Updated October 2018 — Trusts have gained traction as one of the estate planning vehicles of choice in the United States. If you have a trust, it might be easy to feel satisfied that it will take care of every estate settlement issue — from helping you and your family avoid probate after your passing to making the transfer of wealth a smooth process.
And while in many instances that is the case, it isn’t always, says Michael Wernersback, Senior Regional Fiduciary Manager for Estate Settlement Services at Wells Fargo Private Bank.
“More and more, we’re seeing a trust being used as a will substitute,” he says, with many people solely using a will to transfer individually titled assets into a trust. But using a trust is not the same as having a comprehensive estate plan. Wernersback sees six common issues when helping settle estates. Here, he outlines what they are and how to avoid them.
Not naming the right fiduciary
It’s common when choosing a trustee or executor to choose a close family member — often your son or daughter. After all, you’re recognizing how much you value their insight, right?
“In reality, that can be a burden,” Wernersback says. “The fiduciary [the trustee or executor] after death is responsible for all the assets in that trust or estate. For someone who has accumulated diversified wealth, such as commercial real estate or a closely held business, having someone inexperienced in that position could cause a lot of problems.”
Serving as a trustee or executor is a major time commitment, he adds, and often, choosing one child over another can cause family conflict. Alternatively, if you name multiple children, the stress, potential disagreements, and complications of settling the estate could strain their relationships with one another.
Failing to consider the disposition of tangible personal property
Sometimes, the little things mean the most to people — something you’ve kept on your desk for years may not be worth much to the average person, but family members may have a special attachment to it because of memories they have of being with you in the office. Tangible property is typically handled in a will, even if there is a trust in place as well, Wernersback says.
Unfortunately, he adds, that part of the will is often just a clause saying that the property will be divided “as my children agree.” This can cause conflict if two beneficiaries want the same item, which can, in the worst-case scenario, lead to the need for the courts to get involved. That involvement isn’t free, so it erodes some of the value of your estate.
Most states, if not all, Wernersback says, will allow for a “separate writing” — a companion document that can be incorporated by reference into your will and that allows you to list out certain tangible property items and assign them to certain beneficiaries. (A key best practice: Inform beneficiaries about who gets what before your passing to help smooth any potential hurt feelings about distribution of assets once you are gone.)
Not accounting for digital assets
When you think of your assets, what comes to mind? For most, it’s real estate, investments, personal property, and cash. But what about the extensive music collection you purchased through your phone or the airline miles you’ve accumulated from your decades of traveling for work?
Law is still evolving on these kinds of digital assets, Wernersback says, so it’s important to talk to your estate planning attorney with any concerns you might have.
“More and more, the authority is going to the fiduciary to act on behalf of the decedent” in matters of digital assets, he says. “But there are some things executors and trustees would never know existed unless you bring it up as a topic of discussion as part of the estate planning process.”
“Many people just don’t understand the resentment and conflict that can bubble up during the estate settlement process.” — Michael Wernersback, Senior Regional Fiduciary Manager for Estate Settlement Services, Wells Fargo Private Bank
Improper titling of assets
This is probably the most common mistake, though thankfully, Wernersback says, it’s being prevented more often with high-net-worth clients. Different assets — 401(k) plans, IRAs, insurance policies — transfer in different ways. As your life changes and you draft new estate planning documents, it’s critical to confirm that assets are titled properly and beneficiary designations are reviewed so these two factors do not defeat the goals of your estate plan.
Ignoring family discord
One of the hardest things to handle is realizing some members of your family may not get along all that well. Yet this unfortunate fact is still ignored in many estate plans.
“People will still set up their trust or will in a way that flames that discord,” Wernersback says. And even the best-planned documents can still cause problems if you don’t communicate with your beneficiaries prior to your passing.
“Talk to your kids about your estate plan and why you set it up the way you did,” he suggests. “Why did you leave money to child A in a trust, but child B gets the money outright? You may have valid reasons for the way you set things up, but if your estate plan doesn’t meet their expectations, it can lead to resentment or even litigation where someone challenges the will or trust.” If you can’t bring yourself to have the difficult conversation in person, write a letter that can be left with your estate planning documents.
Failing to update your plan
“Estate laws change frequently,” Wernersback says. “If you have a remarriage, or a child passes away, or you have a different set of assets from when you drafted your documents, those changes can greatly affect your estate plan.”
Be specific — if you’ve remarried and want your new spouse to be able to live comfortably but also want your children to be left with a significant inheritance, spell out the terms of what “living comfortably” means instead of leaving it up to the competing forces of your family to figure out.
“Having a professional fiduciary in some of these instances could make sense,” he adds. “Many people just don’t understand the resentment and conflict that can bubble up during the estate settlement process. It’s amazing how many times you hear a beneficiary who is battling with their siblings about a parent’s estate saying ‘I never thought this could happen to us.’ “