"We have had clients make such large gifts before they consulted their financial advisor to see if they could 'afford' to make such a gift and still maintain their own standard of living in retirement," says Susan Hartman, a wealth strategist at Raymond James who specializes in retirement and tax and estate planning issues. She and other estate attorneys have seen clients make mistakes in trying to plan for life after their death—and some are doozies. "One of the number one problems with estate planning is when the tax tail has wagged the financial planning dog," Matthew Erskine, an estate planning lawyer in Worcester, Massachusetts, adds. "People go deer-in-headlights, saying 'Oh my God, taxes, taxes, taxes!' That's irrelevant," Erskine says. "There are an enormous amount of techniques for reducing or eliminating taxes. It's not about taxes, it's about wealth transfer."
Sometimes well meaning missteps can be repaired after the client's death, but sometimes not. Here are the top 10 mistakes that can mean your client's wishes will not be followed after their death.
Procrastination. Clients don't like to deal with estate planning because it's an acknowledgment of their mortality, so they put it off and off and off. But lack of action isn't smart. "If you don't have your own [estate plan], state law creates one for you," Marc J. Lane, an estate attorney in Chicago, warns. "In order to have control over what assets go where and over tax consequences and to have the plan be a reflection of your own personal values, it's wise to say to the client: "Okay, we need to do this."
Take a cue from the old Nike ads. Tell the client: "Just do it."
The client takes the previous advice too far and tries to "do it themselves" with online legal form services such as Nolo or LegalZoom. There's nothing inherently wrong with the forms posted by these services, say lawyers. But they're only forms. Without an advisor or lawyer with experience in which forms to use in which situations, or planning for how much money to set aside, it's a recipe for disaster. "If you use one of the online services, you won't have an attorney to represent you at probate; so if there is any concern or lack of clarity, who is there to shine a little light on what the intent was?" Hartman says. Furthermore, without a lawyer, there's no one to tell the client if tax laws have changed, rendering a particular document or strategy useless or less useful, noted Lane.
Guide your clients to use an experienced estate attorney. Tell them to think of the cost as an investment.
Clients latch onto a novel planning idea to lock in a particular gain or credit, and lose sight of the big picture. "They'll peddle it to you, whether it's insurance or estate planning, and never bother to think through the consequences of what could happen," Erskine says. Often the client doesn't ask "what if" questions, such as: "'What happens if I give my kids all this stock, then I get divorced and I need the money? Can I borrow money back from my kid's trust?'" according to Erskine. The answer is the client can, but the legal trust has to be drafted to allow it. Often, the trusts aren't designed with such emergency clauses, and the client is left in the lurch.
Examine every solution carefully, whether it's the flavor of the month or the most traditional, with an eye to what might go wrong. And ask about additional clauses to give the client wiggle room if needed.
Failure to account for potential divorce. Hartman notes that as women's income increases, so does the likelihood she'll divorce her husband. If a client sets up a trust for a child, and fails to account for him getting divorced, the ex-wife could very well tap that trust and get a bigger income stream, for alimony or child support.