Seven Reasons Your Estate Plan May Be Weak (34:17)
Estate planning is a topic often put off as a conversation that can be had in the future. However, do you know what would happen if you were to suddenly pass and you didn’t have an estate plan in place or if it was drafted incorrectly? Jadin Winberg of Mariner Wealth Advisors discusses some of the more common mistakes he has encountered with reviewing and discussing estate plans.
Brian Leitner: Hello and thank you for listening to another episode of Your Life, Simplified. My name is Brian Leitner, and I’ll be your host of this episode. In today’s episode we’re going to talk about estate planning and specifically seven reasons why your estate plan might be weak. It may not be up to par, it may not be the plan that’s going to help you accomplish what some of your goals are. I’m an excited to have a reoccurring guest on the show. His name is Jadin Winberg, vice president of our estate planning and trust services group here at Mariner Wealth Advisors. So Jadin, thanks for coming on the show today.
Jadin Winberg: Thank you for having me, Brian.
Brian: So Jadin, I know that a lot of times people will get confused as it relates to estate planning because there are intricacies about it. There are the basic documents you need for estate planning to protect your family and to help you carry out your wishes.
And then there’s the idea of wealth transfer and truly transferring wealth down to generations or transferring money to certain causes. Earlier this week, you and I were talking about just some of the areas of estate planning specifically and where you find on a regular basis that some of the documents are either out of date or there’s something that’s just simply off, even though individuals themselves may say, I’ve already done the plan. I’ve already met with the attorney, and everything is in place, and I’m all good. And so I thought we might do this morning is talk about again, these seven reasons why someone’s estate plan is weak. So if you’re ready to go…
Jadin: Let’s do it.
Brian: So, the first reason your estate plan may be weak is because you don’t have all of the basic documents in place. So can you talk about the basic documents that our clients and prospects likely need?
Jadin: Absolutely. So I like to say there are key documents to estate planning. Obviously these are documents that will apply to virtually everybody’s situation as the complexity of your asset composition increases, or the value of your estate increases, you would add to these documents and add to your planning. But from your basic document perspective, there are a couple things. One is a will and the will provides directions to the probate court telling them what is to happen to your estate when you die. The other key thing that it does for our clients who have minor children or they care for incapacitated children is naming guardians. And so that’s a really important component of a will that’s going to tell the probate court who is going to have responsibility for those individuals when you pass away.
Next is a revocable trust. I say everybody should have one of these. It’s not a function of net worth or anything like that. And it is a document that’s going to say how these assets are going be managed during your lifetime. You’re the grantor, you’re the trustee. It’s reported under your tax ID number. There is a lot of flexibility with it. Really nothing changes during the lifetime in regard to how those trust assets are managed. But importantly at your death, what’s going to happen is it’s going to be a seamless transition of those assets to that next generation of beneficiaries without having to go to the probate court. And so it’s a customized document. You can put any sort of dispositive provisions you want in there. You’re going to select your successor trustees who are going to take over once you’re unable to manage that trust on your own, whether that’s incapacity or death.
Next are your powers of attorneys: there are a couple of different types. One is a financial power of attorney and it’s going to be somebody who takes control of or has responsibility for any financial aspect of your life if you are unable to do so. The other type of power of attorney is what’s called a healthcare power of attorney. It’s going to deal with any health-related care needs if you are unable to do that. Where the financial power of attorney deals with your finances, the healthcare power of attorney is for your health and well-being. Finally, there is a healthcare directive. And that’s sort of a type of power of attorney for health care. But it’s very specific in terms of situation including end of life care, or what you would want to happen if you ever found yourself needing a feeding tube or you couldn’t breathe on your own and require machines and medical care to help with those kinds of essential life functions. These are instructions that are telling the medical care providers what you would want to happen if you found yourself in these very specific types of situations.
Brian: Let me just recap that really fast. You were talking about the will itself and how that’s going to help you pass your assets down to whomever that might be and also again, guardians and how you want those children raised. Otherwise the state will make the decision on who’s going to raise those children and what that looks like, and every state is going to be a little bit different. You also talked about the living trust, and I think we’re going to talk a little bit about what the trust does and how that helps distribute assets and doesn’t tie those assets up and in probate, which is really that process of approving the will where things can get tied up and for up to nine months, depending upon the state, there are additional fees and so forth. You also talked about the two powers of attorney, whether that be healthcare or financial. And then lastly, you talked about the healthcare directive, which is also known as the living will, just to make sure that everyone understands that nomenclature and vernacular. That’s a great basic understanding of the documents that we need to have in place. And you know, I’ll bet there are probably some folks out there who have that all buttoned up, and there are likely others who say, I have two out of the three and maybe I’m leaving something out. One thing that we didn’t mention is the HIPAA documents themselves. For those of us who have gone to the doctor in the past, we know we need that in place to share information, especially if you have kids who are off to college. We always recommend that clients have those in place. Because if mom and dad rush up to the university and want to figure out what’s wrong with their child, the doctor can’t share that information unless there’s a HIPAA on file. Then we talked about, the number two reason that your estate plan might be weak is whether the beneficiaries that you selected are the right ones and have you communicated what’s important to you to them? Can you talk a little bit about that?
Jadin: With beneficiaries, it’s always a sensitive area for our clients, and it runs the spectrum in terms of information that they want their beneficiaries to have in regard to assets they may be receiving through their estate plan. So that’s one of those areas where you can structure that communication in a way that reflects your values and how much information you want those beneficiaries to have. Whether that means you’re bringing them along through that financial planning process and introducing them to your wealth advisor and, having those discussions now about, what does it look like to properly manage your money and plan. The other end of that spectrum is that we see a lot of clients where privacy is a really big issue, and they’re very sensitive to not wanting their beneficiaries to create this sort of trust fund mentality that we see in our industry. Where it can disincentivize them from being productive. Wherever our clients fall on that spectrum, it’s important that their views are reflected in their estate planning documents and that, as the wealth advisors and as their fiduciaries, we’re helping them walk through that process with those beneficiaries and have those conversations.
Brian: I think communication is critical, and it’s a topic that we spend a lot of time educating clients on and then sharing what I would refer to as the best practices and best conversations we have with families. Communication and money don’t generally don’t go hand in hand. We don’t talk about these things on a regular basis. We don’t talk to our best friends, we don’t talk to our family about how much we’re worth or what debt we have and things of that nature. But as it relates to communication, from what I’ve heard in conversations and just being in a lot of these meetings, mom and dad might joke to junior about, don’t worry, when you’re no longer around, you’re going to be taken care of, and your junior thinks he’s getting millions of dollars. And the reality is mom and dad are going to give him maybe a lot less than that. So there’s room for interpretation there and expectations. That’s one reason I think communication is critically important, but also, to your point, they don’t want to spoil the child. Maybe some of their money goes to the children and 50% of their wealth is going to charity. It’s better to have that conversation today versus in a time of grief or after the fact. Getting everybody on the same page is really important. I think what’s even more interesting is, depending upon where you live and the legal age when you get your license, mom and dad may sit down with their son or daughter and talk to them about the responsibilities now that you have a driver’s license. You shouldn’t text, you shouldn’t speed, you shouldn’t go out with a bunch of friends in the car and do crazy things. And there’s a time and a place to have that conversation, because there’s a law in place when you get a license. But I don’t know a particular law that’s in place where you should sit down and say, listen, let’s talk a little bit about our wealth, even if you’re not talking about dollars and cents and maybe just percentages and wishes. I think that does get missed with beneficiaries. Again, that’s maybe another area in which the estate plan maybe needs to be buttoned up.
Jadin: Yes. And an offshoot of that we see is if you have particular types of assets. So if you have a closely held business interest, you have farmland, you have something else that takes a unique interest or skillset to manage those assets. I think those situations are particularly important in terms of setting expectations for those beneficiaries. If they are going to be receiving those assets, what that looks like, making sure they are equipped to handle them, making sure they want to take on some of that responsibility. Whether that’s a family farm and or the sale of a business, they may want one child to receive that or they want all of their children to be involved. Well, that may or may not be what their children want. And so to flush that out on the front-end is much more beneficial. If it falls within your values in terms of communicating it to your children and grandchildren.
Brian: That’s an excellent point. Because in that situation where one child is going to get the business how do you equalize that estate? And the more time you have to plan for that, I think the more efficient it can be for everybody.
Brian: So the third reason that that your estate plan might be weak is that you’re not using a trust. And so you talked a little bit about the revocable trust. Can you dive a little bit deeper as to why someone would want that? You hear conversations sometimes where clients say, “Well, what does that cost, or do I really need to pay for that? Any thoughts from that perspective?
Jadin: Obviously one of the big benefits of trusts is that you avoid probate. Probate is a core process you would go through when you pass away to determine what is happens to your assets. There are two ways that assets get passed to the probate court. One is if you have a will, your will is going to tell that probate court what happens to your assets. If you die without a will, every state has laws that say who gets your assets and what percentages. The downside to that process, one, is that it can be timely. Depending on what probate looks like in your particular state, it could be six months, nine months or longer. Some of those are statutory timelines so there is not really a way to speed them up artificially.
Probate is public. For a lot of people privacy is very important. Again, as we previously spoke about, not only within your family but within anyone in the community who might have an interest to see what happens with your estate. And so it is a public process. Anybody can go down to the probate court and pull your probate file and see who got what. It can be costly, and the cost varies. Each state has their own cost structure around it. In some jurisdictions it’s not as expensive and in others, it could be up to 10% of the estate.
It’s a tiered fee. It’s a statutory fee in some jurisdictions, meaning the attorneys and the executors get to take that. It doesn’t matter if they spend no time or a lot of time, they’re going to be awarded those fees.
Brian: It sounds like you want to avoid probate.
Jadin: Absolutely, a trust is a great way to do it. And so a revocable trust is a document that you’re creating. You can put whatever parameters you want in that document in terms of leaving those assets to your spouse, kids or grandkids. There’s really no limit to how you would structure that, other than you can’t have things that would be considered illegal. But, but outside of anything illegal, you can really be very creative with how you’re structuring those inheritances, instilling your values, whether you want to have children working and incentivize them to work and be productive. You can do things like that in a trust. You can also do special needs provisions. So if you have a child who’s going to need additional care, if you’re no longer around to take care of them, you can build these types of things into your trust. It’s a very customizable document and avoids probate. The caveat is that you need to make sure that you’re titling assets into the trust. So it is actually an entity, if you will, that does own assets, and it would take a title as an asset. So deed your real estate into that. You could do that through a beneficiary deed and you can add investment accounts, things like that. You would just want to make sure you are titling in the name of the trust. The other important thing it provides for is during times of incapacity. It’s similar to the power of attorney if you were unable to care for yourself and make decisions for yourself. That trust is going to provide some protection during those times.
Brian: All great points. I think one of the other things that we always talk about is the fact that you basically have the ability to make decisions today and control those decisions from the grave afterward. You can make sure, regardless of what happens, that you know your wishes are carried out. To me, that’s peace of mind, and it is absolutely worthwhile to go through that process and speak to a wealth advisor who then works with an attorney to draft those documents. The individual who is creating this has complete control of those assets in every sense. And I think that’s really important when we think about these things. And you had mentioned the titling of the assets. That onto itself is probably another reason in which estate plans might be weak. But can you talk a little bit about why you need to retitle assets and make sure that that they are up to date when you’re doing your estate planning?
Jadin: Sure. So, titling of your assets is a very important component of estate planning. You can structure that different ways. For example, you may have jointly titled assets that your joint title owner is going to take control of when you pass away. You might be able to have a transfer on death (TOD) title. So a car, for instance, can have a TOD on it. If you’re using trust, you want to make sure that assets that are eligible are titled in that trust. So essentially anything, other than a qualified account, you would want to make sure you’re titling that through your trust. Because that’s how you’re ensuring that assets are actually getting funded into that trust and avoiding probate.
Brian: Thanks Jadin. The titling is critical. I know from an advisor perspective, if you will, when we look at someone’s balance sheet and things of that nature, once we see that they own A, B and C investment, and they are in their own name and not held in a revocable trust, that gives us an opportunity to bring it up and talk about some of the benefits and understand why it’s not currently. There may be a reason or two why it isn’t, but for most folks who we work with, it probably does make sense to have that title in the name of the trust.
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Brian: So, the fourth reason that your estate plan is weak is that you’re not able to locate your documents. And so you know, we hear this from people all the time. Any suggestions on that front?
Jadin: Make sure that you have your documents in a secure and safe location. For many people that might be a safe deposit box at a bank. A couple of things that are nice about that. Typically when you do pass away, banks will allow an executor come in and do what’s called a will search in a safe deposit box. And so they will actually accompany them and let them look through that safe deposit box to try to locate an original copy of the will. So an individual or your executor, successful trustees will not have to dig through your files at home and crack the code on a home safe to try to locate those. Attorneys sometimes will keep copies of the documents for their clients and, depending upon the attorney’s practice and what they are comfortable doing.
The other thing I think is important for your successor trustees, whether you know or executors, those types of individuals or whether it’s a corporate trustee who is going to be taking over at some point. I think it’s important to give them copies of those documents or at least if they’re redacted versions or whatever you’re comfortable doing, but just something so that they’re made aware that they could potentially have to take over that rule. But then that obviously that they also have copies in their files and so they don’t have to spend a lot of time and energy trying to locate that information when you’re no longer around to help them with that.
Brian: I think from just a bigger picture perspective, these documents, a lot of times they come into place in a time of grief when people are dealing with a lot of different issues. And now they need to look at these documents. For a lot of folks, they don’t know where they are; part of it’s in their closet on a bookshelf somewhere. Maybe it’s with an attorney, maybe it’s in a safety deposit box. In my personal opinion, you should be able to get your hands on your documents in 30 minutes, whether that’s your estate planning documents such as your wills, trusts, tax returns, passport and things of that nature—all of your important documents. That’s why we use Mariner GPS, our platform where we store those documents digitally for clients. They have access to it right on their phone. That is just one of those things I think is getting missed. And I know that people will have their own binders as well. While I think that’s okay, you have potential issues if there’s a fire or something happens within the house. But the greater risk that I’ve seen is that the families can’t locate these documents, and they haven’t been updated. I mean, when you think about all the weaknesses we’re talking about, it’s critical to note that a lot of people have a plan where they believe a plan is in place, but if it’s not updated on a regular basis based upon changes they’ve made, life events, tax changes, all different sorts of things, that plan is effectively inadequate and weak unto itself. And the fifth reason, there’s no personal property memorandum. Can you talk a little bit about what that is so people know that?
Jadin: A personal property memorandum is basically a list that you’re going to include with your will or trust. It’s going to specify who receives certain pieces of personal property. Believe it or not, personal property is often what families and kids will fight over the most. The stocks and bonds are easy to deal with in terms of dividing. There’s usually not sentimental value associated with those types of assets. But the personal property absolutely can be a problem. There’s a spectrum there with our clients in terms of how concerned they are with who’s receiving what. If you have a wishes that certain pieces of property go to certain beneficiaries, you would want to do that in a memorandum.
The other thing that I would at least encourage our clients to consider, if you have assets, personal property, things that you don’t use or don’t need anymore, and you’re really just holding onto to for your beneficiaries, maybe consider doing that during your lifetime. The benefit with that is, it removes the possibility of that asset disappearing or causing conflict, again, when you’re no longer around, and the kids and grandkids are having to go through your house and locate items. And so we’ve seen where a memorandum might list something to a certain beneficiary, and the family can’t locate that personal piece of property. So it can create some hard feelings and things amongst the beneficiaries if they feel like maybe somebody got to that before they should have, or one sibling took it. Again, if it’s a situation where you’re able and you’re comfortable and you’re really just holding onto property just to hold onto it, give to them during your life.
Brian: That’s a great point and something I see missing in a lot of estate plans. For example, you could have a will and mom has some jewelry, and it’s going to be split a third, a third, a third amongst her three daughters. One wants the red jewel and one wants the emerald, so how does that get divided? Just having a game plan for, maybe not all of your assets, but some of the sentimental ones that could cause conflict. So the sixth reason why your estate plan is weak is that you have the wrong people named in your documents. What are your thoughts about that as it relates to the executor, trustee and the person that you’re putting in charge of your healthcare power of attorney.
Jadin: We see a couple of different things. First, what we often see is it’s out of date. So the individuals you have named in there for one reason or another, you don’t have much of a relationship with that person anymore. Or we see situations where clients might have their parents named as trustees and executors and they are probably going to be gone before you are. So those are just out of date; not the right people anymore for one reason or another. With those roles, it’s a very high standard of care being an executor, a fiduciary, a trustee, even a power of attorney. And so you want to make sure that you’re selecting people who have the competency to carry out those roles appropriately and have the time to do it, because these can be very time-consuming tasks. The final thing is whether they actually have an interest in doing that. We find that a lot of times, our kids or other advisors who they might work with: CPAs, attorneys, don’t really have an interest in serving in that capacity. So they never brought it up to them, as in, “Hey, I’m going to put you in this role.” I’m a firm believer in a corporate trustee. I think there are a lot of great benefits of that in terms of expertise. You know they have policies and procedures and processes in place to do this the right way.
There are checks and balances with corporate trustees that you don’t have with individual trustees. Whether that’s regulators who look at what corporate trustees do on an ongoing basis from an administration standpoint. They usually have internal compliance folks who are keeping tabs and, again, you have professionals at the trust officer level and at the fiduciary officer level managing these trusts and making these decisions, versus an individual. Again that individual doesn’t necessarily have that expertise, interest or time to do it appropriately. There really isn’t a lot of oversight on what they’re doing. There is no governing agency that’s watching an individual trustee. It’s a matter of the other beneficiaries watching over what that trustee is doing and, if that trustee is not cooperating and is not doing tasks like they should. Really the only recourse that those beneficiaries have is to go into court and force them to behave properly. That’s a whole set of problems within itself. You can avoid a lot of that. Not to mention the family dynamics through a corporate trustee.
Brian: You bet. You can have a some middle ground as well there, right? You can have a family member be a co-trustee. If that’s important to what the family wants, they have somebody within the family who is helping to navigate and then they make the trust company itself a co-trustee. So now you know, everything is being done on the up and up and you sort of have that. Maybe it’s the best of both worlds for folks. Everyone’s a little bit different. But going back to your point, the reality is, when you name someone to be in this position, he or she doesn’t necessarily know what to do. One of the things that we’d like to do is meet with everybody named in the documents. So there’s a game plan and we all understand upfront what the wishes are of the family.
Just another thought when we talk about documents themselves, I’m also thinking about as it relates to the healthcare power of attorney and who you’re going to elect. Who is going to be that person whom you want to have in charge of your health once you’re in the hospital? Who is going to be stubborn enough or willing to fight for your wishes when maybe the hospital has their own policies and procedures? You want to select the person that you obviously trust but also has potentially the willpower and strength to fight, where appropriate, on your behalf. For the last of the seven, it is missing clauses that are in your estate plan. Can you name maybe just a couple of clauses that you know, again, people may say I have the estate plan, but maybe if these two clauses aren’t in there, it’s going to give that individual reason for pause or something is incomplete.
Jadin: One of the emerging things I’m seeing are what are called trust protectors. It can also be called trusted advisors or special trustees. There are different names for this role, but it’s not a trustee, but an individual typically who has certain responsibilities on that document if they’re needed. And usually it’s things in terms of modifying that trust, whether that’s for tax purposes, or they can have powers to appoint and remove and trustees, things of that nature. But it builds a lot of flexibility into that document. So obviously during your lifetime, and if you have a revocable trust during your lifetime, that doesn’t really matter because to your point earlier in the conversation, a revocable trust is going to allow you to make changes and do whatever you want during your lifetime. But once you’re unable to make those decisions, whether incapacitated or have passed away, that trust becomes what’s known as irrevocable. That means you can’t change the terms of that trust. If you have a trust protector, that individual does build in some flexibility into that document. So I think that that’s a really neat thing to have in there, because there are often unforeseen circumstances that come about.
Brian: Or the company itself, the trust company, there have been a lot of change there and, because we’re talking 20, 30, 40 years later, it’s not the same company it was. So to be able to have somebody who decides we’re going to move the trust from this place to this place, or this institution to this institution, might be a powerful clause to have in place.
Jadin: The other thing that we’re seeing is jurisdiction. There’s a lot of variation among different states in terms of their laws of trust administration and things trustees can do and beneficiary rights. At one point in time it wasn’t such a big deal. But now there’s such a variation among different states that what we like to see in our documents or if we’re reviewing a trust for a client and making comments, one big thing that we’re wanting to have included in there is language around situs, meaning which state controls the administration. The creation is where it’s created, but what is the situs of the administration and the tax status. Having a clause in there that’s granting some flexibility to the trustee to move that if you can locate a trustee and jurisdiction that’s much more favorable for one reason or another in terms of tax laws or administrative laws, having the ability under that document to move that is a great thing. And we’re seeing more and more of that with trusts that are being created. Because again, there’s such the disparity between different trust jurisdictions in terms of the laws.
Brian: And so Jadin, when we create trust documents, you know via Mariner Trust, the situs that we use happens to be South Dakota because of the favorable tax laws, right? There isn’t any state income tax there. Once you create a trust and once that’s funded, it can last forever. Whereas other states at some point they’re going to make that trust end. I greatly appreciate having you on the show today. I know you’re a busy guy, but I think again, if folks want to take a step back after listening to this podcast and review what their current situation is, talk to their wealth advisor. If you’re not working with an advisor here at Mariner, you can visit us at MarinerWealthAdvisors.com. There is a great deal of information that discusses roles and responsibilities of some of the key players, the basic documents, and a whole host of other information. So again, feel free to visit that information on MarinerWealthAdvisors.com. Jadin, thanks for coming to do this show this morning.
Jadin: Thank you for having me, Brian.
Brian: We know that your time is incredibly valuable and we hope you find this podcast a worthwhile investment of your time. Thank you for listening.
The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.
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