- Intestate succession
- Outdated estate plan
- Improper tax planning
- Improper property ownership
- Lack of liquidity
- Improper appointment of executor/trustee
- Lost documents
The term “intestate” describes a person who dies without a valid will. States use intestate succession statutes within the probate process to determine asset distribution of a person who dies intestate.
When evaluating a client’s existing plan, you should always verify the execution of all his/her estate planning documents in the state in which he/she resides. Clients often overlook the fact that they must update all of their estate planning documents to reflect the laws of their current state of residence when they move to a new state. This common mistake could result in your client dying intestate.
Problems with Intestate
The following problems may occur if your client dies intestate:
- Distribution of assets to family members not intended as beneficiaries
- Reduction of estate assets due to the cost of the probate process
- Distribution delays due to the lengthy process of probate
- Inability to locate beneficiaries
- Force sale of assets
- Family disputes
Outdated Estate Plan
The following circumstances may cause an update to an estate plan:
- Divorce or separation
- Death of an executor/trustee or beneficiary
- Change of resident state
- Children from another relationship
- Changes in state laws
- Document errors and/or omissions
- Lost estate planning documents
- Sale/purchase of property
- Business purchase/start-up/sale
When evaluating a client’s existing plan, you should always inquire about the circumstances above during the client interview or prior to the interview in the form of a questionnaire. Keep in mind that many of these circumstances are sensitive but essential for you to prepare a completed estate plan. Often, financial planners send clients annual estate planning review checklists to help identify possible estate plans in need of an update.
Improper Tax Planning
The primary goal of proper tax planning within an estate plan is to reduce potential tax liability without placing the client’s wishes, needs, and objectives at risk.
The following problems may occur from improper tax planning within an estate plan:
- Lack of liquidity
- Overuse of unlimited marital deduction
- Reduction of estate assets
- Failure to meet the client’s wishes, needs, and objectives
For example, if a client wishes to keep a specific real estate property within the family, you must identify in the estate plan an adequate source of cash to pay the required property taxes during and after the property’s distribution.
Improper Property Ownership
Improper property ownership commonly occurs with the implementation of life insurance policies. During the evaluation of the client’s current estate plan, you should also verify life insurance ownership and the beneficiary structure. If an insured still has ownership rights to the life insurance policy at his/her death, the taxable estate will include the policy’s benefits. Also, improper ownership of an asset transferred by operation of law will always supersede provisions in a valid will or trust. The bottom line is that you must review the proper ownership of an asset on a case-by-case basis to successfully distribute the asset to your client’s intended beneficiary.
Failure to adequately plan for disability, long-term illness, or job loss could significantly deplete an estate. To overcome this estate planning obstacle, you must properly educate your clients regarding their disability and long-term care insurance needs.
The current dilemma with long-term care (LTC) insurance planning is that clients who have a greater risk of depleting their estates due to an illness (those with a low-to-average net worth) cannot afford LTC premiums. In turn, clients who do not have a risk of depleting their estates due to illness (those who have a high net worth) can afford LTC premiums. Therefore, you absolutely must educate at-risk clients about the importance of proper disability and LTC insurance planning.
Given current economic conditions, failure to consider inflation risk will drastically reduce the possibility that your client will meet his/her estate planning objectives. On an annual basis, you should review the impact of inflation on a client’s estate plan.
Lack of Liquidity
The following problems may occur if an estate lacks cash availability:
- Force sale of assets
- Dramatic reduction of assets, which prevents beneficiaries from receiving their intended
- Financial burden placed on family
- Foreclosure of property
- Failure of family business
Assessment of estate liquidity represents an essential part of estate planning. On an annual basis, you must review an estate’s debt/asset ratio, asset diversification, and projected estate tax liability. Proper tax, insurance, and business succession planning all represent ways to resolve lack of liquidity issues within an estate plan.
Improper Appointment of Executor/Trustee
Improper appointment of an executor/trustee may cause the following problems:
- Conflict of interest (especially if executor/trustee is also a beneficiary)
- Penalties for missed tax filings and debt payments
- Delays in estate administration and distribution
- Unnecessary family disputes
- Will contest
The person appointed as executor/trustee absolutely must understand and willingly accept the duties of a fiduciary.
Missing and lost documents may cause the following problems:
- Inefficiencies during administration of estate
- Increased administrative costs
- Unnecessary distribution delays
- Lack of clarity of the decedent’s goals
- Failure to identify assets
For example, a client executes and funds a trust for the benefit of his sister. However, after his death, his sister cannot locate the original trust documents. Since she cannot find the trust documents, his estate must go through probate and be distributed per intestate succession statues within his state of residence. If the client had properly communicated the location of the trust documents to his sister or financial planner, the distribution of his assets would occur as he intended per his trust without having to go through probate.
Dealing with Mortality
Clients often procrastinate or avoid creating an estate plan because they have great difficulty confronting their own mortality. Most clients view the decisions they make during their estate planning process as their final acts. As a financial planner, you must help your clients overcome this obstacle by discussing the importance of creating an estate plan and how doing so will benefit your client’s family. You will have an easier time discussing this matter with your client if you disburse information and tasks in segments over a suitable time period so that you do not overwhelm your client.