Sensible Perspectives

Estate Plan Mistakes You Can Easily Avoid

Posted by on January 26, 2017

Estate PlanEvery December I try to attend the Harvard Memorial Church’s Annual Carols Service. This year I was supposed to go with an old friend. I’ll call him Larry.

Larry and I had dinner in October to celebrate his 64th birthday. We made plans at the time to attend the Carols Service together. Four days later I received a call that he had died suddenly from a brain aneurysm.

Larry’s death affected me very deeply. In addition to being a world-class musician, he was one of the best people I ever met. Unfortunately, Larry made no plans for his death. This left me and his other friends and family to pick up the pieces.

I still don’t know if Larry ever made a will. Nor do I know if he would have distributed his estate in the manner chosen for him by the Commonwealth of Massachusetts. I do know that given more time, I would have encouraged him to make an estate plan and answer the difficult decisions while he still could.

Estate planning, in contrast to investment management, is exceedingly practical. No one really knows what the market will return next year. But death, like taxes, is inevitable. If you do not plan for it, then someone else will.

In this blog I will cover the issues surrounding dying with and without a will. Because you don’t know Larry, I’m going to use the examples of several famous people. I do so because, one, you’ll know who they are and, two, you’ll see how estate planning affects real people. In these examples I believe you’ll find people who, with just a little extra effort, could have saved their loved ones significant time and money.

What is an estate plan?

An estate plan is a fundamental element of a comprehensive financial plan. It does a number of things, including controlling the distribution of your assets when you die and designating someone to make financial and health decisions for you if you become incapacitated. (For a more comprehensive list of things an estate plan can do, read this article on the American Bar Association website).

If you don’t think you need an estate plan, you should know that you already have one. It’s just that someone other than you has written it.

If you think you’re fine because you already made an estate plan, you should be aware of several common mistakes that could make your estate plan operate substantially differently than how it exists on paper.

You have an estate plan whether or not you made it yourself

Everyone has an estate plan. Even though many Americans never make their own estate plan, they have one. When someone dies “intestate,” i.e., without a will, the intestacy laws of the person’s state of residence determine how their property is distributed.

Prince Rogers Nelson died in April 2016 at only 57 years old. Despite having a $300 million estate, he never wrote a will. Now it’s up to a Minnesota judge to decide how to distribute his estate among Prince’s six siblings. Complicating an already difficult situation is the fact that other potential heirs have surfaced, including a federal inmate claiming to be Prince’s son.

Intestacy laws vary among states. To see what sort of rules would apply in your situation, start with an internet search such as “[your state]’s intestacy laws.” If the results surprise you, get an estate plan. If they don’t, still get an estate plan, which is more than just about distributing assets on death.

So you already have an estate plan?

If you’ve gone through the trouble of executing an estate plan, congratulations. You’ve done the hard stuff of getting your financial life in order, answering some tough questions, and making the plan legally binding. Importantly, you’re not off the hook. Even if you make an estate plan, it may not actually operate the way you expect it to. Here are a few reasons why.

1. The plan can become stale over time

Imagine a person or couple who makes an estate plan and years later their circumstances change. Perhaps they move to a different state, have (more) children, or remarry. The old estate plan no longer applies to their current situation and, if implemented, could lead to undesired outcomes.

Whitney Houston executed a will before the birth of her daughter at a time when her estate was relatively modest. When she died in 2012, her estate had grown substantially and her teenage daughter, Bobbi Kristina, would inherit $20 million. Given the size of her estate and her daughter’s young age, Whitney might have updated her estate plan, holding some of the assets in trust for Bobbi’s benefit or simply distributing the estate more slowly over time. Her daughter died before her 21st birthday in an apparent drug-related drowning.

2. The plan is never fully implemented

This is surprisingly common. A plan is drafted and legally executed but for some reason, e.g., accounts weren’t retitled, beneficiary designations weren’t updated, the estate plan doesn’t work the way it’s supposed to on paper.

Michael Jackson’s estate plan called for funding a revocable living trust (a kind of alternative to a will that avoids probate). However, he never transferred the assets into the trust while he was still alive. As a result, his assets did not avoid probate and his entire estate (all $600 million) is currently going through a very public and probably very expensive court process.

3. The plan cannot be found after death

Even if you create an estate plan, it’s no good to your heirs if they can’t find it. In most states, if the will or (in some states) a copy of the will cannot be found, you will be treated as if you had died intestate and state law will govern the distribution of your assets.

Olympic gold medalist Florence Griffith Joyner was one of the fastest women of all time.  When she died unexpectedly in 1998, her family members could not find her will. Without a will to instruct it, the probate court treated her as if she had died intestate and it took four years to settle her estate.

Make a plan and revisit regularly

Failing to make an estate plan is simply adopting someone else’s plan for you and your family in the event of an emergency. Most people would be better off thinking through things themselves and setting down their wishes in an estate plan. If you don’t have an estate plan, seriously consider making one. Even if you already have an estate plan, commit to revisiting it regularly – at least every few years or when your circumstances change.