(The Press-Enterprise) “Mistakes were made” is practically the family motto in my household. But when mistakes are made in estate planning the results can be, well, if not deadly, certainly detrimental to loved ones.
The most common mistakes
The most common mistake in estate planning is not planning at all.
Some folks mistakenly believe that only the wealthy need wills or trusts. That choice can backfire quickly. In California, if you die without a will or a trust, the state steps in to determine your heirs. The state knows nothing about you and has to assume certain facts — which may not work for you at all.
For example, if you’re married, you might assume your spouse would inherit everything. But that is not the case if you have separate property (including anything you inherited) and one or more children. Community property all goes to a spouse, but separate property gets divided between a spouse and children — even very young children.
Not having a health care directive or power of attorney can force your loved ones into a court proceeding to take care of you in the event of incapacity, and can also result in a person you would never have chosen becoming your conservator.
Choosing not to plan is a choice to leave it up to the state of California to sort out your affairs. That choice is sure to backfire.
Future mistakes
Another common and sometimes disastrous mistake is putting an estate plan in place and never looking at it again. What you chose to do 10 years ago may have made sense then, but does it now?
When you were single and named your mom as the insurance or retirement plan beneficiary, that probably made sense. Does it still? As personal circumstances and wealth changes over time, your estate plan needs to keep up.
A living trust can generally be amended if the person creating the trust is alive and has full mental capacity. A trust you put in place when your children were minors may need revising once they’re grown and you can see how they are with money and the choices they’re making.
Likewise, you may have named someone as successor trustee who is no longer the right person. You may have made gifts to people you are no longer in touch with or no longer wish to help. You have the opportunity to make those adjustments. It’s one of the reasons it’s called a “living trust” — it’s a living document that can and should change over time. Don’t make the mistake of treating it as a “one-and-done” document.
Irrevocable mistakes
When a person creates a trust, then dies, the trust becomes “irrevocable.” It cannot be revoked or amended. A person can also create an irrevocable trust during their lifetime. Generally, this happens when the person creating the trust wants to make a permanent gift to someone else but doesn’t want the recipient to have the money or assets outright. Sometimes irrevocable trusts are part of tax planning.
One example is irrevocable life insurance trusts, set up to hold life insurance outside of a person’s estate to assure estate taxes can be paid upon their death. When the estate tax exemption was much lower than the current $11.4 million, these types of trusts were more common. Now they may not be needed.
But there are ways to modify even irrevocable trusts. If a trust included terms for a “trust advisor” or “trust protector” there may be changes that can be made, such as correcting scrivener errors, delaying distributions, updating the trust to comply with current laws, or even changing trustees. A trustee may have some of those rights as well. If not, California law does have provisions that allow for the reformation of trusts in very specific circumstances. Generally, consent of all beneficiaries is required, and in some instances, the consent of the trustors (the person or people who created the trust).
Finally, judicial reformation of a trust is also possible. An interested party, generally the trustee, can petition probate court to interpret a trust, change it or even revoke it. This does, however, require a court proceeding, which can be time consuming and expensive.
While making changes to an irrevocable trust is not simple, it’s not impossible. However, changing the terms of an irrevocable trust can have tax consequences, and the methodology for changes is very specific. Thus it’s important to obtain proper legal and tax advice.
Avoiding mistakes
Mistakes happen. Times change, opinions change, and laws change. The best way to assure your choices don’t backfire in your estate planning is to regularly review your documents.
Confirm who you’ve named as trustee, power of attorney, and health care agent. Are they still the right choice? Who will inherit your estate and what are the terms? Does that still make sense? Do you have a plan that no longer applies? It’s easier to undo that plan now than after you’ve passed on.
“Irrevocable” does not have to mean the plan cannot change. Check your beneficiary designations on your insurance policies, retirement plans, and “transfer on death” accounts regularly.
Your choices are less likely to backfire on you if they are regularly reviewed and adjusted while you still can still make changes.
