By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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Perhaps one of the best ways to learn is to learn from your mistakes. However, mistakes in estate planning can be very costly and sometimes irreversible. As we wrap up our blog series for Estate Planning Awareness Week, we will focus on some “famous” mistakes so that you and your loved ones can learn to avoid them.
Failing to plan at all: Prince
Many consider the artist Prince to be one of the most talented and prolific entertainers of our times, whether it be his musical portfolio, his historic Super Bowl halftime show, or his fashion. However, Prince was like the majority of Americans in that he had no estate plan. Dying intestate left his estate in complete disarray and exposed it to significant estate taxes that could have been minimized with proper planning. After nearly 7 years of litigation to resolve who would inherit Prince’s assets, along with how much estate tax would be owed, his estate settled.
The takeaway: You should proactively execute an estate plan to determine who will inherit your assets, and if you face an estate tax liability, how to address that liability.
Will planning vs. trust planning: James Gandolfini
Famous for his role in The Sopranos, James Gandolfini earned a significant amount of money. His will left 20% of his estate to his spouse, chunks of money to his daughter, his sisters and other family/friends, and a trust for his then 13-year-old son. There are lots of articles about how Mr. Gandolfini’s will failed to utilize many estate tax savings techniques, or failed to protect wealth because his children eventually inherit their assets outright at very young ages. That said, we don’t know what Mr. Gandolfini’s legacy goals were, whether he knew of these tax or asset protection techniques or not, or whether he simply declined these options.
In the grand scheme, the bigger takeaway is that Mr. Gandolfini used a will for his primary planning, which means everything in the will is public record. That’s how we know how much his estate was worth, where his assets are passing, and when. Had Mr. Gandolfini utilized a revocable trust, which is privately administered, we would have no idea where his assets were passing or how.
The takeaway: Wills are fine planning documents; however, they are public record, involve courts and attorney’s fees, and do not come into effect until death. A revocable trust, however, properly funded and administered provides privacy, avoids court involvement, and can help address incapacity during life. Consider whether a trust plan may be better for you.
Picking the wrong fiduciaries: Jimmy Buffett
Famous singer, songwriter, and “pirate” Jimmy Buffett passed away with an estimated $275 million estate. In his plan he set up a trust for his wife Jane, with Jane serving as a co-trustee of the trust with long time accountant Richard Mozenter. Unfortunately, within a year of Jimmy’s death the co-trustees were suing each other for excessive fees, acting in self-interest, mismanagement of funds and “openly hostile and adversarial” trust administration.
This unfortunate situation happens all the time. First, naming two (or any even number) trustees can lead to deadlock. All trustees have the same fiduciary obligations and liabilities. When the trustees can’t get along, and if the trust doesn’t stipulate a “tiebreaker” or some other process to resolve deadlocks, the trust administration goes awry. Either one trustee acts in spite of the deadlock, or sometimes no action will occur at all. Both situations often lead to the litigation we see here.
Another concern, especially for estates that are large and complex, is naming individuals who may not be able to manage the obligations and responsibilities of the office of trustee. Serving as a trustee is one of the highest duties under the law obligating the named trustee to serve as a fiduciary to the trust and its beneficiaries.
The takeaway: Because of the potential for conflict and for the heavy legal burden of serving as a trustee, many consider using a professional trustee, even for more “humble” estates. Many people with less than $1 million use a professional trustee because the trust company has no bias, will follow the terms of the trust as written, and have vast experience in trust administration. While no trust company would advertise this as a “plus”, trust companies also have errors and omissions insurance to make an estate whole should they make a mistake. Individual trustees rarely provide this piece of mind.
Failing to fund your plan: Michael Jackson
The “King of Pop,” Michael Jackson, avoided many of the issues we’ve covered so far. He had some significant trust planning in place; however, he never “funded” the trust(s) with assets. While again there are debates about how those trusts could have been better structured to minimize estate tax and protect assets for his descendants for generations, the bigger mistake is Mr. Jackson failed to title assets into his trust during his lifetime. Consequently, probate courts were involved again, and it took years to finalize Mr. Jackson’s estate.
The takeaway: Your estate planning is an ongoing process. Once you sign documents, your work isn’t done. If you utilize trust planning, you need to title assets into the trust. Consider making a day of your estate planning: sign your documents in the morning, meet with your financial advisors next to retitle assets, go to the bank to establish appropriate accounts, etc. Moreover, once your plan is implemented, review it every three to five years, if there are any tax law changes, or if you have a significant life event (e.g., birth, death, marriage, divorce).
Everyone makes mistakes. However, the key is to learn from those mistakes. As you implement and monitor your estate plan, be sure to avoid these famous mistakes. Doing so can help ensure your legacy plans are successful.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards & Co. is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.