Estate planning. It’s such a noble phrase. It conjures up images of passing on to your loved ones a lifetime of hard work and success—leaving a legacy. But the road to distributing your estate is filled with potholes that may hijack your good intentions.
Pothole # 1. Probate Court.
If you have a will, your estate will go through probate. And if you hire an attorney to settle the estate there will be attorney fees, sometimes referred to as administrative expenses, in the range of 5-7% of the value of the probate estate. On a one million dollar estate that could be $70,000 your heirs will not receive.
Some states have court costs for probate. Court costs are just a tax on assets of the deceased. I have a client who settled her uncle’s estate in North Carolina. She had to pay more than $6000 in court costs.
One way to reduce the assets that go into probate is to establish Transfer-on-Death (TOD) or Payable-on-Death (POD) designations for bank accounts and investment accounts. You name the person or persons you want to receive the money, just like naming a beneficiary on an IRA or other retirement accounts. Then at your death, those assets pass outside your estate directly to the individuals you’ve named. They do not go through probate. Some states allow you to do TOD on real estate or vehicles, but not all. Check with your local clerk of court to see if your state is one that does allow it.
Pothole # 2. Time delays.
A consideration is whether to use common probate or solemn probate.
Most of the time, common probate is used. It’s the easiest of the two forms. The executor provides the court with the last will and testament naming them as the person to settle the estate. No one else has to be involved. Potential heirs can request and receive copies of the will from the court but it’s not required.
The downside to common probate is the amount of time allowed for challenges. Sometimes it can be years. There have been cases of beneficiaries receiving their inheritances and then forced to give it to someone else who filled a successful challenge several years later. Probate is not final until the challenge period passes. An estate attorney told me about a disputed probate in North Carolina that’s been in litigation for 16 years. Even if there’s no dispute, the probate process can take 18-24 months.
If an executor thinks there is the possibility the will may be contested, then solemn probate may be the best option. All potential heirs, whether named in the document or not, are required to be notified of the date for a court hearing and receive a copy of the will. It forces heirs to contest the will right up front, or accept the document as written thereby giving up their ability to contest it in the future. That means solemn form probate can often be settled in a shorter amount of time, sometimes as little as 6 months.
The downside of solemn probate is the possibility of pitting family members against each other and damaging relationships to the point that it may take a long time, if ever, to repair. So, there’s much more to consider when choosing which form of probate to use other than how quickly the estate can be settled.
Pothole # 3. Public Record
Everything is public record when you are in probate court. Who gets the money? How do they get the money? How much? There’s a huge loss of control when you are in the court system because the court is in control, not you, not your family. And because everything is public record there are “courthouse scavengers” who hang around the court system looking for assets to pick up cheap or at a reduced cost from an estate being probated or from a divorce situation.
Pothole # 4. Blended Families
Love is in the air, even at older ages. Without proper planning, your assets could go to someone you don’t like or even someone you’ve never met.
Remarriage protection can be included in your estate plan. If the first spouse dies and the surviving spouse remarries, a well-designed estate plan can require the new person to sign a prenuptial agreement so your estate goes to your family and not someone else’s.
Also, you can build in lawsuit protections from a car accident lawsuit. Inherited IRAs may or may not be creditor protected. People move from one state to the other and the laws change. So, it’s a good idea to review current regulations on a regular basis.
Pothole # 5. Rule Changes
Just because something is a law right now doesn’t mean it will be the law in the future. Legislatures can change the law or a different political party with a different agenda that may win control of the legislature.
Pothole # 6. Adult Children
Some adult children are their own worst enemy. They may be spendthrifts or the money you leave them may not mean much because they didn’t work for it, they don’t have anything invested in it. They may squander their inheritance, and in a year or two it’s gone. An estate plan can require that the adult child receive money over time, for example, as monthly payments. They may still blow the money, but they’ll blow it a little at a time rather than all at once.
Pothole # 7. Hidden Trustees
When your estate planning is completed, don’t stick the document in a drawer. Read it! Is it exactly the way you explained it to the preparer? Are there some extra items you didn’t talk about?
According to estate attorney Stephen Andrew Jackson, some lawyers have placed themselves inside your estate plan as the successor trustee after you’re gone and you don’t realize that it happened. They don’t tell you. You believe the person you chose is going to be your successor trustee. But the law firm or lawyer has inserted themselves in the fine print, naming themselves as a ‘Trust Adviser’ and then later refer to the trust adviser as the successor trustee so you don’t see their name listed in the trustee section. If you don’t know what is happening, after you’re deceased, it’s too late to fix it and too late to modify it, meaning part of your estate goes to pay the successor trustee/lawyer/law firm rather than going to the ones you intended to have that money.
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