From time to time, it’s good to review why having a complete, up-to-date estate plan is so important. The following is quite basic, but the intent to emphasize the importance of starting to plan. So, here are five common estate planning mistakes to avoid.
1. Not having a plan. Every state has laws for distributing the property of someone who dies without an estate plan, but not very many people would be pleased with the results. State laws vary, but generally they leave a percentage of the deceased’s assets to family members. Non-family members, like an unmarried partner, will not receive any assets. The law of the state in which you die as a resident will generally control. In Michigan, your spouse will get your estate unless they are not the parent of your children. In that case, your spouse gets half, which may mean the surviving spouse will not have enough money to live on. If the children are minors, the court will control their inheritances until they reach legal age (usually 18), at which time they will receive the full amount. Most parents prefer their children inherit later, when they are more mature.
2. Not naming a guardian for minor children. A guardian for minor children can only be named through a will. If the parents have not done this, and both die before the children reach legal age, the court will have to name someone to raise them without knowing whom the parents would have chosen.
3. Relying on joint ownership. Many older people add an adult child to the title of their assets (especially their home), often to avoid probate, but this can create all kinds of problems. Wn you add a co-owner, you lose control. Jointly-owned assets are now exposed to the co-owner’s creditors, divorce proceedings and possible misuse of the assets, and the co-owner must agree to all business transactions. There could be gift and/or income tax issues. If you have more than one child, but only name one to be co-owner with you, fluctuating values could cause your children to receive unbalanced/unintended inheritances. It could lead to family arguments and law suits.
4. Not planning for incapacity. If someone cannot conduct business due to mental or physical incapacity, only a court appointee can sign for this person—even if a valid will exists. A will only goes into effect after death. The court usually stays involved until the person recovers or dies and the court, not the family, will control how their assets are used to provide for their care. The process is public and can become expensive, embarrassing, time consuming, and difficult to end. In Michigan, this is a guardianship proceeding.
Giving someone power of attorney as a way to avoid the court process can be risky because that person can do anything they want with your assets with no real restrictions. For this reason, a living trust is often preferred for incapacity planning. With a trust, the person(s) you choose to act for you can do so without court interference, yet they are held to a higher standard of conduct as a trustee. If they misuse their power, they can be held accountable.
Someone also needs to be given the power to make health care decisions for you (including life and death decisions) if you are unable to make them for yourself. Without a designated health care agent, you could be kept alive by artificial means for an indefinite period of time. Remember Terri Schiavo? Your health care agent is your advocate to make sure you get the care you need and want.
The exorbitant costs of long term care, most of which are not covered by health insurance or Medicare, must also be part of incapacity planning. Consider long term care insurance to protect your assets.
5. Not keeping your plan up to date. Every estate plan is based on the personal, family, and financial situations, laws, and tax laws in effect at the time it was created. All of these will change over time and your plan needs to change with them. It’s a good idea to review your plan every couple of years or so to make sure it still does what you want it to do.
Randall A. Denha, J.D, LL.M., is principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. He can be reached at (248) 265-4100 or by email at email@example.com.