The 10 Most Common Estate Planning Mistakes

Hi, my name is Joseph Girard. I’m an attorney practicing in California. I have offices throughout the state and have focused my practice on a commonly misunderstood area of law. I work with estate planning; a combination of financial planning and legal jargon that tends to confuse many people. What I do is help people avoid probate, conservatorships and the federal estate tax. These are the main problems that can happen to individual’s estate, and they all have very expensive ramifications. Generally, when I sit down with a client to discuss their particular estate, we spend 5 to 10 percent of our time talking about the solution and the other 90 percent of the time discussing problems they were unaware of. Unless people understand that they have a problem, they cannot seek solutions. Over the past ten years, I have discovered there are 10 most common, and most severe, mistakes that people make when planning their estates. I would like to give you the benefit of my decade of experience and review them for you now.

MISTAKE #1

The purpose of this information is to help you recognize areas of your estate that may have issues, and how you may take steps to resolve them. The first idea I will discuss is this: believing that if you don’t have a will, the government will take the assets of your estate and your heirs will be forced into probate court to get your estate back. Many people believe that terrible things happen if you do not have a will, mainly that “the government will take the assets of the estate.”  First of all, that’s a misnomer; the government doesn’t take the estate. It’s not the objective of the government to steal, although there are those who would disagree with that comment. Their objective instead is to decide the best, and fairest, way to distribute your estate. What this really means, is that if you die without a will, the state determines where your assets go. Now that sounds almost the same, but it’s actually quite different. If a person dies, they typically want their estate to go to their spouse if they’re married, and if they’re not married or their spouse has predeceased them, then they typically want it to go to their children. If they don’t have any children, then it generally would go to their nearest relative. So, even the state has a provision in the probate code that dictates what will happen to an estate. If there is no will, they will in turn give it to a spouse, children, or nearest relative, etc.  Oftentimes, this process does not happen in the way that you would want it to. 99% of the time, however, the particular state in which the decedent died will distribute the estate very consistently with the document or Will that they wrote or would have written had they had the time or opportunity. So, you see a duplication of effort. For example, California is a Community Property state. If a husband or a wife who has children writes a Will, typically the Will says “upon my death, I leave my entire estate to my spouse. If my spouse has predeceased me, I leave the estate to my children equally, if any of those children should pass away before I die, I’ll take their share which would have been theirs and give it to their respective children, which are my grandchildren.” This pattern is typical. If you don’t have a Will in the state of California, the government gives the estate to your spouse. If you are unmarried, then it goes to your children. If you don’t have any children, or if they are predeceased, it goes to their respective children. In other words, the way that most Wills are written in the state of California is also the way that the state of California distributes the estate if you don’t have a Will. So the concern many people have, that the government will take your estate, is generally invalid. The federal government may take the estate away, however, but not necessarily because you didn’t have a Will. They can do this for tax reasons, which we’ll discuss in a moment. The other common complaint is that the heirs are forced into probate court in order to justify or establish that they have the rights to the estate. Dying without a will, however, is not the cause of probate. I will discuss this later.

MISTAKE #2

Another common mistake, opposite of the first, is believing that simply having a will allows your estate complete protection. Just having a will can protect your estate for your heirs and allow them to avoid probate. Again, this is the reverse of the previous mistake. Estate planning should not begin and end with just a will. A will, in and of itself, does not avoid probate; it also cannot avoid the problems associated with conservatorship. Since a will does not take effect until you die, it does nothing to help with issues that may arise before you pass away. People can become incapacitated or incompetent and the Will has no effect over a person’s estate while they’re living. Consequently, you can end up in a conservatorship. It amazes me how many provisions are put in a Will regarding what should happen if a person becomes incompetent, and yet no one looks at the Will when this occurs. It has no legal effect at that point.

In my opinion, the primary purpose of a Will, and one that it is always used for when it is used appropriately, is to name a Guardian for your children. The issue with this, though, is that only young people have children young enough to require a guardian. And generally, only older people think to write wills, since they are the ones who think of death. When terrible things occur, though, and parents pass away while they still have young children—often, there is not a will to dictate who will take care of these children. Then, you end up with Guardians that are named by a court, and this may not be whom the parents would have chosen to care for their children. In my opinion, the major asset of a family is how, where, and by whom the children are raised. Parents typically have very strong feelings about what relative or what parent or what person they want to raise their children. And it’s interesting, because I will sit in conference with many of my clients who have specific ideas of who they do not want to raise their children. These people are often relatives, and they are exactly whom the court would give their children to. It’s just natural that a relative would be the court’s first choice, even if it may not be yours. This purpose of the will, to decide who would raise a child if the parents pass away, is often ignored and underappreciated.

MISTAKE #3

My third concern is with the idea of joint-tenancy. Many people believe that this is the best way to hold title to their assets. I believe, though, that it’s the worst. Many people, though, take title in joint tenancy. After buying their first home, realtors or escrow officers will ask a couple how they would like to hold title. Since they have not previously thought of this, many people take joint title because it seems easiest. This practice is also believed to be much more common—and a better idea—than it actually is. First of all, not everybody does it this way anymore. It is common enough, though, that this mistake is made by most new homeowners. And this habit spills over into stock purchases, savings and checking accounts, and other assets that you may invest in. Someone recommended it, so you figured it was no big deal to follow their advice. Many people also believe that if a problem occurs with this, they can fix it later. Well, the problem doesn’t even occur until after you pass away, or when another drastic event occurs. At this point, your decision is irreparable. The first issue with joint tenancy is that it doesn’t avoid probate. It will only postpone probate until the death of the other joint tenant. There’s a big difference between avoiding and postponing probate. Let me give you an example. Let’s say Mr. and Mrs. Jones buy their house, put it in joint tenancy, and then Mr. Jones passes away. Through a legal process known as operation of law, the interest of the deceased spouse transfers to the surviving spouse. The will does not do this, it’s because of joint tenancy and the consequential operation of law. So, Mrs. Jones, the surviving spouse, owns the property, only in her name. Even though Mr. Jones’ name may still be on the deed, it is irrelevant. It’s now the separate property of the survivor. This means that the survivor’s death will trigger probate. The house or whatever other asset will now get stuck in probate. If your desire was for the house to go to your children after the passing of you and your spouse, while avoiding probate, then joint tenancy is not the proper option.

The second characteristic of joint tenancy which creates a problem is the conservatorship or guardianship. These terms mean the same thing, but are used in different states. In a conservatorship, one or both spouses become incapacitated or incompetent. In other words, they are unable to carry out financial transactions. Consequently, the court takes over the management of this person’s estate. Deeds, stocks, bonds and other types of assets, if in joint tenancy, will require the signatures of both parties. This is not the case with joint savings or checking accounts. With these, either joint tenant can have access to these funds. In the event of a severe medical problem and tremendous medical expenses, the savings and checking account assets are going to be withdrawn very rapidly. After these funds run out, people look to selling stocks, bonds, rental properties, or even their own homes. However, if there are two names on those assets, you need to have to have two signatures in order to sell them. If one of the parties is incapacitated or incompetent, you cannot get their signature. So, you are forced to go to court, set up a conservatorship, and then you have the ability to act on behalf of the person unable to act for themselves. Joint-tenancy can lead you to this messy legal situation. As medical technology continues to keep us alive longer, one spouse often becomes unable to act for themselves before another. The financial world has yet to adjust to this situation. All that joint-tenancy does is increase the eventual likelihood of probate or conservatorship. You’re essentially doubling your chances of having to go to court.

The third negative characteristic of joint tenancy is that it allows two independent estates, that of husband and that of wife, to merge into one. This often causes it to become a taxable estate when the two were not taxable on their own. Smaller estates cannot be taxed. But, if two moderately sized estates are merged together upon the death of one spouse, the estate becomes taxable by the IRS in the event of the surviving spouse’s passing. This tax can begin at 45% and increase to as much as 47% of your estate. Some people believe they will be able to do quick financial planning after the death of their spouse, but in this event it’s usually too late. In the case of joint-tenancy, the estate has already shifted over to the ownership of the surviving spouse. I often become frustrated meeting with clients in this situation, for I must tell them that nothing can be done to help their cause.

The last two issues with joint tenancy have to do with passing assets from parents to children. Many people ask if it is possible to simply add other names to the joint-tenancy, and yes, this is possible. However, it has serious consequences people often do not consider. First off, one is not allowed to give away more than $12,000 in one year without violating the gift tax. The only exceptions to this rule are charities and spouses. Violating this law forces you to file a gift tax return explaining what you have given away and pay a rather steep tax. The tax also increases depending on how much over $12,000 your gift was. So, if you add your child’s name to your assets, and half of the value of the asset is over $12,000, you have violated the gift tax rule. Many people think they can get away with doing this, for they haven’t really “given” their child anything. Usually, though, the government does not notice this mistake until the passing of someone named on the asset. The longer the government waits to catch you, the more interest on the tax accrues, so you or your heirs lose even more money. It is also simpler to deal with this matter once you have passed. Frankly, a person who is no longer living is not likely to put up a fight.

The final joint-tenancy issue that I will discuss is known as liability exposure. If you put your assets in joint tenancy with your kids, or add their name as to your assets, what will occur if one of your children goes bankrupt? Their business may have failed, and now what was yours is now half theirs. Some people think this situation is rather unlikely, but it is hardly the only issue with liability exposure. Perhaps this seems more tangible…divorce. The major discussion in a divorce is who gets what, in terms of children and assets. Let’s talk about the assets. If you put your assets in joint tenancy with your son, he now owns half of the asset which bears his name. If he divorces your daughter-in-law, she may feel that she deserves this asset as well. Now, let’s think about the liability exposure issue in terms of lawsuits. Your son or daughter may never go bankrupt or get divorced, but other accidents do happen. Perhaps they will get in a car accident, and it happens to be their fault. A lawsuit is served, and they are now being sued for a large amount of money. Unfortunately, your assets are listed under joint tenancy. This issue can also occur in reverse, where you have an issue with assets, and your child is listed as a joint tenant. Oftentimes, you may not have even told your child that they were listed on your asset, and now you are asking for their share back. They, however, may not be so quick to oblige. Also, if you leave your estate in joint tenancy with one child, that child will gain your estate when you pass, regardless of what your will may state. The assets will be given to the joint-tenant, and it is then their decision to distribute them. One never wants to think of this situation, but it is possible that a child may not follow your last wishes. This situation can go wrong in a million ways, including your child giving away part of your estate, causing the gift tax to go into effect. This is the IRS’ dream, fulfilled all because of joint tenancy.

MISTAKE #4

The Fourth major misconception is that probate is a tax. This is incorrect. Probate is a judicial process that occurs in court. It costs your local government or the taxpayers thousands of dollars to administer, and it generates money for an attorney and an Executor. Now, think about that for a minute. Many people go to executors and attorneys to discuss how to avoid this “probate tax.” First off, remember that it’s not a tax, it is a process. A tax is a revenue generating vehicle which may either be at a state level or a federal level. Probate generates income for attorneys and executors, so they may not be the best people to speak with about avoiding probate. In California, like many states, we don’t have an inheritance tax. There’s a federal estate tax for owning more than two million in assets, but that’s a federal tax. It has nothing to do with probate. Probate is a procedure in place to help your assets to be distributed after your passing. And remember, that writing a will doesn’t always help you to avoid probate.

And remember, probate should not be taken lightly. When a person’s estate goes into probate, the attorney and the Executor are paid a fee which is calculated based on the size of the estate. Also, size refers to gross size, not net size. There is a crucial difference. Let’s say that you buy a house worth $100,000, and you borrow the entire amount. Your net estate is zero, meaning you technically have nothing. When you die, however, it is your gross estate that will be used to calculate fees. Your gross estate, in this case, would be $100,000. This is the fair market value of your estate, period. In California, this would generate fees of over $50,000. It’s not in the estate, though, right? Well, that creates a major problem. Most people have some equity in the estate, but this doesn’t entirely solve your issue. So, who is going to handle these fees? An attorney isn’t obligated to handle a probate, and in this example, there’s no money available regardless. Typically, the state would handle it for you. This means that they will take care of you if you’re poor and have no assets. Also, some of you may be in states where the attorney does not take a percentage of the estate. In other words, by law, California and other states have the right to take a percentage. But, other states ask that the attorneys take a reasonable fee. Even a reasonable fee, though, when you’re still living often seems ridiculous. Now, you’re gone. The attorney is in a pioneer state, so you are going to probate. When you pass away he or she is going to charge a ‘reasonable fee” to distribute the estate. But, whether you charge a percentage or whether the attorney charges a reasonable fee, it’s expensive. That’s the point: Probate is a very expensive process, for you and for the government, and it’s not a tax.

MISTAKE #5

The Fifth major mistake that people make is thinking that a power of attorney will allow you to avoid probate. Let’s first understand the powers of attorney. There are three of them, the first one being a limited or special power of attorney. They call them different things, but they have the same meaning. A special or limited power of attorney gives someone power temporarily, in case you leave town and need your CPA to sign your taxes, for example. And as such, the CPA has the power to sign your tax return only on that date. His power expires.

The second one is called a general power of attorney. A general power of attorney was used quite often during war or when a husband or wife goes away from the other spouse and they’re going to be gone for a period of time. They will typically give the other spouse the power to sign their name. That’s called a general power of attorney. It doesn’t always have to be a spouse that’s the recipient of a general power of attorney, but it is the most common case.

The third type, and some states don’t have this yet, is called a durable power of attorney. This is much more powerful than the general power of attorney and allows you to do a number of things which create a problem. First of all, all three types of powers of attorney stop when you die. So, having them does not help you to avoid probate. The next best thing that they might be able to do is avoid a situation where one spouse becomes incompetent or incapacitated. But, a special power of attorney is useless here, for these things cannot be planned. The general power of attorney also expires when you become incapacitated. Durable power of attorney is the only one that endures beyond your incompetency. Now, that may sound like a solve-all, but it’s really not. The durable power of attorney is so powerful that many institutions don’t like it, and consequently, will not accept it. The reason no one will accept it is this: if you give your spouse the power to sign your name on your behalf, they can do so even in the event that you’re healthy.  If you get in a major argument, your spouse can sell your house. Many institutions see this as a liability, like the real estate office whom you may sue if this were to occur. Now, I’m not suggesting that a durable power of attorney is not a good document. It is a good document, but don’t rely on it. It’s the safety net under the tight wire, but it’s not a good plan in and of itself. Also, the power of attorney won’t avoid probate since it is useless when you die.

MISTAKE #6

The sixth major mistake I see is that couples often belief there is no need to begin planning the estate while they are both still living. They think the best time to start planning is when one spouse is deceased. The only problem with that is when one spouse passes away, you won’t have the benefit of doing any tax planning. Tax planning must occur when both people are still living, so that you don’t encounter issues with joint tenancy. Another issue is what’s called the “Sweetheart Will,” in which you leave your entire estate to one person. This can often create a taxable estate where there was not one previously. Even if you do not have a will or your properties in joint-tenancy, when the state takes care of your estate they will be likely to transfer it to your wife. This, still, can create a taxable estate which you can do nothing about.

Also, people generally rely upon the fact that one spouse will die before another. This is not always the case, though, for accidents happen. If you and your spouse were both victims of the same car accident, your estate would be left in shambles without the proper estate planning.

MISTAKE #7

The seventh major mistake that people make is with life insurance. It is important that you understand its characteristics before purchasing a policy. The problem that most people have with life insurance is they think life insurance avoids estate taxes. It doesn’t, in fact, life insurance proceeds are the number one revenue source for the Internal Revenue Service. Most people believe that if you buy life insurance, the proceeds will distribute automatically to someone outside the estate, and this will help you to avoid probate. That’s true. Life insurance can be payable to somebody else outside the estate, a son, daughter, or spouse. But, there’s still a tax issue.

The second point that is made is it will go to your heirs income tax free. That’s true, but it is not estate tax free. The point is, if the decedent had the right to change the beneficiary or cancel the policy or do all sorts of things which they call “incidents of ownership,’ then the proceeds will be includable in the decedent’s estate. So, if a person owns an estate worth $2,l00,000, upon his death it will trigger a tax of $47,000. You can’t afford this tax, so you buy a life insurance policy to solve the liquidity problem. All this did was create a bigger liquidity problem.

I’m not suggesting that you shouldn’t have life insurance. Quite the contrary, if you have a federal estate tax problem, there is no better way to pay the estate tax than life insurance. But you should not own the policy, your children should. If they’re old enough and sufficiently trustworthy, than this is the best option. You should put your money in what is called an Irrevocable Life Insurance Trust.

MISTAKE #8

The Eighth mistake I see tends to be one of the most common. People believe that a will creates a trust, so it avoids probate and consequently the federal estate tax. This document, the will that creates the trust, is called a Testamentary Trust. It’s a Catch-22 of a document. In order for the document to work, as you may have already figured out, you have to go into probate. In order for the document to be implemented, you must go to court twice.  And you have to go to court twice, once when one spouse dies, and again when the second spouse dies. So a Will that creates a Trust doubles your probate. This is not a Living Trust, this is a Testamentary Trust.

Frankly, you shouldn’t create a Trust within your Will. Don’t do the A-B Trust. A living trust makes much more sense, for you can actually avoid probate. Also, with a testamentary trust, you’re not going to avoid a conservatorship because the Will doesn’t provide for anything to occur while you are living. So, if you become incapacitated, it will not help you at all.  It also will not help to avoid being taxed. Most people try to bypass the probate and consequently the Will has no effect, since it cannot create the trusts without the probate process. Living trusts take the same amount of time and effort, and will help you to avoid all of the mishaps of a testamentary trust.

MISTAKE #9

The Ninth mistake that many people make is believing a living trust as “only for the wealthy” or thinking it will cause them to lose control of their assets. A trust is cheaper than going through probate, even though it may appear more expensive than just having a will. The truth is, though, this will can still trigger probate, which will not occur with the trust. The second concern is the loss of control. The purpose of the trust is so that your assets are no longer in your name after you die, and that your estate does not go into probate. The trust will not be controlled by another person while you are still living and capable. The trust is simply an artificial entity that has been created and will endure beyond your lifetime.

Another way that you can organize your estate accounts for second marriages and children from previous marriages. You can create what is called a QTIP Trust, a Qualified Terminable Interest Property Trust. This allows you to take a portion of your estate which, if left in your estate, would create a tax, and shift it over to your surviving spouse’s estate. The result of that is you can transfer twice as much using your exemption amount and a spouse’s exemption amount, and make sure that the end result is both halves end up in your kids’ estates. A living trust can give you as much power as you want, and it can give the surviving spouse as much control as you want.

Also, if for any reason you want to terminate the trust upon your death, you may. You can simply have your assets be distributed to the beneficiaries. A trustee, rather than an executer will carry this out for you. An executor gets their power from the court, and follows the direction of your will. This will be a long and tedious process, whereas the trust process can be carried out rather seamlessly. The trust “owns” your assets, so it will not trigger probate or a conservatorship. Also, do not be off-put by the trust “owning” your assets, for as long as you are living and able, you are the trustee and can manage all of your assets. And knowing that you will eventually pass away, you name successive trustees, probably your spouse first, followed by other close kin. With the living trust, you maintain control of your assets while living and you get to dictate exactly what happens to them after you die. Everything will go exactly where you wanted it to, without your estate shrinking due to probate or taxes.

MISTAKE #10

The last mistake I will discuss is the habit of assuming that all attorneys are knowledgeable enough to handle estate planning. You really should be careful in your selection of an attorney. Be wary of how long someone has been in practice, and especially how long they’ve been working with estate planning. Some attorneys may settle into estate planning when they wish to retire from litigation, but I did not come into the field in this manner. I was eager to practice in this area of law, but I refused to do so until I had some experience. In order to gain experience in this field, I worked as a trust officer for a major bank here in California for two years. This is not typical of people in my field, but I think that it gives me an advantage over others. Nothing can replace experience. Often, attorneys practicing in other fields think that they can handle estate planning for family and friends, but this is a mistake. Even one misplaced word can ruin an entire document and leave you with estate taxes, fees, and stuck in the process of probate.

One should also be wary of how much an attorney planning your estate will charge. The priciest lawyer in the field is probably charging unfairly, while the cheapest may provide inadequate services. You should look for an attorney who is reasonably priced while having experience.

Another factor in deciding attorneys is deciding which type of trust you would like to utilize. Now, this gets rather complicated, but basically you can do 3 different things. You can take that which belongs to the survivor and set that up in something called a trust or Survivor’s Trust. The surviving spouse can do whatever he or she wants with that money. The second type, the B Trust or Bypass Trust, can be set up in such a way as to not include these assets in the survivor’s estate when he or she dies.  At the same time, though, they have access, use and enjoyment to the extent that the deceased spouse would like them to have. For example, when I die my estate divides into two parts, and my wife has complete control over the survivor’s portion.  I have also set it up so that she has control over the decedent’s portion. The wording is very different, though, for if I word it the wrong way in my portion of the estate, it will be includable in my wife’s estate when she dies. These words are in the Internal Revenue Code in the Estate Tax Volume. Most people don’t know where they are and don’t know how to find them. My point is, it’s nothing magical or mysterious and we’re not playing games with the IRS. We’re doing exactly what the IRS said we can and we’re being very careful when we do it. You simply have to have enough experience in the field to plan your estate in the way that you would like.

So there you have it, the ten major mistakes that most people make when planning their estates. Hopefully I have been able to teach you something new, and now you can take the first steps to properly planning your estate. This is Joseph Girard wishing you the best of success in accumulating, preserving, and most importantly, distributing your estate properly. Thank you.