Avoid These Estate Planning Nightmares

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A serious illness, family crisis or death in the family can bring out the best behavior among relatives -- or the worst. According to the 2014 Intra-Family Generational Finance Study by Fidelity Investments, 64 percent of parents older than 55 who have at least $100,000 in investable assets and their adult children over 30 aren't on the same page about when the right time is to have conversations about estate planning. Even among those families that do talk about these topics, few get into the level of detail that's recommended. The study found that 31 percent of parents say they haven't talked in detail about estate planning; an additional 10 percent haven't discussed the subject with their offspring at all.

One reason that estate planning is so complicated and emotionally fraught is that adult offspring often confuse love and money. "What many parents don't understand is that their children do not see an inheritance as dollars, they see it as 'love units,' " says Ken Moraif, a certified financial planner or at Money Matters, a wealth management and investment firm in Dallas-Fort Worth.

Problems can arise when parents decide to leave a bigger inheritance to one child because, for example, that child isn't doing as well financially as another. "The child that received the smaller inheritance interprets that as 'Mom and Dad loved my sibling more than me,' " says Moraif. "This creates resentment and ill will that the parents had no intention of creating." He says parents should individually explain a disproportionate inheritance to each adult child and allow them to vent their frustrations, so that they don't feel punished for their success or less loved.

Hurt feelings and misunderstandings aren't the only inheritance troubles that can plague families. Consider the following real-world stories of times when estate plans (or lack thereof) went awry.

1. Failure to Plan

"We recently faced an unfortunate situation with a grandson who had lived with his grandfather for 30 years because his mother wasn't in his life and his father had died," says Pat Simasko, founder of Simasko Law in Mount Clemens, Michigan. The grandson put his life on hold to take care of his grandfather as he got older, but when the grandfather passed away, the grandson wasn't entitled to any inheritance.

"The grandfather never put his $750,000 estate in proper order," says Simasko. "There wasn't anything that could be done. It truly amazes me that if a person would take one to two hours to properly plan, future disappointments could be avoided."

2. Derailed by Simple Administrative Details

Craig Myers, a financial adviser and president of CR Myers & Associates in Southfield, Michigan, says he met with a woman whose mother left a trust that stated that her children were to inherit 100 percent of the estate. There was even a prenuptial agreement with her new husband stating that all of her assets prior to the marriage were to go to her daughter.

Unfortunately, the beneficiary designations on the accounts were never changed to name the trust, and as a result of this oversight, her new husband received 100 percent of her estate. "Someone may have a trust that explains their wishes upon death," Myers says, "but if their beneficiary designations are not properly titled, they could disinherit their family without meaning to do so."

Dan White, a financial adviser and founder of Dan White and Associates in Philadelphia, had a similar problem with a client whose husband passed away from a heart attack during their vacation in Spain.

"Her husband was a self-employed lawyer," says White. "He put together all the paperwork, but forgot to take care of the biggest item. ... He never named a beneficiary. Everything had to go to probate, and it took her months to sort out this mess." White stresses to his clients the importance of having a professional review all paperwork. "One proofread through the document, and all of the delays would've been avoided."

3. Cross-Country Squabbling Siblings

A client of John O. McManus, an estate attorney and founding principal of McManus & Associates in New York City, had a client whose daughter lived on the West Coast and son and daughter-in-law lived close to her on the East Coast. The children had joint power of attorney, and the daughter would sign blank checks so that her brother and his wife could pay for things their mother needed without constantly needing her signature.

"The son wrote his wife checks from his mom's account as a salary to pay her for taking care of his mother, which caused some tension between the siblings," says McManus. "Due to the son's history of run-ins with the law, the daughter was wary of letting him have too much power over his mom's estate."

Ultimately, the mother named the daughter as sole executor. But after the mother passed away, the daughter-in-law took things out of the house that she claimed were hers or were "intended for her" by the deceased mom. "The daughter called the cops to have the daughter-in-law arrested when she would not leave the home of the decedent," says McManus.

McManus was able to get both parties to agree that the daughter-in-law could go through the house with the estate sales team to select items that she claimed were left to her, and the company would value these items to be deducted from her share of the deceased's estate.

To avoid situations in which relatives fight over individual property, it's best to include a written list of items of value with designated recipients in your will.

4. Blended Family Brouhaha

Lauren Brouhard, vice president of retirement at Fidelity Investments, says that census data shows that blended families now outnumber traditional families in the United States. And stepparents, stepsiblings, and half-siblings can make estate planning much more complicated.

For example, a mother may want to leave different inheritances to her biological children than she does to her stepchildren, or want to protect her biological family's inheritance in the event anything happens. "Without a meaningful discussion with the family about her intentions -- and some follow-up steps to ensure these intentions are carried out -- things can end up quite different than expected," says Brouhard.

McManus recalls a client who died, leaving an administrative mess that led to an extended and complicated estate settlement process involving the man's ex-wife, kids and current girlfriend.

For more than a year, there was a fight over who could open one of the client's storage units. "Finally, we were able to find a day that lawyers from all the represented parties could go together to open the unit," McManus says. "We had to count every item down to the socks to create an itemized list of contents to be divided among the heirs."

The haggling over every detail of the deceased's estate continues, McManus says: "His ex-wife, kids and current girlfriend are still fighting over anything and everything, including airline frequent flyer miles. We had to value the miles, investigate the transfer of ownership to an estate name and then equitably divide them."

Don't Leave Your Heirs a Mess

A detailed will, properly identified beneficiaries, and designated recipients of effects from an estate can reduce the chances of a free-for-all after a death, although when multiple parties are involved who were already arguing before the parent's death, the chances are high that lawyers will be brought into the fray.

"The point is, if parents don't make it clear what they want when it comes to things like estate planning, there's a strong likelihood things won't end up that way," says Brouhard. "Adult children have an important role to play in helping to clarify and carry out their parents' wishes, but this can only happen by talking things through as a family."

Michele Lerner is a Motley Fool contributing writer.

23 PHOTOS
Your 22-Step Checklist to a Financially Sound Post-Divorce Life
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Avoid These Estate Planning Nightmares
If you haven't already, cancel and close all joint accounts with your ex-spouse immediately. Joint accounts that remain open are liabilities that could come back to haunt you. The last thing you need is to be on the hook after your ex-spouse runs up charges on credit cards or overdrafts a bank account. If you currently have a balance on a joint account that can't be paid off (for example, a credit card), instruct the bank that you want to suspend the account to prevent future charges. Confirm that the account cannot be reopened or unsuspended.

Depending on your situation, it may make sense to apply for new credit cards before you cancel joint accounts. If you have marginal credit and don't have an emergency reserve of cash, getting access to a credit card should be your priority. I don't advocate using credit cards, but I've seen what can happen in the short-term if someone does not have sufficient funds to cover their core bills. Sometimes you need a small bridge loan after a divorce while you get on your feet, and a credit card can be that temporary bridge.

You'll also need to open new bank accounts, investment accounts, etc. Make a list of the accounts you had while married, and seek to replace these as soon as possible.

I cannot overestimate the importance of changing the beneficiaries on your accounts. If you fail to do this, your ex-spouse could end up with your IRA, 401(k) and other assets when you pass away. Changing beneficiary designations is an easy process that can usually be done with a simple form. Most forms list a primary beneficiary and a contingent beneficiary. If you have a new living trust, ask your estate attorney who should be listed as primary and contingent beneficiaries on your accounts.
Contact your insurance broker and update your auto, homeowner's, and umbrella liability coverage. Pay particular attention to the list of assets you scheduled on your homeowner's policy. Jewelry, firearms, collectible and artwork are often listed, but some of those listings may no longer apply to you if your spouse received the items in question in the divorce, or if they were sold. There is no sense in paying insurance premiums for assets you do not own. For asset protection purposes, make sure you have an umbrella liability policy on yourself. It's cheap, and I view it as a must-have.
Now that you're single, it is more important than ever to have a cash safety net. Have six months of living expenses set aside in a bank account. Or, given that interest rates are so low, consider putting it into an ultra-short term bond fund to get a 2 percent to 3 percent yield.
One of the most common fears I hear from men and women alike after a divorce is that they feel financially vulnerable –- that they don't have anyone to turn to if they get laid off or suffer a financial setback. One solution is get disability insurance, which provides you with a monthly "paycheck" if you become injured or ill and can't work. It is often not cheap, but it can provide peace of mind that your financial life will not be ruined if you suffer from a long-term disability.
During and after a divorce, you should check your credit score at all three credit bureaus. You can receive a free credit report (note that you will receive a report, not your credit score), but if you can afford to get your score, I would recommend this as well. If you see errors or other issues on the report, contact the bureau immediately and get them resolved. Otherwise, they'll cause you to pay more for loans, insurance, and possibly even make it harder for you to get a new job or rent an apartment.
There is no better time to think about your estate plan than after a major life change. If you have children, you may need to update your will, but even if you don't, many estate planning issues still apply. Update or create a living will, a power of attorney for health care and finances, and other documents. If you had a living trust, work with your estate attorney to create a new one.
Post-divorce, there may be many assets that need to be retitled. For example, if you owned your house in a trust with your spouse, you'll want to retitle it in your name personally or in the name of a new living trust you create.
Immediately after a divorce, work with your accountant and do a new tax projection based on your income and deductions. Based on your new tax liability, you may need to change your withholding, pay more or less in estimated taxes, and change your investments. For example, if you were in a high tax bracket with your spouse and owned tax-free municipal bonds, after a divorce, your tax bracket may be low enough that you'd do better by selling the munis and investing in taxable bonds. Run the numbers and find out.
If your spouse handled the investing, you may now own things that you aren't familiar with or that aren't right for you. Do a deep analysis of each investment to see if it is prudent and makes sense for your risk tolerance and goals. Work with an independent investment adviser to create an appropriate asset allocation and analyze the tax consequences of selling and buying replacement investments.
Work with an independent financial planner to help you analyze your financial situation post-divorce so you know what you should be saving for retirement, what your budget should look like and how to make the most financially of your new life.
If you cannot afford a full-fledged financial plan, at a minimum, craft a budget. List your income sources (e.g., work, marital support, child support, investments) and list your new expenses. Track what's coming in and going out so you can see how much you have to save and invest, and how much you have to spend on non-essentials.
Since you will have all new accounts, policies and documents, this is the perfect time to create a new filing system. The time you spend getting organized in the beginning will pay off later in time saved locating documents when you need them, and by giving you the data you need to make the right financial decisions for you.
If you want to be able to see where you stand financially at any time, considering using a website such as Mint.com or the others to track your expenses, income, assets and liabilities in real time. The financial insecurity many newly divorced people feel can be lessened or eliminated by having access to their financial world at a moment's notice.
If you were the "out spouse" (the one who didn't have the relationship with the accountant, financial adviser, attorney, insurance broker, etc.), then you'll need to create your own team. Start slowly. There's no rush. Ask your family law attorney for referrals. Use AdvisorFit to help you evaluate financial advisers.
If you change your name after a divorce, send the news to the Social Security Administration.
You'd be surprised how often couples going through a divorce forget about their safe deposit box. Check what you have in it and then close the account. Consider getting a new safe deposit box if you have valuables that need to be secured.
If you didn't get the safe in the division of assets, get one to protect your valuables.
Identify theft is all too common and it can cost you thousands of dollars and countless hours to resolve. Buy a good cross-cut shredder so you can destroy old credit cards, credit card offers and other items you don't want to fall into the wrong hands.
If you shared a computer with your ex-spouse but are not taking it with you, use a program such as Eraser or Permanent Eraser (for Mac) to destroy personal files. Be sure to delete personal information from browsers.

Just because you're divorced doesn’t mean you are not both on the hook for past taxes and joint debts. If you get the dreaded IRS audit letter, you’ll want to make sure you have all of your financial records. You don’t want to rely on your ex to have these or to help in an audit. Before you part ways, make copies of everything –- past tax returns, agreements, loan documents, check registers, bank statements, investment reports, 1099s, etc. Hopefully you won’t need any of these after the divorce, but if you do, you’ll be glad you have them.

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