Ten Estate Planning Mistakes to Avoid

The Importance of Obtaining Timely and Competent Legal Advice for your Personal Planning

Click to download (pdf) | By Attorney Susan M. Mooney

In my more than twenty-five (25) years of practicing law in the Estate planning and Elder law area of practice, I find that a typical and frequent call I receive on a regular basis is a request or inquiry from a senior citizen expressing a desire to create a Trust to hold ownership of their personal residence or a desire to gift their residence to their children. Their motivation is most often a desire to protect or preserve their home (frequently their most substantial or only asset) in the event of a future serious illness that may require long term medical care for that senior. Their request is usually based on advice they’ve received from a well-meaning neighbor, friend or relative. This type of free advice, however well-meaning, can be very expensive, resulting in devastating or catastrophic consequences if competent legal advice is not obtained and considered before any action is taken.

Fortunately, most folks do seek professional advice before taking any such action, but occasionally some seniors take action based on the friendly advice of relatives or friends and by doing so they inadvertently create significant legal problems, tax consequences or Medicaid disqualification. While it still may not be too late to obtain competent advice in an effort to undo some or all of the damage that may have resulted at any stage, it is far better and more cost effective to obtain the advice, explore available options and alternatives, and then take action that is appropriate for your own situation, than it is to act first and ask questions later. Undoing the damage, if it is possible to undo it all, that may have been done by relying on the free friendly advice, generally costs far more than having obtained the competent legal advice in the first place.

The following are some of the mistakes I have found to be quite common due to a failure to obtain timely and competent legal advice:

    1. Failure to plan for future disability, illness or incompetence, while healthy and competent.

      A failure to execute simple, inexpensive legal documents, such as a Durable Power of Attorney and Health Care Proxy, while you are healthy and competent, in order to appoint the persons you would personally select to make your medical and financial decisions, could result in the Court appointing a Guardian or Conservator for you, in the event you were to become incompetent in the future. The Guardianship/Conservatorship process is a legal process requiring Court appearances, and public notices, that is costly, both financially and emotionally. The Guardianship/Conservatorship process in most cases may be totally avoided by some simple lifetime planning accomplished while you are legally competent. Furthermore, a Court appointed Guardian or Conservator could be someone you would not have personally chosen and could be a complete stranger, appointed by the Court.

    2. Failing to have a Simple Will where you would state your wishes and intentions regarding how your Estate will be distributed and naming the Personal Representative (a/k/a Executor ) of your choice to carry out your intentions.

      I find there is a common misconception that if you do not have a Will, the State will take your assets upon death. If you do leave behind any heirs at all (spouse, children, grandchildren, parents, siblings, aunts, uncles, cousins) it is not true that the State will take your assets upon your death. However, it is true that the laws of the State where you reside at the time of your death will control to whom and in what shares your assets will be distributed, if you should die without a Will. The State law may not reflect your personal intentions. For example, I find most folks commonly think that if they were to die without a Will and leave behind a spouse and children, that their spouse would automatically inherit all the assets of the deceased spouse. This is not necessarily true. Your spouse may inherit only a portion of your Estate and your children may inherit a share as well, if you do not have a Will. While most parents do want to provide for their children after the death of the parent, I find that they commonly wish to do so only after their surviving spouse is properly protected and financially secure. Further, if you do not have a Will naming your choice of a Personal Representative, any legally interested person, including a creditor, can petition the Court to be appointed to manage your Estate and this may not be the person you would have chosen to handle your affairs.

    3. Naming an individual as a beneficiary on certain assets (life insurance, IRA, 401K), who is expected to share that asset with other family members or is expected to pay your funeral bill or other debts with that asset.

      For example, I have found that it is fairly common for some people to select one of their children as a beneficiary of an asset, such as a life insurance policy, and expect that child to share the asset equally with their siblings after paying your funeral bill in accordance with intentions that you may have verbally stated to that child. Perhaps you have even named that child as Personal Representative (Executor) and therefore think you are protected and that your wishes will be carried out. However, as the sole named beneficiary of an asset, that individual holds legal title to that asset upon your death, and has no legal obligation to share the asset, or to pay your bills with it. Even if there is no other money available in your Estate to pay your funeral bill, the individual named as the sole beneficiary gets to keep that asset without any obligation whatsoever.

    4. Naming one child as a joint owner of bank accounts creates the same problems as naming a sole beneficiary.

      Despite your verbally stated wishes that a joint account owner share the account or pay your debts with the funds, the joint account owner has no legal obligation to share that account with others, or to pay your debts with the funds left in that account after your death, unless very specific provisions are set forth in your Will to carry out your intentions with regard to joint accounts. Failure to include the proper Will language, renders the joint account a gift to the other joint owner upon the death of one joint owner.

      Furthermore, by adding another individual as a joint owner of your funds during lifetime, your funds are automatically exposed to all that individual’s risks. If the other individual joint owner has financial difficulties, such as bankruptcy, marital problems, or lawsuits against them while a joint owner of your funds, you would be at risk of losing your funds.

    5. Gifting funds or property, including real estate, to others (such as family members) without proper advice or planning and thereby causing many potential adverse consequences, such as:
       
      1. Medicaid disqualification;
      2. Capital gains tax consequences (that may otherwise be totally avoidable); and/or
      3. Personal impoverishment, or possibly even homelessness for yourself, if the gifted property becomes the subject of a bankruptcy, divorce proceeding or lawsuit against the person to whom you have gifted the property.

      It is common for elderly parents to express a wish to transfer their personal residence to a child. However, by giving an outright gift of their real estate, a parent could create a capital gains tax due from the child upon a future sale of property, depending on capital gains tax rates in effect at the time. In a situation where a property is valued at approximately $300,000.00, the tax could be between $60,000.00 and $100,000.00, or even more . Further, the parents’ home (which they in all likelihood wish to maintain as their own personal residence) is now at risk of loss due to the financial difficulties, marital problems or lawsuits of the child owner. With proper, and frequently simple, legal planning, both of these problems may be avoided; the parents’ right to reside in the property can be protected, and the adverse tax consequences maybe totally avoided.

    6. Failure to provide special provisions in your Estate Plan for your personal and special or unique circumstances.

      Sometimes specific planning is necessary to protect a disabled spouse, child or grandchild during your lifetime, and/or after your death. Perhaps a disabled child is receiving social security disability benefits that would be lost if that child received even a small or insignificant inheritance directly. With proper planning, the child could be left the same assets, without risking loss of their benefits that they receive that are necessary for their support. Perhaps a spouse needs long term medical care, while the spouse remaining at home and in the community needs to preserve the couple’s income and assets for their own financial security. With proper planning these issues can be addressed and a plan implemented to meet your personal needs.

    7. Failure to explore the option of purchasing Long-Term Care Insurance while an individual is young, healthy and insurable.

      Premiums are far more affordable for a fifty-five (55) year old, than for a seventy-five (75) year old individual. Premiums are also dependent on health. While a person in fair or poor health may be able to qualify to purchase coverage, a person of the same age in excellent health will have lower premiums. An individual with appropriate Long-Term Care Insurance coverage can potentially preserve their entire Estate in the event of a catastrophic illness.

      By way of example, suppose you pay a $2,000.00 premium over a twenty-five (25) year period for Long-Term Care Insurance policy coverage, you will have paid out $50,000.00 in premiums, however, you may then have little or no risk of exposing your Estate to the costs of your medical care even in the face of a catastrophic illness. Thus, whether your Estate is valued at $300,000.00 or $1,000,000.00, you would have the potential to preserve the entire value of your Estate for the $50,000.00 investment in Long-Term Care Insurance in our example.

    8. Failure to obtain a legal review of a Medicaid application before applying for benefits.

      Too often I have seen benefits denied or delayed that are rightfully due to an applicant because of the complicated applications. Sometimes there is lack of understanding of the necessary documentation, or a misinterpretation of the question, causing an incorrect response to the questions on the application.

      While other professionals in the nursing home business frequently provide valuable assistance to applicants in completing these complicated applications, their interests may conflict with that of the applicant. Unfortunately, I have seen many applications result in denial of benefits, or very costly legal work to correct when they have been submitted by those who rely on advice or assistance from non-lawyers who may work in the nursing home business. A review by competent legal counsel is suggested in order to be sure there is a review by a professional who is both knowledgeable about the law and acting solely in the applicant’s best interest.

    9. Failing to establish an appropriate Estate Plan on larger Estates, valued above the Estate taxable level.

      Federal Estate tax is applicable to Estates valued over $5.0 million dollars for dates of death on or after January 1, 2012, with the Massachusetts Estate tax applicable to Estates valued over $1.0 million dollars. Most people do not realize that assets such as life insurance (that are not available to them during lifetime) are, in fact, included in the value of their Estate upon death for purposes of calculating Estate taxes. Planning is available which would provide for substantial Estate tax savings (frequently tens or hundreds of thousands of dollars in Estate tax savings), but most of these planning opportunities are available to couples, only if established while both spouses are living.

    10. Believing a Revocable Living Trust will protect your personal residence from risks associated with costs of long term care in the event of a catastrophic illness.

      I frequently receive calls from folks who have been told by friends, neighbors, or relatives that placing their home in a Revocable Living Trust will protect their home in the event of an illness requiring long term care and application for Medicaid benefits. This is not true. While a Revocable Living Trust may have been popular several years ago, under current Medicaid laws an applicant cannot own their home in a Revocable Living Trust and also qualify for benefits. In fact, an individual may personally own their own home and qualify for benefits, while a person owning a home of the exact same value in a Revocable Living Trust would be disqualified from Medicaid benefits. Revocable Living Trusts are, in fact, detrimental to Medicaid applicants, and most often must be revoked in order for an individual to qualify for benefits.

In summary, each individual’s situation and objectives are personal and unique to that person. The facts and family issues that apply to your situation are unlikely to be identical to that of your friends and neighbors. I have found that a simple Estate Plan for the majority of people who require legal assistance with these issues and which addresses most, if not all, of the above issues and includes a planning session, ranges in legal costs between $500.00 to $1,000.00, yet the costs of simple mistakes, made without the benefit of competent legal advice, can very often result in disastrous consequences, resulting in costs of tens or hundreds of thousands of dollars in taxes or loss of Medicaid benefits. The importance of obtaining timely and competent legal advice for your own personal situation before acting cannot be overstated.