Common Estate Planning Mistakes
- By Wayne Lennan
- •
- 14 May, 2020
- •
How to make sure your Will is executed effectively
NOT KEEPING YOUR WILL UP TO DATE
Review your Will when circumstances change, such as when there is a birth or death in the family, a marriage or divorce, or when you establish a family trust, take out a major loan, or buy or sell assets. There are plenty of cases of possessions being bequeathed that had actually been sold long before, leaving the supposed beneficiaries with nothing. Or the other situation of assets in an estate that had not been bequeathed or divested.
NOT PROVIDING FOR DEPENDANTS
Dependants who are not adequately provided for can contest a Will. The term 'providing for' is relative to the size of your estate, the degree of dependence on you, and consideration of others to whom you have responsibility. In most states a divorces spouse in automatically disinherited. However, if your ex-spouse is financially dependent on you, you should make a provision for him or her in your Will. Otherwise they may have a right to claim on your estate, and are likely to be successful.
APPOINTING UNSUITABLE EXECUTORS
Taking care appointing your executor(s). It is advisable to avoid appointing someone as executor who might have a conflict of interest (such as a business partner who might wish to buy your share of the business). Nor is it wise to appoint executors whom you suspect will be in conflict on the administration of your estate, people who might die before you, people who may not be capable of carrying out the duties of an executor adequately because of lack of financial expertise or knowledge, or people who may not have the time because of their own business of family pressures.
BEQUEATHING ASSETS NOT 'OWNED'
This might sound impossible, but you'd be surprised how often it happens. The problem usually occurs when a family trust, a company, business, or partnership holds some assets. A personal can only leaves assets directly owned by them.
LEAVING SOMEONE OUT
If you want to leave someone out of your Will, you should say so in the Will. This will not preclude that person from pledging a claim but it means that they cannot argue that they have simply been forgotten. Many people assume that as long as a person is bequeathed something, non matter how small, they cannot contest that Will because it is obvious that they were not forgotten.
BEING AMBIGUOUS
If your intentions are not totally clear - if they can be interpreted in more than one way - you're leaving your estate open to disputation. This is a very common mistake and a good reason why it is best to have your Will drafted by a professional.
NOT SPECIFYING DEBTS THAT HAVE TO BE PAID
If you do not specify that debts are to be paid out before distribution of your assets, your beneficiaries might inherit your debt. A parent left one child life insurance proceeds of $400,000 and the other an investment portfolio also worth $400,000. On the surface it was an equal distribution, but the investment portfolio had borrowings of $100,000; thus the second child actually received only $300,000.
NOT TAKING TAX INTO ACCOUNT
Most people don't realise that tax might be payable on an inheritance. Example: A mother left one child the family home worth $290,000; the other child was bequeathed the holiday home worth about the same. However, the family home was tax-free, the holiday home was subject to capital gains tax. So the second child ended up with $55,000 capital gains tax bill on the sale of the holiday home.
NOT EMPOWERING EXECUTORS
Make sure you give your executors the necessary and specific power to carry out your wishes easily. Otherwise your executors may have to make costly court applications to get approvals for commonsense matters, which will end up recording the size of your estate.
WRITING AN INFORMAL WILL
Don't write lists or letters instructing how you want your assets distributed, when those notes are not part of your Will, nor intended to supersede it. Many people do this. Anything that looks like an 'informal' will may be treated as a Will. This can create extra delays, anxiety and expense.
NOT NOMINATING GUARDIANS
If you have young children you should nominate who you would like to look after them should anything happen to you. Of course, you should check with that person first to make sure they're comfortable with that arrangement. If you do not nominate a guardian, it will be left to others, possibly the courts to decide.
USING BENEFICIARIES AS WITNESS TO THE WILL
Don't use beneficiaries or their spouses to witness your Will. Any gifts to them will be invalidated and they will not be entitled to any part of your estate. The disinherited beneficiary would then need to rely on the generosity of the other beneficiaries or, in some particular instances, take them problem to court, again causing costs to the estate and delays in execution.
NOT TELLING PEOPLE WHERE YOUR WILL IS
This is probably the most common mistake. Make sure your executors, plus at least one beneficiary know where your Will is stored. There are many occasions that a Will is discovered well after the estate has been distributed.
NOT KEEPING UP TO DATE WITH NEW LAWS
Laws relating to inheritance, estates and individual rights can change dramatically. Legal precedents are being set in all sorts of areas that can affect Wills bequests and charities. You should review your Will and inheritance plans on a regular basis with the appropriate professionals.
Review your Will when circumstances change, such as when there is a birth or death in the family, a marriage or divorce, or when you establish a family trust, take out a major loan, or buy or sell assets. There are plenty of cases of possessions being bequeathed that had actually been sold long before, leaving the supposed beneficiaries with nothing. Or the other situation of assets in an estate that had not been bequeathed or divested.
NOT PROVIDING FOR DEPENDANTS
Dependants who are not adequately provided for can contest a Will. The term 'providing for' is relative to the size of your estate, the degree of dependence on you, and consideration of others to whom you have responsibility. In most states a divorces spouse in automatically disinherited. However, if your ex-spouse is financially dependent on you, you should make a provision for him or her in your Will. Otherwise they may have a right to claim on your estate, and are likely to be successful.
APPOINTING UNSUITABLE EXECUTORS
Taking care appointing your executor(s). It is advisable to avoid appointing someone as executor who might have a conflict of interest (such as a business partner who might wish to buy your share of the business). Nor is it wise to appoint executors whom you suspect will be in conflict on the administration of your estate, people who might die before you, people who may not be capable of carrying out the duties of an executor adequately because of lack of financial expertise or knowledge, or people who may not have the time because of their own business of family pressures.
BEQUEATHING ASSETS NOT 'OWNED'
This might sound impossible, but you'd be surprised how often it happens. The problem usually occurs when a family trust, a company, business, or partnership holds some assets. A personal can only leaves assets directly owned by them.
LEAVING SOMEONE OUT
If you want to leave someone out of your Will, you should say so in the Will. This will not preclude that person from pledging a claim but it means that they cannot argue that they have simply been forgotten. Many people assume that as long as a person is bequeathed something, non matter how small, they cannot contest that Will because it is obvious that they were not forgotten.
BEING AMBIGUOUS
If your intentions are not totally clear - if they can be interpreted in more than one way - you're leaving your estate open to disputation. This is a very common mistake and a good reason why it is best to have your Will drafted by a professional.
NOT SPECIFYING DEBTS THAT HAVE TO BE PAID
If you do not specify that debts are to be paid out before distribution of your assets, your beneficiaries might inherit your debt. A parent left one child life insurance proceeds of $400,000 and the other an investment portfolio also worth $400,000. On the surface it was an equal distribution, but the investment portfolio had borrowings of $100,000; thus the second child actually received only $300,000.
NOT TAKING TAX INTO ACCOUNT
Most people don't realise that tax might be payable on an inheritance. Example: A mother left one child the family home worth $290,000; the other child was bequeathed the holiday home worth about the same. However, the family home was tax-free, the holiday home was subject to capital gains tax. So the second child ended up with $55,000 capital gains tax bill on the sale of the holiday home.
NOT EMPOWERING EXECUTORS
Make sure you give your executors the necessary and specific power to carry out your wishes easily. Otherwise your executors may have to make costly court applications to get approvals for commonsense matters, which will end up recording the size of your estate.
WRITING AN INFORMAL WILL
Don't write lists or letters instructing how you want your assets distributed, when those notes are not part of your Will, nor intended to supersede it. Many people do this. Anything that looks like an 'informal' will may be treated as a Will. This can create extra delays, anxiety and expense.
NOT NOMINATING GUARDIANS
If you have young children you should nominate who you would like to look after them should anything happen to you. Of course, you should check with that person first to make sure they're comfortable with that arrangement. If you do not nominate a guardian, it will be left to others, possibly the courts to decide.
USING BENEFICIARIES AS WITNESS TO THE WILL
Don't use beneficiaries or their spouses to witness your Will. Any gifts to them will be invalidated and they will not be entitled to any part of your estate. The disinherited beneficiary would then need to rely on the generosity of the other beneficiaries or, in some particular instances, take them problem to court, again causing costs to the estate and delays in execution.
NOT TELLING PEOPLE WHERE YOUR WILL IS
This is probably the most common mistake. Make sure your executors, plus at least one beneficiary know where your Will is stored. There are many occasions that a Will is discovered well after the estate has been distributed.
NOT KEEPING UP TO DATE WITH NEW LAWS
Laws relating to inheritance, estates and individual rights can change dramatically. Legal precedents are being set in all sorts of areas that can affect Wills bequests and charities. You should review your Will and inheritance plans on a regular basis with the appropriate professionals.