Estate Planning Mistakes to Avoid with Tim Denker
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Estate Planning Mistakes to Avoid with Tim Denker Show Notes
Dean Barber could talk for hours about estate planning mistakes to avoid. On Episode 113 of The Guided Retirement Show, Dean decided to cover some of the most common estate planning mistakes that he and Tim Denker of Denker Law Firm, LLC have witnessed. Tim founded Denker Law Firm, LLC in 2006 and has practiced estate planning and business law since 2003.1 Dean and Tim want you to be informed when it comes to estate planning and are going to 10 mistakes to avoid.
10 Estate Planning Mistakes to Avoid
- Not preparing an estate plan
- Not understanding the dangers of will-based trusts
- Improper asset titling
- Using free resources without understanding the details
- Not getting the right people involved—attorneys, CPAs, advisors
- Doing a disservice to your family, not yourself
- Knowing the difference between an IRA and 401(k) in estate terms
- Taking a Set-It-and-Forget It Approach with Your Estate Plan
- Business owners without a succession plan
- Not considering beneficiary-controlled trusts
1. Not Preparing an Estate Plan
Let’s dive right into these nine estate planning mistakes to avoid by starting with the most common one: not preparing an estate plan.
If you do nothing, there are state laws that are in place that dictate what the probate court is going to do with your estate. Probate can cost you (or your family if your estate is being probated) a lot of money and time.
“It’s a big headache. Plus, it’s all public record.” – Tim Denker
Dean always tells people that they have an estate plan whether they know it or not. That’s because the state will make one for you if you don’t make one yourself. Something is going to be in place for you because somebody needs to decide where your stuff is going to go after you die. The courts are going to step in and decide for you if you don’t clearly lay that out.
2. Not Understanding the Dangers of Will-Based Plans
Dean and Tim were in full agreement that not preparing an estate plan is the biggest estate planning mistake to avoid. But that’s far from the only one. The second mistake planning mistake to avoid on Dean and Tim’s list is not understanding the dangers of will-based plans.
Many people don’t understand that all wills must go through probate if it’s not done correctly. Everybody should have a will, but the goal of the will is to catch what slips through the cracks. Above that will, there’s this non-probate planning device in place, whether it’s the use of a trust or if you’re titling your assets.
If you have a will-based plan that has power of attorneys or whatever else you’re going to need, that’s what your plan is. But then there are some more intense titling and things that you need to go do, and you need to stay on top of as life progresses to make sure that the will is not actually what is going to control the distribution. Again, if that will takes place, it’s going through probate.
That’s where the big misunderstanding is. Some people think if their will is done and it says what they want it to say that that’s that. They don’t understand why a judge needs to read it and say that’s what they really intended.
“There’s a good reason for having those judges in place and making sure that creditors, beneficiaries, and everyone else is protected. But it’s still one of those things that 99.9% of the time, you’ll want to avoid it if you can avoid it.” – Tim Denker
3. Improper Asset Titling
That leads us right into No. 3 on our list of estate planning mistakes to avoid, which is improper asset titling. This can very easily happen due to not paying attention to how your assets are titled.
Let’s say that you have an estate that’s not too large and have a will to catch those things. You’ll need title either transfer on death (TOD) or payable on death (POD) on all your assets or have them jointly titled.2 That includes your bank accounts, automobiles, real estate—whatever real assets that you own.
How Are You Titling Your Assets?
However, there can be some potential pitfalls if you jointly title your assets that involve the next generation. For example, what if you create a plan inside your will, title your assets, and add your son/daughter on your account to help you handle it? If you’re in that scenario, Tim and Dean have these questions for you.
- Is your son/daughter a signer on the account?
- Are they a joint owner on the account?
- Did you list them as a beneficiary?
- Did you list them as a TOD?
- How did you list them on the account?
Tim and Dean have seen many people make the estate planning mistake of thinking that their will will take effect after they die and it will control the distributions. That’s not true.
“The will isn’t going to circumvent the planning that you do with the titling of your assets. The titling of your assets is going to control everything.” – Tim Denker
Two Potential Issues with Adding Your Child as a Joint Owner of Your Account
Tim sees two common possible pitfalls with a child as a joint owner of an account. The first pitfall is one to keep in mind if you have multiple kids or people that you want to leave your money or inheritance to. Once you list one child on that account with you, that account is automatically going to transfer to that child when you die. They have no obligation to share that money with anybody else.
While that gives the kid the convenience of accessing the account and helping their parent (whether they need help or not), it still undoes the planning and doesn’t allow them to have their wishes carried out.
The other potential issue Tim frequently sees when adding a child as a joint owner of an account is more of a liability thing. What if your son/daughter is listed on your account and gets in trouble? Maybe they need to file for bankruptcy. There’s a good chance that creditors could go after your child’s assets in your account, even if they aren’t putting money into it.
“That’s very dangerous. Oftentimes I say, ‘Don’t add them as a joint owner on the account. Use your power of attorneys that have been put into place for you or add them as a signer only on the account.’ That’s kind of the bank’s internal power of attorney, I guess you could call it.” – Tim Denker
So, if you create a will-based plan, make sure that you know all the extra things you need to do. Otherwise, it may not be sufficient.
The Two Primary Purposes of Trust-Based Plans
There are a lot of estate planning mistakes that can occur within trust-based plans as well. There are so many different types of trusts, but they have two primary purposes. They’re used to make sure that your wishes are carried out while you’re alive and after you’ve passed on.
“The trust really has a dual purpose. That’s why they call it a living trust.” – Dean Barber
Think of a trust as a massive contract. Tim has seen some trusts that are up to 40 to 50-plus pages long because they include some complex tax strategies. He estimates that the average trust is closer to 20 to 30 pages.
4. Using Free Resources without Understanding the Details
No matter how many pages your trust is, it’s critical to have a thorough understanding of all its provisions so that you’re not missing anything. There are various free resources that can be used for creating a create an estate plan, but do you really want to sign off on it without being 100% sure that everything in your plan is in you and your family’s best interests?
Using those free resources without understanding the details is an important estate planning mistake to avoid. That’s why Tim and Dean strongly advise working with an estate planning professional.
“Once you have your trust, do you know how to use it? Why would you not want to have professionals that are in place to coach and teach you how you should use the trust to best benefit you and your family?” – Tim Denker
Whether you’re creating your own estate plan doing your own taxes or investing, remember that you don’t know what you don’t know. It’s no different than going to a doctor if you’re sick or going to a mechanic if your car needs to get fixed. It’s important to work with subject matter experts that understand your goals so they can assist you with your specific financial planning needs—including estate planning.
5. Not Getting the Right People Involved—Attorneys, CPAs, Advisors
This ties into our fifth estate planning mistake to avoid, which is not getting the right people involved. It really goes beyond working with an estate planning attorney/professional.
At Modern Wealth, our CFP® Professionals build financial plans for people that clearly outline the long-term objectives for them (and their family if legacy is important to them). Then, we collaborate with our CPAs and estate planning attorneys to discuss each individual could consider from an overall financial planning standpoint, tax planning standpoint, and asset transfer and protection standpoint.
“What you kind of craft in that situation is your family’s own little board of directors. You go find these people who are experts in what they do and say, ‘Make my situation the best that it can possibly be’ as opposed to figuring those things out myself.” – Tim Denker
Don’t Get Lost in Translation
If all those professionals aren’t working together on your behalf, it’s easy for key aspects of your plan to be misinterpreted and for planning opportunities to be missed.
“The attorney speaks a different language than the CPA and the CPA speaks a different language than the CFP® Professional. A lot of times, the individual is left in the middle trying to decipher what it is that these three professionals are telling them. Bringing them together collectively to work together is an important factor.” – Dean Barber
6. Doing a Disservice to Your Family, Not Yourself
When Dean looks at an estate plan, he reminds that individual that their plan isn’t for them. Their estate plan is for their family and the people that they care about. That misunderstanding is No. 6 on our list of estate planning mistakes to avoid. If you or your spouse passes away or become incapacitated, are your estate plans up to date so that all your wishes are carried out as you intended?
“I’ve seen some real horror stories where somebody creates a trust but doesn’t update beneficiaries on retirement accounts.” – Dean Barber
7. Knowing the Difference Between an IRA and 401(k) in Estate Terms
No. 6 and No. 7 on our list of estate planning mistakes to avoid really go hand-in-hand. Speaking of retirement accounts, it’s critical to know that IRAs and 401(k)s are different from an estate planning perspective.
Dean recalls a scenario where an individual had lost their spouse and renamed his two children as beneficiaries on his 401(k). The individual remarried several years later but passed away a few months later.
The two children were still beneficiaries on the 401(k) account, which is what the individual wanted. But it didn’t happen that way because of the ERISA laws.3 The new spouse didn’t sign the spousal waiver to waive their rights to the deceased individual’s 401(k). So, even though they had only been married for less than a year and the individual had named their children as beneficiaries on their 401(k), the 401(k) went to the new spouse because of contract law.
“Estate planning is probably one of the most unselfish things that you can do.” – Tim Denker
Anytime you have a change to your personal situation, you need to review it. Did you recently get married or divorced? Are your beneficiaries up to date if there is suddenly a death in the family (or if you pass away)? There are so many different scenarios that can take place, which is why it’s critical to have a thorough estate plan that’s tailored to your unique situation.
8. Taking a Set-It-and-Forget It Approach with Your Estate Plan
Another common mistake that Dean even admits that he’s somewhat guilty of making is not reviewing your estate plan at least every other year. He just realized that it had been six years since he and his wife last reviewed their estate plan. Yes, it’s critical to update it following big life events. But it’s also important to remember that laws and rules change.
“Even if you know what your trust says and you know exactly what’s going on, you still need to figure out how your assets are titled. Most people don’t remember exactly what they did.” – Tim Denker
For example, let’s say that your parents did a trust and went through and retitled everything in the name of the trust prior to passing away. However, there were a couple of accounts that totaled more than $2 million that they didn’t tell you about and they didn’t put that money into the trust. There wasn’t proper titling on those accounts—just joint tenants with right of survivorship. So, that $2 million would go through probate.
9. Business Owners without a Succession Plan
The next estate planning mistake to avoid that we want to discuss involves small business owners. Oftentimes, small business owners don’t have any type of succession plan and might not understand the dangers that are facing them if they die or become incapacitated.
“You can kill a small business and get raked over the coals with excess taxes. All kinds of things can happen. When you’re working with a small business owner, you need to go further than just the trust document.” – Dean Barber
Key Considerations for Small Business Owners
Tim has witnessed a lot of small business owners struggle with treating their business as a separate asset of the estate. Just like your house and retirement accounts, you’re going to put money back into your business. Tim says that it can be the greatest return on investment that you can get if everything goes well. But…
“What a lot of people don’t realize is it’s not just your paycheck during your life and how you’re supporting your family. It’s also your retirement plan and the nest egg you’re going to create if leaving an inheritance is important to you.” – Tim Denker
Building your business up and having these things that you can sell one day are extremely important because you need to plan for the succession of your business. If something happens to you, ask yourself the following questions.
- What is going to happen to the business?
- Are the employees going to lose their jobs?
- Is the business going to get shut down?
- What’s going to happen with the landlord (or do I own the building)?
- Do I have a key employee who might want to buy me out?
- Is there a competing business?
- Are my kids interested in taking over and possibly turn it into a family business? If so, do they need to buy me out?
- And how does all that tie into my retirement plan?
There are so many different factors that can come into play that small business owners need to think through.
Completing the Business Transfer Efficiently
Once this transfer takes place, there’s another big question to consider. How will you minimize the tax impact on yourself and your family with the business transfer?
“Financial planning for a small business owner is probably the most difficult person that you can do financial planning for. And estate planning for the small business owner is probably the most difficult estate plan to create because there are so many different moving parts and complexities to it.” – Dean Barber
Tim believes anyone who is a small business owner has the potential to benefiit greatly from having a trust. At the very least, he says that the trust could put the small business owner in a position as a trustee to step in and manage what’s happening in the business in the meantime so things can get figured out if they don’t get something else in place.
Successor Trustees and Corporate Trustees
Let’s say you’re thinking about naming your oldest child as a successor trustee if you and your spouse wife can’t take care of your own affairs or both pass on. The successor trustee would become responsible for the distribution of the estate. Having a family dynamic with someone who has an intimate familiarity with the estate can bring peace of mind to you, but it’s a lot of work for the successor trustee.
“People don’t understand that they’re putting that individual in the capacity of a fiduciary, and that there are very strict rules that need to be followed. It’s a lot of work that needs to be done.” – Dean Barber
That’s why Dean believes it’s a mistake to not consider a corporate trustee to act on their behalf when they’re no longer able to. Some people dismiss that idea because they think naming a corporate trustee is too expensive.
Dean understands that having the family dynamic of a successor trustee can be very important to some people. If that’s the case for you, Dean thinks that’s great if the successor trustee understands what they’re responsible for and if they have an opportunity to opt out of that capacity if it’s too much for them to handle. Then, the corporate trustee could come in.
Avoiding Family In-Fighting
The corporate trustee can also protect from family in-fighting. Maybe you have multiple children and want to name the oldest to serve as the successor trustee because they’ve got a good head on their shoulders. Well, your other children might not agree with their oldest sibling on some things. That can fracture the family dynamic to a point where it’s very difficult to repair.
“Death and money do crazy things to people and how they act. It just completely reverses the way that you would think things would occur sometimes. Having the corporate trustee handle everything can allow the family to maintain their loving relationship.” – Tim Denker
10. Not Considering Beneficiary-Controlled Trusts
A lot of people want their money to follow the family bloodline. They don’t want it going off to somebody that they never knew. But if you don’t craft the trust in such a way where it can create a beneficiary-controlled trust for the ultimate beneficiaries of the trust, there is the danger that that money can get in the hands of somebody outside of the family. Not considering a beneficiary-controlled trust is our 10th estate planning mistake to avoid.
We’re going to address some of the protections that a trust can put in place for a family. Let’s say that you have two children and want your inheritance to be split equally between them, but want to make sure they’re responsible with it.
Controlling Your Estate After You’re Gone
One of the benefits of a trust is that it allows control from the grave, so to speak. You can protect them from themselves by putting provisions in that dictate that they can have access to the money until a certain point in time. Oftentimes, the beneficiaries might need to attain a certain age or meet another requirement, such as graduating from college.
There’s a lot of control that you can put into the trust. Maybe you’re considering leaving a property to your son/daughter, but don’t want them to have access to it until they’re 75. By doing that, you’re shielding it from creditors. By creditors, we don’t just mean a credit card company or somebody that could be suing following an accident that wasn’t able to be completely covered by insurance. Creditors can also be other people in your life.
Let’s use the risk of divorce as an example. You can put your children into a position where they can inherit these assets and get access to them to a certain extent. But at the same time, they’re not going to have full access to where it could be accessible to creditors. You probably wouldn’t want it to go to a son-in-law or daughter-in-law that you don’t fully trust that could have access if there’s a divorce. There are a lot of different scenarios that could come into play.
Structuring Your Trust
Tim has witnessed several people name their kids as the trustee and as the beneficiary. You need to be careful about in that situation. Maybe they mishandle things due to being in the wrong state or the laws changing.
If they’re filling both roles as the trustee and beneficiary, there’s always the risk that somebody is going to come in and “pierce the veil” as Tim likes to say and claim that your trust is just your alter ego. There are so many practical and emotional aspects to consider with your unique situation, so it’s important to remain level-headed with all things estate planning.
Bonus Estate Planning Mistake to Avoid: Not Sharing Your Estate Plan with Your Children
That brings us to a bonus estate planning mistake to avoid—not sharing your estate plan with your children. Talking about what will happen after you’re gone isn’t easy, but it’s important to have family meetings to review your estate plan and make sure everyone is on the same page.
“You don’t have to talk about everything you have, but explain how you want your things to be handled. Review the trust documents, your list of assets, and the team of professionals that your beneficiaries need to call.” – Dean Barber
It’s important to not wait until you’re on your deathbed to have that conversation. You want to have that conversation on an ongoing basis because you never know what the future holds.
“It’s a good way to make sure that fighting is not going to happen, because you’re going to say, ‘This is what I want. This is what I have. And this is who is doing what.’ If the kids are going to be mad at anybody, they can be mad at the dead person. That’s not that big of a deal. They can continue to maintain that familial relationship of what’s happening.” – Tim Denker
Do You Have Any Questions About These Estate Planning Mistakes to Avoid?
While we covered a lot of information with these estate planning mistakes to avoid, there’s even more that might need to be addressed depending on your unique situation. If you have any questions about these estate planning mistakes to avoid or about how to create or update your estate plan to adequately meet your legacy goals for you and your family, start a conversation with our team below.
Leaving a legacy is so important to so many people. We want to make sure that you have peace of mind that everything will be OK with your loved ones after you pass on.
Resources Mentioned in This Article
5 Estate Planning Documents That Everyone Needs
What Is Probate and Why Should I Avoid It?
What Is a Living Trust and Do I Need One?
Don’t Give Your Grandchildren Money … Give Them the Gift of Learning About Money
Family Financial Planning with Matt Kasper, CFP®, AIF®
DIY Retirement Planning: What Can Be Overlooked?
Why You Need a Financial Planning Team with Jason Gordo
How to Build Generational Wealth
Tax Planning Tips with Corey Hulstein, CPA and Marty James, CPA, PFS
Financial Checklist After the Death of a Spouse
What Happens to Your 401(k) When You Die?
Retirement Planning for Self-Employed Individuals and Small Business Owners
A Successor Trustee Checklist with Matt Kasper, CFP®, AIF®
Other Sources
[1] https://www.denkerlawfirm.com/about/
[2] https://smartasset.com/estate-planning/payable-on-death-vs-transfer-on-death
[3] https://irahelp.com/slottreport/limits-erisa-spousal-protection/
Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.