“Hey, estate planning is a waste of my money. I don’t need a will, I don’t have much.” “My spouse is going to get everything so why would I need to spend a couple thousand dollars on estate planning?” “I’m too young to spend my money on that.” “I’ve got more important things to do now!”
Are any of those common excuses legitimate or are they, along with many other common excuses, nothing but misunderstandings resulting in bad judgment calls?
Since only about one third of Americans have a will, these excuses – and all of the others – are common. Sure, end of life planning and estate planning is at best an uncomfortable topic. But is leaving the major decision of the distribution of what you have, even if it is only a little, up to the state a good idea? Probably not.
The results can vary from state to state which can leave some family members shocked and penniless. Leaving your estate planning up to the state may also promote disputes among family members, tearing apart families and tarnishing what might have been a better memory. Leaving it up to the state will usually end up costing heirs far more than a good estate plan would have cost if undertaken as “preventative medicine.” Getting it right requires more than a will or a trust. It also requires that a person have more than a narrow idea of what estate planning really is.
Estate planning requires more than a will or trust. Many people think their will or their trust control how most or perhaps even all of their assets will pass at death. In many circumstances, that will be far from true. Much wealth is held in retirement plan accounts, life insurance, IRAs, brokerage accounts and bank accounts. Those can and probably will pass outside of the control of a will or trust. These assets will pass according to the beneficiary designation form you fill out when initially opening the account.
To understand just how wide a topic estate planning is and how bad relatively simple mistakes can be, a few real-life stories may help. The estate of the greatest natural hitter professional baseball has ever seen, Ted Williams, became an emotional quagmire. He died in 2002. The disputes were not over his money; instead, Williams’ heirs fought over his body. He made the mistake of leaving multiple conflicting wills, so his final wishes were unclear. One will specified cremation while the other called for his body to be preserved cryogenically until science reached the point where he could be revived. The court battle raged for years and Ted Williams’ body found no peace during that time.
On the other hand, the lack of any will at all was a failing of singer and congressman Sonny Bono. He died in 1998 without a written will. Let the family and legal fights begin! Divorced wife and former singing partner Cher filed a claim against the Bono estate, alleging her ex owed her over $1.6 million that was unpaid from their 1974 divorce. A child allegedly born out of wedlock stepped forward claiming a share of his estate. DNA testing showed the claim was false. The failure to spend a few hours and a few thousand dollars on even simple estate planning left Bono’s surviving wife to face multiple court battles just to be named executor and even more to fight the claims.
There are more stories easily available to the public through a quick Internet search. They all illustrate a few important points:
1. Estate planning isn’t simple (in fact, it is complex);
2. Estate planning requires more than a casual glance (in fact, a good estate plan takes a lot of thought); and
3. It also requires thought into what the future may hold.
What can you do to avoid becoming another paragraph in the story of mistakes?
Try these ideas out for size:
1. Don’t be penny-wise and pound foolish – get it done right
One website using the term “estate planning” actually suggests using online do-it-yourself wills. That is a great idea only if you want to leave uncertainty, doubt and confusion as your legacy. That isn’t an estate plan, it is little more than hoping you get it right. There is a reason attorneys go to law school, study, develop and maintain expertise through continuing legal education. There is nothing simple about dealing with issues surrounding the transfer of property and assets involving state law and federal tax law, all of which may have a dramatic impact on the results of a poorly drafted will or estate plan.
You do not need to leave anything to your imagination, just look above at the story of Ted Williams’ estate. Any attorney dealing with estate planning and probate can give examples of people who brought in one or more handwritten, office supply store or Internet wills, invalid because they were incomprehensible, nonsensical, or not executed as required by state law. At least in Florida, merely signing a will isn’t enough. Nor is having a notary or two witnesses enough to make that signature valid. There are very specific signing requirements in Florida law. Other states have similar but varying requirements. Doing it wrong means time and effort has been wasted and your wishes and expectations may be disregarded.
Have a will done – correctly. Without a will your estate will pass intestate, meaning it will go the way state law says. That will change from state to state. Eliminate any uncertainty, have a will done professionally.
Doing it right matters. Doing nothing often has disastrous results. Rock star Prince left no known will when he died at age 57 of an accidental painkiller overdose in April, 2016. He appears to have done nothing to shelter his assets from tax consequences. As a result, federal and state taxes will likely claim roughly half of his estate, far more than necessary. One guitar reportedly sold for $700,000. Legal maneuvering has resulted in expensive court challenges against the administrator and accusations of assets (unreleased music) being moved out of state. Even in 2018, the legal disputes continue.
Rather than pay close to 50% in taxes, state and federal, with care and foresight, Prince could have set up an estate plan with trusts to benefit persons he chose, leaving little for the IRS. Instead, millions went to the U.S. government that could otherwise have supported loved ones. Granted, most families do not risk nearly that much, but they do risk sizable percentages of their estates by having little or no real planning, and often none done professionally.
Also, be sure that you get more than a will. Terry Schiavo was 27 when she had a health condition that caused her to go into a “persistent vegetative state” resulting in legal battles in Pinellas County, Florida, that consumed over eight years. A will or trust would have done her and her husband Michael Schiavo little good. Instead they needed other common estate planning documents, a living will, a health care surrogate form and a durable power of attorney. Those and other essential documents are all part of good estate planning. See Documents (and Protection) Everyone at Every Age Should Have.
Estate planning reminds us of those disclaimers for soft drink commercials from the 90’s showing teens do wild and dangerous stunts; “don’t try this at home.”
2. Consider life insurance
If you have a spouse or family dependent upon your income, if you have a child about to start college, if you have debts or expect an estate tax burden as death approaches, you need to consider enough life insurance to cover the financial burdens facing your family if you were to die unexpectedly.
Actor James Gandolfini, best known as Tony Soprano, was only 51 when he died in 2013. His estate was worth about $70 million and was simple, far too simple. He left 20% to his wife and the remainder to his children. The problem is that the estate tax bill was $30 million, largely because his simple estate plan was written for a far smaller estate. As he became a star and his wealth grew, he should have considered life insurance or some of the alternatives, including annual gifting, long-term trust planning, a marital trust arrangement to postpone tax until his surviving spouse passed or sufficient insurance to cover the estate tax so his wife and children would not be burdened. He saved a few thousand dollars by not having his estate plan brought up to date. That “savings” cost his family millions.
3. Watch out for changes in your family
Actor Philip Seymour Hoffman had a will written in 2004. But he never updated it before his death in 2014 at 46. The will left his entire estate to his partner and gave her the option of turning down the inheritance, putting the assets in a trust. That sounds fairly simple and easy. The problem? He had two daughters born after the execution of the will and the will only mentioned Hoffman’s son. His will could easily have included the words “or other children I may have” which would have protected his daughters – but it did not. The inevitable happened, the legal fights began over his estate valued at $35 million. The lack of estate planning and tax planning has potentially left his estate subject to $15 million in unnecessary tax liability.
Do the children of Phillip Seymour Hoffman wish he had paid attention to changes in his family? No doubt they do. Estates large or small can be dramatically impacted by changes in a family. A birth, a marriage, a divorce, a re-marriage, an adoption or a death (and many more life events) can have a major impact on almost anyone’s desires for their estate. The inclusion of a few poor choices of words or the careless exclusion of others can create expensive problems.
Imagine that an elderly mother wants to leave her estate to her only son. Her will states that and also includes other common language; in the event he predeceases her the estate will go to his children, her grandchildren. Her will says the money will go into a trust if the grandchildren are minors. Then, the unexpected happens. Her son dies in a tragic accident leaving two children, both of whom just turned 18. The shock of his death causes her to pass away as well. The result? Two young adults inherit their grandmother’s hundreds of thousands of dollars while the daughter-in-law who loved and cared for her son and was loved by her mother-in-law gets nothing. Good estate planning is an exercise in “what ifs?” Had that been done in this circumstance, this undesirable result would have been avoided.
The complexity of life can create many other problems. In many states a divorced spouse is automatically disinherited. But that isn’t always the case or the desire. Or what if the person dies before the divorce is finalized? Another risk is that the person will wait until the divorce is final and then forget about making that change. Now imagine that happens in a state like Florida where the divorced spouse is not automatically disinherited. Years later a disliked ex-spouse in some states can get a surprising and unintended inheritance.
Similarly, it is necessary to change beneficiaries on bank accounts, retirement accounts, life insurance policies, etc. A memory lapse or procrastination can result in the same unintended inheritance.
4. Have your assets increased?
Joe Robbie, the original owner of the Miami Dolphins, became a multi-millionaire as the value of his football franchise soared when the Dolphins became Super Bowl champions and had an undefeated season. Then, in 1990 Robbie died. His eleven children began fighting over his estate with many jockeying for position or even control of the Dolphins. Several of the children angered their mother and their other siblings by removing one of their brothers from the team’s management and operations. Next, they sold half of the stadium and 15 percent of the team to the man who later became the full owner, Wayne Huizenga.
When Elizabeth Robbie died, she showed her anger by disinheriting two children and drastically reducing the inheritances of two others. Half of Elizabeth Robbie’s estate went to her grandchildren while the rest was divided evenly among the other children.
The result? Lawsuits! Three of the five children filed a lawsuit against the members of the family who were trustees and controlled the team. This type of dispute makes a lot of money for the lawyers.
That wasn’t the family’s only problem. The other problem was the greatly inflated value of the Miami Dolphins and passage of the ownership left the estate subject to a huge tax bill, $43 million. The remainder of the Miami Dolphins had to be sold, largely because of poor estate planning and somewhat because of the family fighting that prevented them from working together towards solutions. While that sale brought in a reported $109 million, the tax bill consumed far more than it would have had Joe Robbie planned for the inevitable, his own death.
The Judge over some of the legal battles, Dade Circuit Court Judge Ronald Friedman stated on the record, “As much as Mr. Robbie produced for his children, I’m sure he’s turning in his grave.” He added, “I’m sure this is the last thing Mr. Robbie wanted to see.”
Joe Robbie’s old estate plan did not take into consideration the enormous increase in the value of his estate, both as the Dolphins became perennial winners and when he built what was then known as Joe Robbie stadium and left Miami’s Orange Bowl. Instead of a legacy that included a stadium holding his name, his legacy is only a memory and a court record of a huge family fight.
Changes in assets may require changes in your estate plan. While the current level where estate taxes begin at the present time means very few have to be concerned about federal estate taxes, everyone needs to keep in mind that the federal estate tax amount can be changed by Congress. While it is well above $5 million for a single person now and as this article is being written, the estate tax may be eliminated altogether, it can also re-appear in the next administration – and that re-appearance can be at a much lower dollar level. To make it more complex, some states have state estate taxes.
Stock options, rapidly appreciating real estate, changes in retirement plans or other circumstances may also create the need for updated estate planning to avoid estate tax or to keep the balance of bests where it is desired.
5. How are things titled, both new and old, and who are those beneficiaries?
Often the largest assets people hold fall into two narrow categories, their home and their retirement accounts. How those are titled and how they pass can be very different, surprisingly complex, and does change from state to state.
Let’s take the title to a home or to other real property first. Many people add their children to their home’s title to try to save on probate expenses. When a home (or any other titled asset) is deeded from the parent’s or parents’ ownership to joint or co-ownership with their children, those children become owners of an interest in the home along with their parents. This can cause problems, some of which include:
Problem #1: Putting a home in joint tenancy with children is a taxable gift. A gift tax return must be filed for the year in which the transfer was made if the value of the interest transferred to each child is more than the gift tax amount for the year of the transfer.
Problem #2: In states like Florida, the protection of the homestead is lost when a nonresident child becomes a joint or co-owner. Then, if the child has a lawsuit brought against him or her, for example, for student loans or even a car wreck, fails to pay taxes and the IRS files a tax lien, or goes through a divorce, the creditor may get to live in the home along with the parents. In many jurisdictions, creditors can actually force the sale of the home. Joint or co-ownership has risks.
Problem #3: When the home is later sold, the capital gains tax consequences for the children could be surprising. Each of the children may have a sizable long-term capital gains tax bill that could have been easily avoided had a different approach been used, such as putting the home into a revocable trust.
Adding family members on bank or investment accounts matters for the same reason. A child or family member who is jointly on a bank account may get sued and the account balance for bank and most non-qualified investment accounts can be taken by a judgment creditor in most states. An experienced estate planning attorney can provide excellent and safe alternatives to simply putting someone else on the account.
Now, let’s consider the “titling” or naming of beneficiaries for retirement or bank accounts. Retirement accounts, 401(k)s, 404(b)s, IRAs, etc. most often do not pass through an estate but bypass the estate, going directly to the named beneficiary on the account paperwork.
It is not uncommon for trusts to be drafted but then the titling of property is ignored. The best and most expensive trust even does no good if it isn’t “funded” by having assets placed into it either during the life or upon the death of the grantor who creates the trust. Even if property starts in a trust, sometimes it is sold and the detail of putting replacement assets or property back into the trust. Again, a well-written living trust with no assets is a waste of time and money.
All beneficiary choices, whether on investment accounts, bank accounts, retirement accounts, or insurance policies should be reviewed upon any change in the family and at regular intervals if for no other reason because memories are faulty. Court records are loaded with examples of divorced spouses receiving life insurance or other benefits that were really intended for the new spouse. Someone forgot what had been signed long before.
What if the beneficiaries selected were three children and one passes away? Who receives the proceeds, the two surviving children or the two surviving children and the deceased child’s spouse or children? The answer may depend upon what the beneficiary selection form says in the fine print that was probably not read or considered. The result also may vary from state to state.
Instead, you may want to have a trust named as the beneficiary. That may give you more control and greater ease in changing beneficiaries than if you have to change multiple account’s forms, all of which have different wording. On the other hand, you may want to consider the tax consequences since trust income is taxable. Now you can begin see why estate planning lawyers earn their money!
That’s a lot! However, those are not the only potential issues! Watch for next quarter as we look at additional pitfalls and problems that plague real people at the toughest time of their lives.
About the Author
John Campbell has retired from a 40-year legal practice as a trial attorney in Tampa. He has served in multiple volunteer roles at Idlewild Baptist Church in Lutz, Florida, where he met Jesus. He began serving as the Executive Director of the Idlewild Foundation in 2016. He has been married to the love of his life, Mona Puckett Campbell, since 1972.