients went into a coma. His wife called 911 and rode with him to the hospital. They asked for a healthcare directive or living Will, so she went back to the house, got it, came back, and handed it over. That was the last time she was consulted, because technically, legally the hospital had written, signed and dated instructions from the now-comatose patient on how he wanted his healthcare to be received! Doctors came, told her that her husband was kept alive artificially, and said to gather the family because they were going to pull the plug.
They pulled the plug. While 85%+ of the time people just pass way, he lingered. And lingered. His lips started to crack. His wife wanted ice chips for him. The hospital said, “Nope. It says right here no artificial hydration.” The next day he went fetal and started to moan in agony and pain. It was a horrible situation—a nightmare. She asked for pain medication, but there wasn’t any mention of pain medication in his healthcare directive, so she was denied.
This is why we want you to know that when it comes to spouses and both are still alive, we want you to use your power of attorney, not your healthcare directive.
But, we also want your healthcare directive to be written correctly, because it makes logical sense to use the healthcare directive / living Will once your spouse has passed away in order to protect your children or grandchildren from having to “pull the plug” on you—or watch you suffer. We want to make sure you have comfort measures including pain medication, nutrition, and hydration right in the document. (For some reason, these often aren’t in there.)
We also want to make sure succession is logical if your spouse has predeceased you—is it one child, perhaps with medical experience, that will make the decision about when to take you off life support? Or all the children collectively that have to agree?
Furthermore, what is the trigger that activates the healthcare directive in the first place? Believe it or not, we’ve seen, “When you are diagnosed with a terminal disease,” as the trigger far too often. You could live for years after a diagnosis! We’ve also seen, “When you can no longer recognize your spouse,” or “When your primary care physician says you are terminally ill.”
Don’t leave the trigger vague or open to interpretation, consider making the trigger, “When two medical doctors agree that you are being kept alive artificially, by machines,” with no chance of recovery. This takes the burden off of your family.
3. “Divide Equally” Boilerplate Language in Wills
Even the best estate plans with proper documents in place may contain this tiny clause that can cause huge family rifts: “All tangible assets are to be equally divided.” We don’t want to bash lawyers, but we’ve seen that one sentence far too often. It is divisive, and it causes major problems.
Tangible assets are your stuff, your cars, your artwork, your jewelry, your home, your furniture, your gun collection, your coin collection. Now, let’s say you have three kids who all play piano, but you only have one Steinway piano. Or five kids who drive, but you only have one Ferrari. You cannot divide a house or an automobile or a piano—or many other items, for that matter—equally.
At Decker Retirement Planning, we often recommend that your estate plan require the sale of any valuable property, or property desired by multiple family members which can’t be split fairly, with proceeds equally divided.
The sell provision means that if Johnny, who’s doing really well, says, “Hey, let’s keep the house. This is where Mom and Dad lived,” but the other two siblings, Sally and Mike, who aren’t doing so well, say, “No we need the money,” there is the option that if Johnny wants to buy the house, he can buy the house at fair market value while the siblings split the proceeds.
After major possessions like houses and cars are sold and proceeds split, rather than allow your estate attorney to throw in the “divide equally” boilerplate language, make the effort to check with your family members and find out what they really want while you are still around. Tell your kids, “Hey, kids. We’re not going to be around forever. If there’s something that you want, if you have got your eye on something, let us know, and we’ll make sure that that asset transfers to you.” You could even make it a game using colored sticky notes. You might be surprised to find out what each of your children really wants and values—like the camping gear you used on family vacations or the casserole dish that was used for favorite family meals.
A Will with a tangible assets distribution schedule, or written list divvying up possessions, can help the family avoid additional emotional pain beyond grieving your death. A distribution schedule keeps the sibling who is the successor, executor, or trustee from being seen as heartless if they say, “Let’s sell everything,” while another sibling is looking at Mom’s closet with her clothing at a very emotional period of mourning. It’s much better if you put it all in there in your document, so your children are just following instructions in selling or splitting up possessions.
NOTE: While you have the option to choose a corporate trustee as your successor in order to avoid problems between siblings, know that corporate trustees typically charge about 1% of the assets per year, even if they do nothing. On top of that, many corporate trustees require all the investments come in-house with them, so you may also be giving up performance. They’re charging you fees on the management of your portfolio, and charging you 1% of the estate that they have liability over. It is extremely expensive. We want to make sure you know about that before you go that route.
4. Outdated Documents
Per uslegalwills.com, of the estimated 37% of people in America who do have a Will, nearly 9% of those Wills are out of date. What happens then? With outdated estate documents, it’s a crap shoot for your beneficiaries. Indeed, poor planning can be very costly for heirs.
We can again look to the rich and famous for examples of this—like Philip Seymour Hoffman, who died in 2014. He had a trust, drafted a decade prior in 2004 for his son, Cooper, but appeared to leave the rest of his estate in a poorly-designed structure which left it open to public scrutiny. The mother of his three children (they had two daughters born after Cooper) was left with a huge estate tax bill—estimated to be anywhere from $12-15 million—because New York doesn’t recognize common law unions.
All of your documents should be reviewed at least yearly because family dynamics change, with births, deaths, divorces, marriages, and other life events taking place.
It’s important to understand that accounts like 401(k)s, IRAs, and insurance policies have their own beneficiaries listed, which must also be kept up to date, because these beneficiary designations take precedence over who you name in your estate documents.
5. Non-Blood Relations in Control
Second marriages often have children from both sides. Remember, when you get remarried to someone new, estate documents are critical to protect your children and ensure your final wishes for them are legally carried out. The seemingly best of intentions can change—drastically—after one spouse passes away.
At Decker Retirement Planning, we recommend you set up a revocable family living trust containing distribution instructions such that the trust becomes irrevocable when the first spouse dies. This helps ensure the surviving spouse cannot change the instructions or cut the deceased’s biological children out of the distributions, which unfortunately happens all the time.
Similarly, when discussing the distribution of the assets of an estate, keep the married spouses of adult children out of the conversations. The biological brothers and sisters understand the family dynamics and can usually come to agreement if their unrelated spouses are not involved.
6. The “Lottery Effect”
Large lump sums of money can often destroy the people who receive it, a fact often glossed over in estate planning. Often, people think that leaving a large inheritance will make everything okay for their heirs, when sometimes the opposite may be the case. Dr. Jekyll truly becomes Mr. Hyde when it comes to money. We’ve seen people that are very upstanding citizens, responsible in their positions at work, husbands, fathers, wives, and mothers become totally different people when large assets were distributed to them as one lump sum.
Typically, there are three parts to someone’s estate. The retirement assets like IRAs or 401(k)s are not generally part of the Will or the trust; instead, they are delivered over to designated beneficiaries by financial institutions when presented with the death certificate and a valid driver’s license. A trust usually encompasses all the rest, and there is typically a residual estate that’s handled by the Will, so upon the death of the last of the two spouses, the pour-over provision of the Will takes the residual assets and puts them in the trust.
Now, the estate is no longer subject to probate, because the Will swept everything not in the trust into the trust. The people have died, but the trust hasn’t died, and the assets in the trust could potentially be delivered in one lump sum to the heirs.
So, what is this “lottery effect?” As an example, let’s say mom and dad left $5 million to their only child, Billy. The lottery effect looks something like this:
- Billy’s wife says, “See ya!” and takes half the money and splits.
- Billy quits his job.
- Billy spends through the entire estate in five years.
Because of the lottery effect, we recommend staggered distributions for large estates, which have one to three children who are going to inherit. For instance, the heirs receive the first third upon death, the second third after five years, and the final third 10 years after the date of death. In this example of a three-tiered distribution, the heirs are most likely going to spend the first distribution frivolously. They will thank you to heaven and back that you were wise enough to give them a second (and a third) chance later.
Don’t put your beneficiaries in a bad situation because you put this off or don’t want to do the work on your estate plan. Bite the bullet, and do it now. It may seem time-consuming and painful to get the Wills, powers of attorney, trusts and all the estate planning documents you need put together, but it is worth it for your family’s well-being.
Conclusion
At Decker Retirement Planning, we’re not attorneys. We don’t practice law, but our years of experience have taught our financial planners what to avoid and what to include when it comes to the best interests of our clients—including their estate plans. We are a true fiduciary firm with a legal obligation to you. We have seen pitfall after pitfall and have successfully been able to work with people’s lawyers to avoid or fix boilerplate language, which could cause big errors and huge problems for you later.