Unintended Consequences: The twelve most common Estate Planning Mistakes

In its basic form, Estate Planning can be defined as the process of arranging, managing, protecting, and transferring both financial capital as well as human capital from one generation to the next. So that one’s family and other beneficiaries may enjoy and continue to enjoy the maximum benefit from one’s estate during one’s lifetime and after one’s passing or incapacitation. While simultaneously ensuring family value systems and principles are conveyed from one generation to the next.

Your estate is everything you own in your name, and your share of anything you own with other people (anywhere in the world). Your property and be real – meaning land or buildings or personal (i.e., jewelry or coin collection). Investments, life insurance policies, and money are property too. That means that everything in your own name will be taken into consideration when calculating any death taxes (inheritance tax/estate duty, capital gains tax, wealth transfer tax - depending on the jurisdiction).

Generally, people think that if you have a will and a trust, you have done your estate planning, that is the first mistake. Remember, estate/succession planning is always about the small and technical detail, plan for every thinkable scenario, and never assume anything.

Estate Planning is one of those areas we need to learn from other’s mistakes as we will not have the opportunity to learn from our own! 

In this article, we will work through the twelve most common estate planning mistakes, and they are:

• Thinking that by having a Will you’ve done estate planning
• Do Nothing
• Procrastination 
• Failing to finish what you start
• Not Updating
• Try to do it yourself
• Not planning for liquidity
• Choosing the wrong executor or trustee
• Leaving unclear wishes or ambiguities concerning to intentions or wishes 
• Making verbal promises 
• Forgetting to tell loved ones where your estate planning docs are
• Taking shortcuts/not planning for personal assets

Thinking that by having a Will you’ve done estate planning

For too many people, estate planning means getting a Will — and that’s a problem. 

Everybody should have a Will as Wills are essential documents. A Will is a document expressing your wishes concerning the distribution of assets to specific heirs and appoints guardianship for minor children. 

However, it’s essential to keep in mind that a Will is only a PART of an estate plan, and NOT an entire estate plan.

Our celebrity example:

Academy Award–winner Philip Seymour Hoffman was so worried that his children would turn into so-called “trust-fund kids,” that he chose not to create a trust and only to make use of a Last Will. When he died, his entire $35 million estate went to the mother of his three children. Hoffman’s erred in thinking that trusts would automatically create entitled or lazy trust-fund kids, cost his ultimate beneficiaries, as a high percentage of the estate was lost to tax and costs. A family trusts could have been customized and allowed for specific rules about when, how, and under what circumstances his kids inherited money, including a provision that the children must work.

Do Nothing

When a person dies without a will, it is said that that person died intestate. In most jurisdictions, that means that the state/government would decide how to divide your assets and who would inherit it.

That means that the deceased does not have any control of who will inherit from his/her deceased estate if s/he dies without a Will. This might lead to instances where someone may inherit even if the deceased may have never wanted those persons to benefit from his/her deceased estate.

Did you know: 

It is said that more than between 60% to 70% of people do not have a Last Will and Testament 

Our celebrity examples today are numerous, including:

Abraham Lincoln, 

Prince, 

Sonny Bono, 

Jimi Hendrix 

Pablo Picasso, 

Martin Luther King, Jr,

Howard Hughes,

Bob Marley,

Kurt Cobain,

Amy Winehouse.

The slippery slope of procrastination

This is the: “I will get to that, I know I have to, I know it’s important but does not have the time now” group. The consequences of procrastination usually is a combination of all other mistakes, either the person dies without a will or with an incomplete plan.

What makes procrastination one of the worst enemies of estate planning is the fact that there is always something seemingly more important to deal with, than striating or finishing your estate plan.

This opens you up for a daily gamble as you do not know if today might be the day your final bell is going to the rang!

Do not wait for when you believe you will have the time, make time today and start or finish that estate plan, and remember:

“The time to plan is that time you believe there is no need for planning.”

Our celebrity example today is:

Sonny Bono passed away without even a basic will in place. This lead to many problems, including a secret love child who wanted a piece of Bono’s estate.

Failing to finish what you start

Very similar to the third mistake of procrastination, the difference here is normally indecisiveness or lack of understanding as to how the estate planning techniques or vehicles are to be used. 

Estate planning can present you with difficult decisions, remember that none of those are cast in stone and can mostly be changed, do not let indecisiveness stop you from completing the plan.

Estate planning vehicles and techniques can be compared to the Bluetooth/carplay function in your car, if you do not take time to understand how to use it, you will simply not use. Make sure you understand the techniques and vices used in your estate plan, to use it to your families ultimate benefit.

Our celebrity example today is:

Michael Jackson created a trust, but never fully funded it, defeating a primary purpose of having a trust. This made it much easier for his family to fight in probate court, which resulted in a public feud.

The Sopranos actor James Gandolfini was reportedly worth $70 million when he died in June 2013 of a heart attack while on vacation in Rome. He executed a Will prior to leaving on his vacation, but because he did not complete an estate plan, his estate lost more than 55% to taxes and costs.

Not updating

Not updating an estate planning strategy can create negative consequences as one child not receiving an inheritance or your entire estate being inherited by an ex-spouse. 

One thing with life is that it is not constant and therefore, your estate planning strategy should be updated with life events such as divorce, remarriage, pregnancies, and births, etc.

Our celebrity examples are:

Heath Ledger never updated his Will with the birth of his daughter, leading a public fight. 

Barry White was separated but not divorced from his second wife at the time of his death never updated his state plan, the result His wife got everything, while his live-in girlfriend of several years got nothing.

Try to do it yourself

This is an all too common problem amongst all types of people, those who believe they can do everything themselves. Some because they think they can save money and some because they think they can.

What everyone typically forgets is that they are not a specialist in all fields, it is like going to your GP for Brain surgery, although both are medical doctors the one is specialized in his field.

Today we have a perfect celebrity example: 

Former Supreme Court Justice Warren Burger created his own will consisting of 176 words, but he left out key provisions and his family paid the price. It is said that the “poor estate planning” by the justice cost his heirs hundreds of thousands of dollars in estate taxes, which could have been avoided by using the correct estate planning tools.

Not planning for liquidity

With the majority of people not even having a will what is the chance that they will have enough liquidity in their estate to pay cost and taxes. Liquidity planning is a crucial point in any Estate Planning Strategy as it could result in loss of assets. When looking at liquidity not only will you have to concentrate on death taxes but also consider items, depended on the jurisdiction, such as administrative costs, transfer costs, wealth transfer costs, and capital gains tax.

As a result, there could also be liquidity concerns in a zero death duty jurisdictions, as a result of administrative costs and transfer fees. 

Your celebrity example today:

Joe Robbie, owner of the Miami Dolphins, Joe Robbie’s family was forced to sell its stake in the Miami Dolphins and Joe Robbie Stadium to pay estate taxes. 

Choosing the wrong executor or trustee

Most people do not have the freedom to choose their executor and/or trustee as this is forced upon them by the financial services industries. However choosing an executor is a critical decision to make as, that is the person/s you appoint to take control of your assets, to settle your liabilities, pay final taxes and distribute what is leftover to your heirs.

The choice of Trustees, however, is even more critical as this person/s takes control of your assets to manage those assets at their discretion for the benefit of your beneficiaries.  

Take the time and make wise choices.

The world is full of examples of bad choices in this regard:

Tobacco and energy heiress Doris Duke, here the executor and trustee used assets for personal purposes 

Ernie Banks - it is believed that his caretaker use her position to manipulate him and took control of all of his affairs, excluding his family 

Anna-Nicole Smith - here the executor made false claims, adding to already lengthy and expenses legal costs 

Leaving your intent unclear

Intent is one of the most challenging legal issues to deal with because we can’t read your mind, yet, your words and your actions need to show intent. Due to this by using the wrong wording in your Last Will or Trust deed, your intent may not be clear, and that will leave it open for interpretation.

As interpretation varies from one person to another, this creates different opinions which lead to costly and lengthily legal battles.  

Our example today:

Whitney Houston’s father named Whitney as a beneficiary on a significant life insurance policy, but it was unclear if he wanted Whitney to keep the money or that the money should have been used to pay off a mortgage that Whitney held over his home. Apparently, Whitney lent her father $723,000 in 1990, and this loan was secured by a mortgage against his house, payable to Whitney. This confusion led to a court battle lasting more than 2 years, as was claimed by her Stepmother.

Making verbal promises.

Another mistake people make is to make several statements as well as direct and indirect promises relating to their estate or specific items in their estate. 

This is a sure way of creating or fueling a family feud that could lead to unnecessary legal costs as well as outsiders contesting the Will or attacking the estate based on verbal promises 

We always need to remember the old saying, “loose lips sink ships,” American English idiom meaning “beware of unguarded talk.” when dealing with family wealth and family structures.

Our example today:

Marlon Brando’s housekeeper alleged that he made such verbal promises which included a house as well as continued employment, which led to two separate lawsuits after Brando’s death

Forgetting to tell loved ones where your estate planning docs are

One of the saddest mistakes, after doing everything right, you forget or to tell the people where it is, with the consequence that your estate will be administered as if you did nothing.

Similar, when updating your estate plan make sure that you tell your loved ones or advisors and replace the old documents with the new ones, otherwise the old documents could be used in the event of your death, based on your old or expired wishes.

Today’s example:

Olympian Flo Jo’s original Will couldn’t be located, and her probate estate took over 4 years to close

Taking shortcuts/not planning for personal assets

Individuals often fail to plan and account for personal property in their estate planning, which can generate plenty of fights (legal and family feuds) over the who gets items of sentimental value, such as family heirlooms, collectibles, and other personal assets.

Another asset class people do not consider when completing their estate plans are their digital assets. The reason to plan for digital assets is very simple if no one knows how to access these assets . . . then no one can access these assets, effectively these assets die with you.

Our examples today:

Princess Di used a “letter of wishes” to leave personal effects to her godchildren instead of specifying her wishes in a will or trust.

Robin Williams’s family has engaged in a legal battle over the late actor’s film memorabilia,  

Martin Luther King Jr.’s family fought over his Bible and Nobel medal.

Conclusion 

The primary objective of Estate Planning should be to create a comprehensive plan/strategy that will transfer both financial and human capital from one generation to the next. This plan/strategy will need to evolve with the family’s growth and needs and be flexible enough to absorb whatever changes life may bring.

Secondary objectives include:

• The provision of liquidity
• Capital appreciation & income generation
• Asset protection
• The minimization of taxes and costs
• The facilitation of the administration of the estate (probate)
• The protection of business and family-related interests
• The provision of retirement capital & income as and when needed

The fundamental problem with planning anywhere in the world is the need to use multiple professional advisors, but none of these advisors communicate with each other to ensure a comprehensive plan is ultimately implemented. 

The above can be illustrated as follows:

You the planner gave a knife and piece of wood to every professional advisor to carve out a puzzle piece, but no one ever takes the time to make sure all these pieces actually fit or create the picture you intended.

Will your puzzle reflect what you intended to see?