We’ve all heard the horror stories of rich celebrities who died without an estate plan, like Prince, who died intestate with an estate of over $200 million. In his case, dying unexpectedly without a will resulted in millions of dollars in legal fees and extensive litigation. The most common estate mishap is not having a will or estate plan. However, even if you’ve crossed that off your “to-do” list, there are additional mishaps to avoid.
NOT REVISITING YOUR ESTATE PLAN
Congrats! You finally got your estate plan signed and you can rest easy. Right? As Ben Franklin famously said, “nothing can be said to be certain, except death and taxes,” and that is true for your estate plan, too. The impact of death and taxes on your estate will adjust to ever-evolving tax laws. This means that your estate plan should be monitored over time. Having a team of professionals who are keeping an eye on these changes and know what they mean for you and your plan can make all the difference.
Consider, for example, a couple who created an estate plan after the birth of their children in 2001 when the estate tax exclusion amount was $675K. If their plan created a bypass credit trust to be funded up to the exclusion amount upon the first spouse’s death and the spouse died today, it would be funded up to the current estate tax exclusion amount of $13.6MM. If the couple’s combined assets are such that their estates would not have been subject to estate tax, overfunding a bypass credit trust at the first death could create unintended consequences. Because assets in a bypass credit trust do not get a step up in basis at the surviving spouse’s death, these assets will likely pass to their children with built-in capital gains that could have been avoided. Had the couple revisited their estate plan periodically as the estate tax exemption grew exponentially, they could have avoided that undesirable result.
FAILING TO UPDATE FIDUCIARIES
Trying to identify a person who should manage your affairs upon death or incapacity is a difficult process. Your executor, trustee and financial and health care attorneys-in-fact need to be trustworthy, have an understanding of what is required for the role and feel capable of handling that responsibility. For trustees and certain other fiduciaries such as an investment advisor, experience managing financial or business assets is preferred, especially as assets grow and become more complex. The individual you chose as trustee when you began your business decades ago may not be well equipped to handle assets that have become more complex as your company has grown. A corporate trustee will have the experience to know how to manage these assets and may now be preferred. In addition, even the sharpest of individual fiduciaries may not have the time or expertise to manage a complex estate or trust, and they may begin to lack the energy or cognition to do so as they age. Naming a corporate fiduciary can ensure expertise and continuity in managing your family’s assets over an extended period of time. With regard to health and personal financial decisions during any period of incapacity, you should make sure that you have a succession of competent persons named as your agents under your Healthcare Power of Attorney and your General Power of Attorney.
CONSIDERING BUSINESS CHANGES
Speaking of business assets, another common estate planning mistake is failing to update corporate agreements, such as operating agreements and restrictive stock agreements over time. Valuation of the company may be set for purposes of options or mandatory buy-sell provisions at the time you enter into an agreement, but that value will almost certainly fluctuate. If your startup company’s agreement provides that the value of your stock is worth $1MM and agrees to a buyout provision valued at that amount, but on audit after your death the IRS successfully asserts that your interest in the company is worth $10MM, your estate could be taxed on assets it never received. In fact, a recent Supreme Court decision in Connelly v. U.S. issued on June 6, 2024, held that the value of a closely held company must include the value of company-owned life insurance on the life of a deceased shareholder. Business owners should assess whether this decision impacts the valuation of their interest in the company and, if so, whether any adjustments need to be made to their agreements or the structure of insurance designed to finance buyouts on death.
TITLING AND BENEFICIARY DESIGNATIONS
One of the most common mistakes people make is to spend the time and money to create an estate plan but then not titling their assets to coordinate properly with their plan. For many families, life insurance or retirement accounts make up a significant part of their estates. Thanks to ever-evolving federal laws on retirement plan distributions, such as the SECURE and SECURE 2.0 Acts, the rules on how these assets are left to a trust can be complex and confusing. Having a team of advisors to help you understand the taxation of these assets if designated to a trust, and ensuring that your trust documents and beneficiary designations comply with federal law, is critical. You will likely create a revocable trust as part of your estate plan to avoid probate and plan for asset management during incapacity, but if you then fail to title any assets to the trust, the purpose of establishing that trust is defeated. For example, if you own real property in another state, you will have to go through probate in that state. This ancillary administration could have been avoided if the out-of-state real property had been titled to your revocable trust. Your advisory team should be able to advise you on which assets should be titled to your trust(s) and how to do so.
NOT LEAVING GUIDANCE FOR YOUR LOVED ONES
No one likes to think about dying, but talking about your estate plan with your loved ones will prepare them for the important decisions they need to make. This includes leaving a list of your important legal documents and where they are located, especially the will! Probating a copy of a will is very difficult in North Carolina so informing your loved ones about where the original is located is paramount. It is also helpful to leave a list of your assets and where they are located, the names and numbers of your advisors and a list of how you would like your personal property distributed. The absolute best part of the estate planning process is the peace of mind you get from knowing that your efforts to avoid these common mishaps will help ease the burden on your loved ones in the future.
FOR MORE INFORMATION, PLEASE REACH OUT TO:
Hannah Baublitz, J.D.
Associate Fiduciary Counsel
