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- [00:00]
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Foreign.
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What is up? And welcome back, everyone, to another episode of the Practical Planner Podcast. I'm your host, Thomas Kopelman, and here with me is Dave Hodden. Dave, how you doing today, man?
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I'm great. How you doing?
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I'm good, man. You feeling. I guess I don't even know when this is going to come out. So I was going to say, are you feeling, like, stressed, tired from all the new tax bill changes coming out and trying to think about how to plan, or was it. Did it feel pretty simple for you?
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No, it energizes me. This is my favorite.
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B
Yeah.
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Over the years, it's like the super bowl for me.
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B
Yeah. You're like, hey, I've been talking about the same things. Now I get to talk about something new after about four years. All right. I love it. Well, today I'm excited about this episode. What I found is with a lot of the content that I create, you know, there's always the good, like, here's the things to do. But a lot of times the most reinforcing way to talk about things is here's the mistakes people made. And so today we're going to talk about is some of the biggest estate planning mistakes. And I think move is, you do one, I'll chime in, I'll do the next one. You chime in, you are the next one. So when you think about estate planning, what's the. What's the biggest mistake?
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Well, I think we can start simple, right? Is not forming an estate plan thinking you have more time than you do, thinking you don't need one. You know, they say only one third of people have estate plans. What's interesting about it is everyone knows how important estate planning is. If you talk to someone on the street and you say to them, do you think estate planning is important? I think everyone is going to say yes.
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B
But then your next question is, what is estate planning?
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I've had that. Yeah, true. That's true. Yeah. Yeah. Would it be good to have a will or something like that? Yeah. And the question would. Then the next question would be like, do you have an estate plan? Do you have a will? And the answer will be no. And it's surprising. But everyone across all age groups, all professions, all net worth, it's touches on everybody, even estate planners themselves, financial advisors themselves. So many. There's crazy numbers of people who don't have an estate plan. And, you know, a lot of the times the thought process is, well, everything's going to my spouse anyways, or everything's going to My kids, anyways, what does it matter? And the way I like to talk about it is, well, you know, if you try and do it yourself, or you're just going to let the chips fall where they may. Everyone has an estate plan. But do you know who set up that estate plan for you? It'll be your state legislature. And do they have your best interest at heart? Everything's going to go through court. There's going to be more costs, more, potentially taxes. And so that's why, you know, estate planning is so critical and to make sure that you have a plan in place rather than leaving it up to the government. Because, you know, who do you want to be the guardians of your kids? A lot of times that can be something that you might know internally who you want, but it could be the first person to show up to the courthouse who makes a convincing argument to the judge, who ends up with custody, who's going to be your guardian, you know, the kids, when they receive the money, it's going to go according to state law, which means they might receive it at 18, rather than being delayed until a later age when they're more mature. So, you know, that's gotta be the top estate planning mistake, is just not doing estate planning at all.
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B
Yeah, I think that there's this, you know, disconnect between what we know we should do and what we should do. Right. And the perfect example is financial advisors, estate planning attorneys, et cetera, with either really old estate plans or no estate plans. Right. We know we gotta do it, but it doesn't mean that we find the time and dedicate to actually getting that done. But I think building off the one that you have is like, over. Always thinking that it's like you can put it to the back burner because you eventually will have time to get it done. And, you know, this one hits a home for me because I recently had a buddy who passed away at a really young age and his estate plan was not done. And so that obviously makes things that are already hard, really hard. Because now you need to say, okay, great, there's no beneficiary designations, there's no will, there's none of the documents in place. So now you have this whole, is it going to go to the right person? Are they going to say, instead of the spouse, it goes to a parent? But then does the parent have to use gifting to give it to the spouse? Right. There's just a lot that can go wrong. And so, like, I think people always think, like, okay, I can get to that next year. But you know, there's not always a next year. Right. These are, these things are actually really important to do. They take less time than you think that they will, to be honest. You just need to go get them done.
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A
Absolutely, yeah. I mean, it's, it's, it's, it's, it can be. When you think back traditionally to how estate planning works, it's expensive, it's time consuming, it's burdensome, you have to go into the office. But just like with wealth.com, i mean, there's so many new avenues available to make it more accessible and more convenient that there's really no reason nowadays that someone shouldn't have an estate plan.
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B
Yep, yep. Okay. What's the next one that comes to mind for you?
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So I think another one that comes to mind, and this is drawing off personal experience and it actually goes back to when I was practicing bankruptcy as to what the horror story can be. And that's when people do do it yourself estate planning. And I don't mean that in the context of creating your own documents. I mean that in the context of I'm going to find my own way to avoid probate by gifting put assets in my children's names. You know, as long as everything has a beneficiary designation, as long as I get things out of my name, then I'm okay without knowing all the nuances of what the side detriments could be associated with that. So I once had a client who came in who was in very significant debt and they were looking to file for bankruptcy. It was early on in my career, that's what I was doing. Well, they had almost no assets because they had spent a lot of it down, they'd gone to significant debt. But a few years prior, their parents had actually put the name of their, their house in the child's name and basically said, I'm going to put your name on the house when I pass away. I want you to split it with your brother. And it was kind of a, rather than doing a will, it was kind of a do it yourself estate planning tactic. So what happened? The parent died, the child sold the home, the child did what the parent asked and split the proceeds. Probably a couple hundred thousand dollars maybe. And what happened thereafter? The child had to file for bankruptcy. And so what would happen if you hit that bankruptcy button? The trustee would have said, wait a minute, I see that you had a house a few years ago. What happened to all the proceeds of that money? And they would say, well, I gifted you know, hundreds of thousands of dollars to my sibling, they're going to go looking to the sibling and say, hey, I need some of that money back to be able to pay this person's creditors. So sometimes you can't even fathom what is going to be the implications when you try to do it yourself and do things like put your child's name on a piece of property because you don't know what's going on with that child, you don't know if they're, they have a spouse, you don't know what's going on with their marriage, you don't know if they have creditors. So it's very, very dangerous to put someone else's name on your property unless you're going through the proper channels and you're doing it very carefully.
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B
Yeah, that's a good one. It actually leads into another estate planning mistake which is like not really doing the tax planning. Right. So in that example, you basically have two failed planning opportunities. One, parents didn't use $500,000 capital gain exclusion on the house because they were the ones living in there. And then because they gifted it while alive to the son, he inherits the basis of the parents and he doesn't get step up in cost basis when they pass away. So this is something that a lot of people lived in their house 30, 40 years, right? This huge increase of real estate. So let's say they bought a house for 500k, you know, they sold it for a million dollars, $500,000. Now that they're paying taxes on capital gains taxes on, that takes away a lot of the value, a lot of the things that it could have helped the kids with. So I would definitely say that's a mistake. I see all the time people talk about parents giving them the house when they're younger, parents starting to gift them, you know, some of their stocks or whatever. And if they're going to be over the estate tax threshold, great. Or if kids have 0% capital gains bracket and you can move it over, great. But in general, right, like you need to do this tax planning and make sure that you're getting the step up in basis because that is a big tax savings tool.
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Absolutely.
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Cool. Okay, what's your next one?
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So I think the next one that I would consider would be when someone fails to appropriately name successors or contingencies in their estate plan. I've seen it time and time again. Estate planning is really in an area where you need to think, okay, what if this happens? But then what if this happens? But Then what if this happens? And I see it a lot where people will make a power of attorney. They'll name one person, they'll set up a trustee, they'll name one successor trustee. And you can get to the point where you're stuck in and it's going to be a lot of administrative expense and a lot of time. And the person who comes into the role may not be someone who you would have chosen. So a lot of people are really nervous about, you know, naming multiple successors because they're not 100% sure. But sometimes you need to think, well, what's the worst case scenario of who could step into that role if nobody's available? Because, remember, you're making an estate plan because of what if something happens to me? It's kind of not logical to think that you're going to name one person and not think to yourself, well, what if something happens to that person? So that's a mistake. I've seen. I've had clients in the past. I had one where it was an irrevocable trust and they named a, I think a nephew as the trustee on an irrevocable Medicaid trust. That nephew passed away, and then their neighbor was named as a successor trustee with no one after them. And the whole family was up in arms. And also as the successor beneficiary, the whole family was up in arms. And there was really nothing that could be done because they hadn't thought through all the contingencies. So that's one thing that I think is a big mistake, is people not thinking through the contingencies. I can think about what happens if something happens to me, but you also have to think what happens if something happens to this person as well.
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Yeah, I think that's what estate planning is. Right. Like, if this happens, where does it go? And I found in financial planning, people don't really do that. Right. They just think about, like, first layer, and it's really all. You gotta think through all those layers. So I think that's a good one. I think the next one, I would say, is not funding your trust once it's done. I see this way too often where people pay the money. They get a trust set up. They, you know, they get their whole estate plan, they sign it, and then they never think about it again. Right. So, you know, hopefully if you worked with estate plan attorney, they already moved the deed of your house into it. But this is now gonna be, you know, taxable brokerage accounts. It could be bank accounts or TODs. And then from There it's going to be updating beneficiaries too. Right. So now we need, hey, contingent beneficiary most times to be the trust. And I also think that moves us into another mistake that I'm sure you have horror stories of are people who, they've never updated their beneficiary designation. So like ex wife potentially gets it, or hey, you're married, but now you left it as your parents from 10 years ago before you're married. There's a lot of just mismatching here. And so people think like, well, I did my estate plan or my will says everything should go to this person, but they forget to realize that those beneficiary designations are going to trump that.
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Yeah, I mean, I can't believe I didn't think of that earlier. As far as, I mean, that is has to be maybe number two between behind. Not having an estate plan is not funding because, you know, not funding your estate plan is like just having a nice beautiful treasure chest with a lock on it that protects everything inside, but there's nothing inside it. And it's just so critical. And you know, when I was practicing, I tried to take the approach that we would kind of hand hold people through through the funding process. But so many attorneys, the way that they would approach it would be they would talk to the client about how important it was, but it would be basically as they were on the way out the door with their signed documents and they'd forget about it in the parking lot.
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Well, and if you're paid hourly or you're a flat fee. Right. If you're paid hourly, the client has an incentive to not want to meet with you again and pay you. And if you're paid a flat fee, the attorney kind of has an incentive to say, I already delivered it. I reached out and said, hey, if you want to meet, let me help you do it. And you never say anything, so I can kind of just let it go. And that's where the advisor should step in and we should be reviewing it to say, like, hey, that's not done. We need to get it done because we're working with them on a yearly basis.
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Absolutely. And it's such a value add for the advisor to be a part of that process and to help them get it done, because it can be time consuming, it can be burdensome. But people have to realize that you may have a $10 million estate and you get 9.9 million into that trust or with beneficiary designations, you leave out that one checking account With a large balance, that one piece of land that you had up in New Hampshire that has no real estate on it isn't worth much. It has to go through probate all by itself. So this whole plan was designed for all these different purposes, one of the big ones, to avoid probate. And just because you weren't comprehensive and you left one thing out, you're going to cause a full blown probate. Nobody wants that. And so that's why it's really important to just be vigilant to make sure you get your trust funded.
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Yep, exactly. Next one I can think of is, you know, kids are 18, they go off to college and not getting advanced healthcare directives set up. You know, I, I know when I was in college, I had a lot of friends and a lot of people in my school who went to the hospital either for drinking or other issues. Right. And you want to make sure that there is now that they're adult children, that they have somebody on file who can choose to make health decisions, be alerted of everything that's happening, all that kind of stuff. I think this is one that goes over a lot of people's heads. They don't think about it. And for me, it's something I use wealth for. I just say, hey, kid's 18, you probably just want to get, that's the only document you really need set up. You can do the rest if you want, but just, just get this one set up so, you know, everything is covered.
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Yeah. And, and, you know, I think it's so, so important. Everyone of every age needs estate planning documents. Once you reach the age of majority, the question is just how sophisticated does it need to be? How many documents do you need? You know, what are your priorities? Someone who's 18 to 21 years old, they're probably still dependent from a tax perspective on their parents. On a health insurance perspective, they probably live under their roof. Maybe they went off to college and they're living in a dorm, but all these risks exist. I remember I saw an Instagram post recently of a college party where a roof collapsed on all these kids at a party in. You know, my estate planning mind just went to. I wonder if they have health directives, if they have health care proxies, powers of attorney. And most of those kids, they're not going to go sit down with an attorney and get them done. They're just not, they're not going to pay for it. They have this complex where they think they're invincible. But their parents, certainly, if they know about this risk are going to be really concerned about it and try to drive them, to motivate them to get these documents in place. And that's also why it's good to have more accessible estate planning where you can get some of the stuff done more electronically for some of these more simple documents for these 18 to 20 year, 20 year olds where they're just going to name their parents, but it's just so critical because they don't want to be stuck if something happens.
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Yep, yep, really good points. Okay, next one that I can think of is not updating your estate plan after life changes occur. So to me, you know, what I see is people think this is like a one time event. I've worked with estate planning attorneys, I've worked with financial advisors and a financial planning side of things. And I, and I see all the time they had an estate plan before they had kids. They, you know, potentially move states. You know, there, there's just a bunch of these different life events that happen. It could be, hey, your trustee passed away, it was your dad, and now you need to move it to somebody else or something could have happened with one of your children and that needs to be changed. But just not revisiting your estate plan and updating to reflect your current life is, is definitely a huge mistake. I see often.
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Yeah, absolutely. There's just so many changes that occur and a lot of people, when they get their estate plan done, they breathe a sigh of relief. They're like, oh, that's done. Finally. Now I can set it aside, you know, possibly for the rest of my life. I mean, that's kind of what they're thinking. But 10 years goes by, 15 years goes by. I mean, do you have the same taste in music, the same taste in clothing? I mean, think about how many things in life change over that time period. How is it possible that your estate plan doesn't need to change at all? We've seen multiple tax laws change over the years, but I think the biggest thing that's changed that are not in most people's estate plans, especially those ones who drafted them over a decade ago, are digital asset planning. Because people weren't thinking about it. It just wasn't a part of the estate planning process to include provisions for your Facebook account, your crypto assets, your digital accounts. And now it's really important that you specifically have those provisions in your estate plan or your fiduciary might be stuck in not being able to access them. Think of all your camera, you know, roll your emails, your music library, all these Various things that you might want to pass on or give people access to if you become incapacitated or pass away. If you don't have a specific provision in there, then you're not going to be able to make it happen. And people who haven't kept up with the times probably don't have that provision in there.
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Yeah, that's a really good one. Especially on crypto, right? Like, what we see is most people have crypto. They're not like spouse adjacent in this, where both are like, love it. I, I know, I know what a, you know, cold storage wallet is, all this stuff. So if somebody believes in it, tons of assets in it, and nobody else has the ability to know that exists or how to get into it, et cetera. And that's just tons of lost wealth that you thought was going to help fund your family's life, and now it's actually lost and setting them backwards. So I think it's a really good one. Next one that I can think of is just like, really, I think a lot of it is not having a trust with set rules. So I think we've all seen the stories, and there was one recently this year where kid on Reddit was basically like, hey, I inherited about $900,000 from my grandma. And he ended up putting it all in one individual stock. From something he saw and read it stock ended up going down about 40%. He has, you know, 550,000 left and now he's panicking, right? And so you're like, do I sell and do I rebalance? Do I wait because I don't want to have the loss? But we have no idea if the stock's ever going to come back. And this is exactly why for most people at that age, they should have a trust and they should have no ability to take it out other than for certain specific things. You can appoint an investment advisor over it. I mean, no 18 to 22 year old should be given $900,000 to manage and pick investments on because they haven't gone through the pain of picking individual crypto or individual, individual stocks and losing money to realize, oh my gosh, I have no edge here. Right. There's too many smart people, too much smart technology in the space for you to have an edge and pick individual winners. So, like, make sure that you understand who your kids are, what age they'd be ready for things, and set up these kind of guidelines to help them not make mistakes and lose your art or in dollars.
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Yeah, absolutely. Because a lot of people set up their estate Plans potentially when the kids, before you know anything about the children, they're, you know, toddlers or they're, you know, adolescents and you don't know necessarily how things are going to turn out. And if you dump a bunch of money on them, you know, because when you form your estate plan, you should assume that something's going to happen tomorrow. You should assume that's going to happen when you set it up and think about what will happen if something happens tomorrow. And if a child, when they turn 18, get a ton of money, first of all, you're probably going to demotivate them from really seeking out a career and seeking to really make their own way. If they have this heap of money where they can go open a bar or buy a really expensive truck or these things, they probably a smart, savvy person with money who has had money would know not to do with. They're not going to have those instincts and then you're not going to be around to direct them as far as how to help them manage that. So it's really important to make sure that you really consider, you know, what age do I think that this beneficiary will be mature enough to handle this property? If you can even think of an age, you know, there are some kids where it just makes more sense just to have a trustee in perpetuity to be handling that money for the beneficiary for their own benefit. Yeah, because you want to motivate them to be a productive member of society rather than sit on their inheritance.
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Yep, yep, good points. Okay, maybe the last couple that I'll hit on is like not doing any estate tax planning. So this could be federal and being like, I don't realize I'm over. It could also be as simple as like state and not realizing in New York, hey, you're just barely over the cliff. And actually if you just gift money and do some good stuff with it, maybe a couple of years earlier you would end up with more money just because the cliff ends up going backwards. I think those are two pretty important ones. I think it could be, you know, not using your yearly gifting amount. There's a lot of people who don't use that 19k to multiple people. You know, not realizing that there's the ability to Superfund A529 and get that tax free growth started earlier. Any other ones you want to hit on?
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No, those are all good ones. I think the other one that I would think of is making sure that you are people who don't have A comprehensive power of attorney. So they have a really bare bones, just really generic power of attorney that doesn't lay out any specific powers that the beneficiary has. I mean, that the agent has over the principal. And you know, we see things like with investment accounts, with IRAs, where custodians are rejecting powers of attorney because they don't say that the agent has the ability to change beneficiaries on the account. So laying out those specific things in a power of attorney, even though people hate long documents, they don't like legalese extending them out and putting in each type of power, which I call a kitchen sink power of attorney. Just throwing the kitchen sink of powers in there is really important because it helps to make sure that if something happens to you, you become incapacitated, you know, that that agent is going to be able to do anything they need to on your behalf. And because it's going to be too late otherwise. And if you've made it to bare bones and the bank rejects it, that means that the agent's probably going to have to go to court.
- [23:11]
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Yep, good point, Good point. Good way to wrap it up. So I feel like at the end of the day, there is so many mistakes. These are kind of like a recap of all the topics that we've hit in other episodes, you know, and I think as an advisor, our job is to help make sure our clients have estate plans first in place and then second, that they reflect their life, that beneficiary designations are correct, that trusts are funded, that we're making sure money lasts as long as possible.
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And.
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And you know, we definitely play a really important role here. So I think that's everything that we wanted to cover. Again, everybody, please don't forget to rate and subscribe. We're still trying to build out and get more five star reviews, so we appreciate you take the time to do it. If you have any topics you want us to talk about, feel free to submit them. We love kind of answering these reader submitted questions or doing full episodes on them. And tune back in for our next episode here in a couple weeks.
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Sam.