Nobody wants to think about the inevitable ending. However, with adequate planning, the transition can be smooth for loved ones, creating a wonderful legacy. For example, let’s say Mary and John are married and have two children, Jack and Alicia. When Mary passes away, her assets would go through a court process (“probate”) before they pass on to her heir. This process is expensive, time-consuming and public. Setting up a revocable living trust is a solution. Here are some common mistakes made in estate planning that you can avoid in ensuring this is a smooth process:
Mary and John never did any estate planning. One day, they died in a car accident, leaving Jack and Alicia behind. They have died “intestate”. The court decides where their assets will go. In this case, it will likely be split equally between the children. But if the parents gave Jack a house during his lifetime, with the remainder of their assets going to Alicia but didn’t put anything in writing then Jack would still end up getting 50 percent of his parents’ assets, leaving Alicia upset and unhappy.
Dying with just a will
If John doesn’t want to leave his assets to Mary or the children, he can name a different beneficiary under the will. However, having a will does not avoid probate court. This means if Mary and John had a $500,000 house, their children could end up having to spend $25,000 just to transfer the house to them.
Owning real property jointly
Often a husband and wife, or parents and children own a title jointly. But if one were incapacitated, the whole property is locked. Nobody can sell or refinance the property. The whole asset ends up going to court, costing significant money and time.
Giving assets outright
Eighty-six percent of beneficiaries spend their inheritance within three years and this is especially true with young beneficiaries. If a person just turned 18 when he received the inheritance, which sounds more attractive – saving it, or buying a Ferrari?
Not having the right kind of trust
With minor beneficiaries, we often want to set up a “Lifetime Asset Protection Trust” to protect our assets for our children for the remainder of their lifetimes. Jack can get $20,000 once he finishes college or reaches 21, thus incentivizing Jack to work hard and complete his studies. Without this condition, Jack could be getting a huge amount of money as soon as he turns 18.
Not funding the trust properly
Eighty percent of trusts fail. A common reason is that the assets are never put in the trust. Think of your revocable living trust as a treasure box – if you don’t put any treasure in the box, then the box cannot protect those treasures.
Doing it yourself
It is very easy to get a trust online. But you don’t know what you don’t know. Eighty percent of trusts fail because people ultimately need to go to court if certain provisions or assets were not included, or the trustees lack certain powers.
Simply having a trust
Comprehensive estate planning includes not only a trust but also other important documents – a will, power of attorney, healthcare power of attorney, guardian nomination, etc. Each document serves its purpose working together to protect the family.
We don’t like to think about our own demise. However, not thinking about it doesn’t mean it will not happen. It is way better to plan ahead so that our family knows exactly what it is that we want when we aren’t around to advise.