10 Critical Mistakes in Estate Planning

Over my thirty-two plus year career, I continued to see mistakes in legal documents prepared by attorneys along with the failure to review and update these legal documents by their clients. No offense to the many "flawless" attorneys out there. These are the biggest mistakes that I often see:

1. Failure by the attorney to make certain that individual and joint assets are re-titled into the new Revocable Living Trust by the client.
2. Failure in drafting a Revocable Living Trust (mostly on purpose) that names a bank or corporate trustee.
3. Failure by the client to update their legal documents periodically.
4. Failure by the attorney, again on purpose, to force the creation of one or more Testamentary Trusts at the death of the grantors.
5. Failure to have clear language regarding beneficiaries ability to accept their share outright, or as a lump sum.
6. Failure in drafting a Revocable Living Trust that restricts all beneficiaries as if they were all addicted to drugs, having maritial problems, or are a spendthrift.
7. Failure to record a deed for real estate into the name of the Revocable Living Trust.
8. Failure by the attorney to make clear their fee and timetable to perform trust updates.
9. Failure by the attorney to obtain client signatures in all the proper places.
10. Failure by the attorney in not drafting a "see-through trust" when recommending the beneficiary of qualified plans and IRA's be the new Revocable Living Trust.

Let's take these one by one. 

Number one is very typical. The attorney drafts the document, then tells the client to re-title everything, yet nobody follows up to see that it is completed.

Number two in most cases is totally unnecessary for middle class families. Someone with a small estate has no need for a bank trustee. This should be a no-brainer by the attorney, but I have seen it often.

Number three is very common. Sometimes the grantor's beneficiary dies before they do and the Revocable Living Trust is never updated. Further still, the grantor may have wanted to change their beneficiaries, but did not get around to it.

Number four is a pure money grab by the attorney, in my opinion. The grantor paid the attorney for the Revocable Living Trust, then the attorney never explained and the client never read it to see that each beneficiary cannot have access to their share of the estate. Only the income from the principal and for their health and welfare. By adding Testamentary Trusts which are created upon the death of the last grantor, then this is what you end up with. This makes each beneficiary have to hire an attorney. You see, even though your parents left you a share, since you are three siblings for example, then all three have to hire their own attorney to draft their own Testamentary Trust. One attorney cannot represent three siblings. They are barred from doing so since each sibling has competing interests and different beneficiaries.

Number five is related to number four. There is no provision for an outright distribution or lump-sum distribution for beneficiaries when Testamentary Trusts are created. You do not need Testamentary Trusts if you pay beneficiaries outright.

Number six is where the attorney drafts the Revocable Living Trust so that all beneficiaries are considered spendthrifts or have marriage or addiction problems. Each family is different, but attorneys tend to treat all the beneficiaries the same when they draft legal documents, even if only one beneficiary has issues.

Number seven is related to number one. I see this a lot. The attorney tells the client to do a quit claim deed, but there is a breakdown in communication somewhere along the line and the quit claim deed does not get filed with the county where the real estate is located.

Number eight is where the attorneys gladly take the client's money to do the initial drafting of the Revocable Living Trust, but do not have a clear explanation about their fee to update the trust as the client's lives change, or tax laws change. Clients are left to wonder how much it costs for an update and typically blow it off and file it away in the "I'll do it later" category. For example, in Florida, the Revocable Living Trust, the Pour-Over Will and the Financial Powers of Attorney should all be witnessed by two people with their full addresses. Everyone, the grantor and the two witnesses signatures should also be notarized. You may have a problem in Florida if the trust does not have two witnesses and a notarization of everyone's signature. You do not want to find out when someone passes away about this issue. Do an Estate Planning Review!

Number nine is another no-brainer. Believe it or not, most attorneys leave the notarization up to someone who works for them in their office. This is ripe for mistakes. I have seen it numerous times where a signature is left blank, or not dated properly and where the grantor's date and the notary's date do not match. Plus, scribbling through something and initialing it, is a mistake. Never ever scribble through anything on a legal document. RE-DO IT!! The attorney that allows this on a newly created trust is not professional, but rather lazy, in my opinion.

Number ten can be costly. I had a client whose attorney let her husband name his Revocable Living Trust as the beneficiary of his IRA. His wife was a beneficiary, but there was also a corporate beneficiary. This failed to meet the definition of a "see-through trust" as far as the IRS is concerned, because a corporation is not a person. Therefore, you cannot "see-through it" to any person. As a result, the wife could not treat the IRA as her own and she had to take it all out in five years.

There you have my 10 Critical Mistakes in Estate Planning. Trust me, it is worthwhile to have someone like me take a look at your legal documents. Although, I am not an attorney, I am qualified by training and experience as a Certified Financial Planner® to review estate planning documents. By this I mean that I can read!

https://marianfs.com

Legal Zoom Effect

Did Legal Zoom replace estate planning attorneys? Not hardly, but they did make life difficult for them. I can remember about 10 years ago when attorneys were getting as much as $5,000 for a revocable living trust with all the ancillary documents. Today, I think most attorneys will charge somewhere in the $1,000 to $2,000 range for the same services. A lot of attorneys will not waste their time for anything less than $1,000. It is simply not worth it to them. Legal Zoom had a fee compression effect on attorneys' fees.

I have a story in my book, Meet Wally Street, The Reason You're Stupid about people who use online legal document preparation firms. What most people do not think about when they use these online legal document preparation firms is that all they are doing is part of the equation. Yes, they are creating the documents at a discounted price from most attorneys, but they are failing to consider a lot of factors in their decision. One of those being...

Is this going to work?

How do you know the documents that you created online are going to work in your state and county? You can never be sure until you actually try and use them in a legal situation. I cannot tell you how many times that I have seen people prepare legal documents via some online legal document preparation firm and fail to dot an "i" or cross a "t". Most all of the mistakes that I see are in two main areas.

1) They fail to give the trustee the right powers; and
2) They fail to update their legal documents due to their death or disability of their trustees, successor trustees or beneficiaries.

Let me give you an example to ponder as to why you should always use an estate planning and an elder law attorney to draft and update your legal documents. This is an example of a lady who only had a will that she created online and never updated it.

In this example, an elderly man's unmarried adult daughter passes away with only a will that she created online. Her beneficiaries included her elderly father in addition to her two siblings. At the time the will was written, the elderly father was in good health. Fast forward a few years and the adult daughter gets ill with cancer and eventually succumbs to it and dies. While she was dying of cancer, her elderly father goes into a nursing home with dementia. The elderly father had a will leaving everything to his three children one of which just passed away. Now what?

Well, since the elderly father is now not legally competent and he doesn't have someone appointed by the court to handle his affairs, then someone has to go hire an attorney for him to obtain his share of his adult daughters estate which will have to go this route to get back to the two living siblings. Since the elderly father is in the nursing home with dementia, he is burning through all of his cash and runs out of all his cash. He didn't believe in Long Term Care Insurance. He sure could use the proceeds from his adult daughter's estate to help pay his nursing home costs, but unfortunately he has to have a legal guardian or conservator appointed first.

Meanwhile, while that is going on, the elderly father suddenly passes away. So, now the money from the adult daughter cannot be paid until her elderly father's estate goes through the probate process. The nursing home had to advise the family that they needed an attorney to get him qualified for Medicaid towards the end of his life. Nursing homes cost around $6,000 to $7,000 per month. If Medicaid pays it, then they want their money back when they can get it. In this case, Medicaid wanted their share of the proceeds of the adult daughter's estate! You see the elderly father ran out of funds while he was in the nursing home and had to go on Medicaid for about a year.

Now, the other siblings who thought they were the beneficiaries of their sister's and their elderly father's estates are going to get nothing from their father's estate. It is all going to pay back Medicaid and the probate attorney who had to step in and clean up this mess. Plus, they had to use some of the money that they inherited from their sister to pay for the attorney for their dad's guardianship, then later his estate and his burial, too. He didn't believe in life insurance either.

The moral of this story is that there are several things that could have happened to preserve family assets. The adult daughter could have hired an attorney to update her legal documents with a revocable living trust and keep them updated. In that document, it would have provided for contingencies. Anytime someone gets a serious illness, then those legal documents should be reviewed immediately. In addition, an elder law attorney could have saved most of the elderly father's estate with proper planning in advance. Further, the money from the sister's estate could have bypassed her elderly father's estate entirely once he went into the nursing home and gone directly to the two remaining siblings instead. However, one-third of their sister's estate which should have ended up with the two surviving siblings was gone like the wind to Medicaid.

Like I say in my book, estate planning and elder law attorneys are worth every single cent you pay them. The same cannot be said for doing your legal documents online and never updating them.

Do you realize that I may have just saved your family tens if not hundreds of thousands of dollars by telling you this? And, you thought that I was just another financial advisor.

Routine Advice Makes for Difficult Choices Later

For the record, I am not an attorney and I do not provide legal advice.

I still meet people who have no wills, or worse wills that they have not updated in over a decade. Then, of course there are the people who have gone to an attorney's Living Trust Seminar. Generally, they get a Living Trust completed and think everything is fine. I am amazed to see these client's of local attorneys who have Living Trusts, but have not transferred any of their assets into their new Living Trusts. There is a reason for this that I will discuss later. Wills and Living Trusts that are properly designed and implemented are useful tools for the "what if you die" scenario. However, what if you do not die, but rather have a prolonged illness that requires Long Term Care?

The choices to pay for Long Term Care are simple.

1. Long Term Care Insurance.
2. Use your own money.
3. Public benefits like Medicaid or VA that you have to qualify to receive.

I dare to say that none of these choices are choices that anyone really likes. Most people do not buy Long Term Care Insurance, because of the costs. Most people do not want to use their own money to pay for Long Term Care costs and expenses, either. Finally, most people do not want to think of themselves as having to take handouts from the government. Nevertheless, these are the choices. You can plan for it, or not.

Sadly, if you do not have any Long Term Care insurance, then you have to use your own money, unless you can qualify for Medicaid or VA benefits. In order to qualify for Medicaid, you can have about $2,000 in cash. If you have more than that, then the state that you live in expects you to pay your own way.

Here is the inescapable truth: If you do not plan, then you will pay out of our own pocket.

With proper planning however, there are things that you can do to protect your assets.

A lot of older Living Trusts and Wills were what is known as "I Love You" trusts or wills. This means that the husband leaves everything to the wife and the wife leaves everything to the husband, then when they both die, everything goes to the kids. There may be reasons why leaving everything to your spouse could be a bad idea. Especially, if your spouse has qualified for Medicaid and is in a nursing home. Suppose the healthy spouse dies and leaves everything to the Medicaid patient husband in the nursing home! Yikes!!! This would be an irrevocable scenario where the family would receive nothing until after Medicaid was fully reimbursed.

As adult children, we assume that our parents have hired the right attorney, the right financial adviser and the right accountant and everything should be in order. I can tell you that in most cases, everything is not in order. The main reason is that the attorney wants to earn their fee and generally does not work with the financial adviser or accountant. The financial adviser does not want to have roadblocks like attorneys and accountants to get in the way of their advice. The accountant does have any time as it is since most people wait until the last minute to file their taxes. The last thing the accountant wants to do is chase down some attorney or financial adviser on April 15th and tell them what they are filing on behalf of their client. The point is that there is a strong likelihood that your parents financial situation is not in order like you may think. It is worth it to take a look see.

Of course, some people do not have attorneys, accountants or financial advisers at all, but are do-it-yourself-ers. These people go to Legal Zoom® for legal documents, online brokerage firms to manage their own money and they use Turbo Tax® to file their taxes. I can guarantee you these people have not properly planned for a prolonged illness.

We have a process to help you through this complex area of life. Instead of using an attorney to sell you a Living Trust, a financial adviser to recommend investments or an accountant to file your taxes, you might want to think about using someone like us to help you navigate the complexity of what happens if you or a loved one has a prolonged illness requiring you to spend all of your hard earn money. In conjunction with an Elder Care Attorney, we can help devise a plan to protect your assets.

Our next seminars are October 6, 2011 at 2 pm or 6 pm at the aloft Tapestry Park Hotel at the Southeast corner of Southside Blvd and Gate Parkway (across from Claude Nolan Cadillac) in Jacksonville, Florida. R. Kellen Bryant, Elder Care Attorney who is a member of the National Academy of Elder Law Attorneys, WealthCounsel, Medicaid Planning Systems and who is a VA accredited attorney will be the guest speaker. You can RSVP to 800-769-8516.