A Will or Trust Is a Document. An Estate Plan Is Much More.
INTRODUCTION
Eight Problems We Find When Reviewing Existing Estate Plans
A will can be legally valid. A trust can be properly signed. A power of attorney can satisfy all of the formal requirements of Virginia law. And the estate plan can still be wrong.
We have reviewed many estate plans prepared by other attorneys, as well as documents clients prepared online or obtained from other sources. Often, there is nothing obviously defective about the documents themselves. They may be professionally drafted and legally effective. The problem is more fundamental: drafting estate planning documents is not the same thing as estate planning.
Good estate planning requires much more than deciding whether someone needs a will or a trust. It requires understanding the family, the assets, how those assets are owned, the client’s concerns and objectives, the tax consequences, the beneficiary designations, what could happen during incapacity, and what needs to be done after the documents are signed.
It also requires helping clients make decisions they may not even have realized they needed to make. When that work is not done, the documents may operate exactly as written—and still produce a result the client never would have wanted.
Here are eight examples of problems we look for when reviewing an existing estate plan.
The Trust Worked—But the Family Lost a Potential Tax Opportunity
Sometimes the problem with an estate plan does not become apparent until it is too late to fix it.
We reviewed planning for a married couple in which the trust documents were designed to preserve the ownership character of property contributed to the trust. Property belonging to the husband remained his property; property belonging to the wife remained hers.
That may sound perfectly reasonable.
But ownership can have important income-tax consequences when highly appreciated property is involved. Under federal tax law, certain property included in a person’s estate at death generally receives a new income-tax basis based on its value at death. How property is owned before the first spouse dies can therefore have significant consequences when the surviving spouse later sells appreciated property.
In this situation, by the time we reviewed the planning, one spouse had already died. The way the property had been owned meant that a potentially valuable basis adjustment had been missed and unnecessary capital gains taxes would now have to be paid.
There was nothing we could do after the fact to recreate a planning opportunity that should have been considered before death.
The planning lesson:
Estate planning should not merely answer, “Who gets the property?” A good estate planner should also be asking, “How should the property be owned before death, and what are the tax consequences?”
That analysis can be far more valuable than the documents themselves.
They Had a Living Trust. Their Assets Weren’t in It.
One of the most common misconceptions about revocable living trusts is that signing the trust completes the planning.
It doesn’t.
A trust generally controls property that has actually been transferred to it, along with property directed to it through appropriate beneficiary designations or other planning.
We have seen clients with substantial, professionally prepared trust documents who were surprised to discover that important assets had never been properly coordinated with the trust.
That can defeat one of the principal reasons the client created the trust in the first place.
A lawyer can prepare an excellent trust. But if nobody determines which assets should be transferred to it, explains how that should be accomplished, coordinates the other assets, and follows through on implementation, the client may have purchased an impressive document rather than a completed estate plan.
The planning lesson:
Signing day should not necessarily be the end of estate planning. Implementation matters.
When we design a trust-based estate plan, we don’t want our clients simply to leave with a binder. We want them to understand what needs to happen next.
The Will Said One Thing. The Beneficiary Designation Said Another.
Clients understandably assume that their will or trust determines who receives their property.
For many assets, it doesn’t.
Retirement accounts, life insurance, transfer-on-death accounts, payable-on-death accounts and other assets may pass according to beneficiary designations rather than according to a will. Joint ownership can create yet another result.
That means it is entirely possible to have a carefully drafted estate plan saying that property should be divided one way while a beneficiary designation sends a substantial asset somewhere else.
The document isn’t necessarily defective.
The planning is incomplete.
We have seen old beneficiary designations, inconsistent designations, and asset ownership arrangements that simply did not match what clients believed their estate plans accomplished.
The planning lesson:
An estate planner should not look only at your estate planning documents. The lawyer should understand what you own, how you own it, and how each significant asset will pass at death.
Your will, trust, beneficiary designations and asset ownership should be parts of one coordinated plan.
“I Trust My Spouse to Take Care of My Children.”
We hear variations of this frequently in blended families.
A husband and wife each have children from previous relationships. They love and trust each other. Their estate plan leaves everything outright to the surviving spouse, with the expectation that whatever remains eventually will benefit the children.
That may work.
But it isn’t much of a plan.
After the first spouse dies, the surviving spouse may generally have substantial freedom over property received outright. Circumstances can change. Relationships with stepchildren can deteriorate. The surviving spouse can change an estate plan. The survivor may remarry. Assets can be spent, retitled or ultimately left to different beneficiaries.
None of those possibilities necessarily means anyone is dishonest.
It means hope is being asked to do the work that the estate plan should have done.
For some blended families, the better solution may be a trust that provides appropriately for the surviving spouse while also protecting the deceased spouse’s intended beneficiaries.
The planning lesson:
Trust between spouses is important. But an estate plan should be designed to accomplish the client’s objectives even when life does not unfold exactly as everyone expects.
A good estate plan should not depend upon everyone continuing to agree for the next 20 years.
An Inheritance Could Create a Problem for a Beneficiary With Special Needs
Sometimes leaving money to someone is easy.
Leaving it to them in the right way is considerably more important.
An outright inheritance for a beneficiary with disabilities can have serious consequences, particularly when the beneficiary receives or may need means-tested government benefits.
Yet a conventional estate plan may simply divide the estate among the children or other beneficiaries outright.
The document does exactly what it says.
And that can be precisely the problem.
Appropriate special-needs planning may allow assets to be held and administered for a beneficiary without producing the same consequences as an outright inheritance.
The planning lesson:
“Who should inherit?” is only the first question.
The next question should be, “How should that person inherit?”
The answer may be very different for different members of the same family.
They Had a Power of Attorney. It Didn’t Give the Family the Powers They Needed.
A power of attorney is sometimes treated as the simplest document in an estate-planning package.
Name an agent. Add standard provisions. Sign it. Done.
Until the family actually needs it.
A power of attorney can become critically important if a client becomes incapacitated. At that point, the question is no longer whether the client has a document entitled “Power of Attorney.” The question is whether that document gives the agent the authority needed to deal with the circumstances the family is actually facing.
Certain estate-planning, gifting, trust, beneficiary, long-term-care and asset-management decisions may require powers that should be considered carefully when the document is prepared.
Once the person who signed the power of attorney has lost capacity, it may be too late simply to sign a better one.
The planning lesson:
A power of attorney should be designed as part of the client’s incapacity and estate plan—not treated as an accessory that comes with the will.
The time to think about what your agent may need to do is while you are still able to give your agent the appropriate authority.
The Children Received Their Inheritance—Exactly as the Documents Required
Many traditional estate plans say essentially this:
When both parents are gone, divide everything among the children.
That accomplishes distribution.
But is distribution the only objective?
Suppose an adult child later divorces. Is sued. Has creditor problems. Makes poor financial decisions. Develops a substance-abuse problem. Or simply receives a substantial inheritance that would be better protected and managed rather than distributed outright.
Depending upon the family’s circumstances and objectives, an inheritance can sometimes remain in trust for a child rather than being distributed outright. Properly designed planning may provide meaningful protections while still allowing the child substantial access to and benefit from the inheritance.
Yet many estate plans never seriously explore that choice.
They simply ask, “At what age should the children get the money?”
We think there is a better question: Why must they receive it outright at all?
The planning lesson:
Estate planning should not merely move property from one generation to the next. It should consider whether the way the beneficiary receives the property can make the inheritance more valuable and more secure.
The Online Documents Answered the Questions They Asked. Nobody Asked the Questions That Mattered.
Online estate planning has made it remarkably easy to create legal documents.
That can be useful.
But software can only work with the questions it asks and the information the user knows is important.
The harder part of estate planning is often recognizing the issues the client doesn’t know to ask about.
Should property be owned differently between spouses?
Should a child’s inheritance remain in trust?
What happens if a beneficiary is receiving government benefits?
Do the beneficiary designations coordinate with the trust?
Should a particular asset pass outside the trust?
What powers might an agent need if long-term care becomes necessary?
What happens in a second marriage?
Who should actually serve as trustee?
What needs to be retitled after the documents are signed?
Those are not primarily document-production questions.
They are counseling questions.
The planning lesson:
The greatest value an experienced estate-planning lawyer provides may not be knowing how to draft the document.
It may be knowing which questions to ask before drafting it.
PERSPECTIVE
The Difference Between
Documents and Planning
These examples have something important in common.
In many of them, the legal document was not the problem.
The trust existed.
The will worked.
The beneficiary designation did exactly what it said.
The power of attorney was signed.
The inheritance was distributed.
The problem was that the larger consequences had not been adequately considered.
That is the distinction between document preparation and estate planning.
We do not believe good estate planning starts by pulling up a standard document and changing the names.
It starts with questions.
What do you own?
How is it owned?
What are you trying to accomplish?
What worries you?
What happens if you become incapacitated?
What happens when the first spouse dies?
What happens when the second spouse dies?
Are there tax opportunities that should be considered?
Should every beneficiary inherit the same way?
Are there blended-family concerns?
Could an inheritance be better protected?
Do your beneficiary designations actually accomplish what you think they accomplish?
And after the documents are signed, what needs to be done to make the plan work?
Only after those questions are answered should the documents be designed.
OUR PHILOSOPHY
Not Every Estate Planning Lawyer Practices This Way
Estate planning can be practiced as a document business.
A lawyer can gather some basic information, determine that a client needs a will or revocable trust, insert the client’s information into an established form, supervise execution, hand over the documents and move on to the next client.
The resulting documents may be entirely valid.
OUR APPROACH
That is simply not how we believe estate planning should be done.
The value of an estate-planning lawyer should not be measured by the number of pages in a trust or how quickly the documents can be produced.
The value is in identifying issues the client did not know existed, helping the client make thoughtful decisions, designing provisions around those decisions, coordinating the legal documents with the client’s assets, and helping implement the resulting plan.
A form cannot exercise judgment. A document cannot ask whether the assumptions behind it make sense.
And a trust sitting in a binder cannot fund itself.
Already Have an Estate Plan? That May Be the Best Reason to Have It Reviewed.
If your existing estate plan was prepared years ago—or if you are simply unsure whether this level of analysis went into it—you do not necessarily need to start over.
You need to know what you have.
A meaningful estate-plan review should involve more than checking whether your documents are current. It should ask whether the documents, asset ownership, beneficiary designations, tax planning and family circumstances still work together to accomplish what you actually want.
Sometimes we review an existing plan and conclude that it continues to work well.
Sometimes relatively modest changes can improve it.
And sometimes we identify a problem that could have become expensive or impossible to correct if it had not been discovered until after incapacity or death.
The best time to discover a weakness in an estate plan is while you still have the ability to fix it.