Understanding Your Estate Plan

06/15/2016 1:18 pm EST


Robert Carlson

Editor, Retirement Watch

Your estate plan is likely to have gaps. Most people, especially those with at least modest wealth, have engaged in some estate planning. But few people have complete plans, even many people who think their plans are complete, cautions Bob Carlson, editor of Retirement Watch.

There are plenty of anecdotes to support the statement, but there also is concrete evidence. I regularly see surveys of either estate planning professionals or wealthy people with substantial assets. They always indicate that even people with financial sophistication, substantial assets and access to top advisors have significant shortcomings in their plans.

People with less valuable estates probably have more holes in their plans. Many plans these days do a good job of having all of the standard documents, such as a will, trusts, powers of attorney and more.

The absence of these key documents is not the type of mistake I’m talking about. Instead, key planning steps often aren’t attempted or aren’t completed. You can avoid having a failed estate plan by ensuring your plan isn’t riddled with the oversights and shortcomings that frequently occur.

No cash flow plan

Your estate will need some cash. Even when there won’t be any federal or state estate taxes, there are other cash needs. The property you own must be managed and maintained while the estate is being settled.

Even if your only substantial property holding is a home, there will be continuing expenses for utilities, real estate taxes and any maintenance and repairs needed. The expenses of dependents also must be paid during this time. The size of your estate, the probate process of your state and how organized your estate is all affect how long the estate settlement process takes.

As part of the estate settlement, your outstanding debts must be paid. There also will be a final income tax return for you and an income tax return for the estate, possibly with taxes due. Of course, any professionals who work on settling your estate must be paid. There also must be money for any cash bequests in your will.

Because too many estate plans don’t have liquidity plans, it’s not unusual for an estate to have cash flow problems during the settlement process. You don’t want assets to be sold at inopportune times or in a hurry to raise cash to pay the estate expenses.

All these reasons are why a complete estate plan includes an estimate of cash flow. The estimate includes both the continuing expenses the estate will assume plus the additional cash needs generated by your passing and the settlement of the estate. Of course, the estimate must include sources of cash to pay these items.

Lack of information and instructions

No one knows your estate as well as you do. The problem is that most people assume that their executors, trustees and loved ones either understand the estate or will be able to so after a quick study. Things usually work out differently, especially when loved ones are grieving.

An essential element of every estate plan that too many people overlook is what I call the instruction letter. It also can be a book or file. It can be in a digital format. I often refer to it as the best gift to leave your heirs.

The essence of the instruction letter is the basic information telling your heirs everything they need to know to administer your estate quickly and efficiently. It also contains advice on how to manage or dispose of certain items in your estate.

The letter should be accompanied by additional documents. Ideally these documents include identifying and providing access information to all of your financial accounts, insurance, property, digital assets, debts and anything else that is part of your life. It should be accompanied by recent income tax returns and financial statements.

I put together a workbook that can help you get started, titled To My Heirs: A Book of Final Wishes and Instructions. It’s available for $24.99 through the Bob’s Library tab on the web site at www.retirementwatch.com.

No business succession plan

It is remarkable how few business owners have real succession plans. Too often, the plan is a vague belief that a particular child or employee will run the business. A business isn’t going to survive long without a clear plan for who will own and manage it (they can be separate people) after the current owner.

There’s a greatly reduced probability of the owner’s loved ones receiving much value from the business without a succession plan. The value of a business declines rapidly when the owner departs without a firm succession plan in place.

Whether the succession is to sell the business or have a loved one take over, a successful succession plan usually takes five years or longer. If you expect the business to provide some wealth to your survivors, you need to have a succession plan in place, revisit it often and execute the plan.

Failure to avoid family conflicts

Some sources of conflict are unique to a family. There might be a long-term dispute between siblings or a particular piece of property that is coveted by more than one family member.

Other conflict sources are common. These include conflicts among families formed by multiple marriages and jealousy or distrust directed at the adult child appointed executor of the estate.

Sometimes, one child believes the parents always favored another child. It’s not unusual for dislikes or disputes among family members to simmer unresolved while the senior family members are alive, only to explode after their passing.

An estate plan also can create conflicts. For example, the plan might require siblings with different values to share and co-manage assets. A trustee or executor might be given significant discretion over the distribution of income and assets. Or siblings who haven’t worked together might jointly inherit the family business or real estate.

Too many people choose either to deny that there are potential conflicts in their family or decide to ignore the conflicts and let the next generation work things out. Others inadvertently create conflicts in their estate plans.

It’s better to work with an estate planner to identify potential conflicts and consider ways to reduce them. An experienced estate planner has seen or heard the possible conflicts already. The planner will be able to recommend strategies.

Unfortunately, too many people decide that an effective strategy will hurt someone’s feelings or result in a confrontation. The result often is a far more complicated and expensive drama played out during settlement of the estate.

Failure to communicate

Most people fail to communicate the outlines of their goals and wishes to their spouses and children. The desire to avoid conflicts is at least partly responsible for this. Some people aren’t comfortable talking about their money and estate plans.

The unfortunate result is that loved ones often don’t understand the property owner’s intentions and, more importantly, the best ways to handle the estate. It’s not unusual for the spouse and children of a financially successful person to have very limited understanding of how wealth is created and preserved.

One solution if you don’t want to communicate details about your finances is to give property through trusts and ther vehicles. Professionals will handle the property while loved ones benefit from it.

Another option is to introduce your loved ones to your estate planner and other financial advisors. Have the professionals educate your loved ones and answer their questions. This should be considered a long-term process. Most likely, a series of meetings with increasing detail are necessary to bring the loved ones up to speed and make them comfortable with your advisors and plan.

Failure to revise and update

Most people don’t like estate planning, because it requires them to address their mortality. They like to think of estate planning as a one-and-done exercise. They don’t want to reopen the discussions after a plan is complete.

For a plan to be effective, however, it must be up-to-date. Of course, there are likely to be changes in your family. Your goals might change. There also are changes in the laws, your assets and liabilities, the markets and more. Every couple of years or so, you should talk through the plan with your estate planner and see if revisions are needed.

I suspect the major cause of these holes in estate plans is that too many people don’t really understand their plans. It might be their fault, or the planner’s fault, or a bit of both. It is important that you understand your plan. Only then are you likely to know what might be missing.

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