Estate Planning Mistakes: How to Protect Yourself

Paul Winkler: And welcome. This is “The Investor Coaching Show,” Paul Winkler. We talk about money, investing, financial planning, retirement planning, anything to do with money …

As I refer to in my book—to be coming out, the financial planning book. It takes a long time to get that stuff out, but we’re working on it.

So I talk about your castle.

Well, your castle is your assets, right? That’s what I refer to as the stuff you put together.

And anytime you put a lot of assets in one place, somebody wants to get a hold of it. Somebody wants to get at that money.

And the other thing that you have to do, and you have to think about, is the moat that you put around the castle, which is the protection. Taught a workshop about that this week, as a matter of fact.

Now one of the things that I didn’t cover a whole lot of—and we’ll cover right here with Robert Pautienus, attorney, Fidelis Law—we talk a lot about estate planning.

Robert, good to see you, man.

Robert Pautienus: Good to see you too. Glad to join you.

PW: Yeah. So I thought what we’d do is we’d just talk a little bit about some of the basics of estate planning.

Typically people don’t think a whole lot about how do we distribute assets at death. How do people get stuff later on?

RP: Right.

What Are the Common Estate Planning Mistakes?

PW: Now, typically you’ll find that people make mistakes regarding estate planning. And what are some things that just come to the top of your head when I say “mistakes in estate planning”?

RP: I would think of a couple of things.

One, not doing any planning at all. And just kind of assuming that when they pass, the way they want it to go is going to somehow magically happen. That would be number one.

Number two would be doing their own planning without seeking any type of expert advice. They’ll either pull something off the internet or read something on a website, and then they’ll try to create their own will.

PW: Right.

RP: Which, those I’ve seen have really bad consequences, numerous times.

PW: I’ve heard that a lot.

RP: Yeah.

PW: What do you think about that? And people ask me, “Paul, what do you think?”

And I go, “I just remember trying it myself one time.” And this is many, many, many years ago.

And I thought, Wow, I will never try that again.

But typically, what are the kinds of things that you see people running into?

RP: What I find is whenever people try to do that themselves, one: probably the biggest thing is, is it executed properly?

So you could write the perfect will. If you don’t execute it properly in Tennessee, a court’s not going to recognize it.

PW: Oh, wow. And I think a lot of times you miss provisions, things that you should cover.

RP: Right. So kind of the whole second thing is even if you execute it properly, are you addressing everything that needs to be addressed in it?

PW: The right types of powers of attorney—

RP: Power of attorney.

PW: —the right types of assets, tax consequences of certain assets. I find people don’t understand that.

RP: Right. Words, certain words that are used in a will, per capita or …

PW: … Per capita, per stirpes, yeah.

RP: So all those terms that they’re pulling off the internet and they’re plugging into there will have specific legal meaning that a lot of times they don’t intend to happen.

PW: That is so true. We talk about per capita, per stirpes. By the branch, you got the body, I guess per capita is …

RP: Yeah.

PW: So you may have an intention, for example, of leaving money to … let’s say you got two kids, and one kid has two children of their own.

And you want to … if something happens to that child, and you would like the grandchildren to get it. And you may unintentionally use the wrong language, and those grandchildren are disinherited.

RP: Correct.

PW: So to speak, so yeah.

RP: Correct. Which you’ll routinely see. They’ll say, “I leave it to my two children in equal shares.”

And that’s all they’ll say, and kind of their assumption is if one child dies their equal share goes to those grandchildren. And that’s not what happens if you use that specific language.

PW: Oh, see, that’s a good example.

How Should Assets Be Divided?

Okay, so how about the example that I see all the time. Got IRAs, got 401(k)s, maybe got life insurance.

They write up a will thinking that that will is going to direct those assets. Go on that one.

RP: So your will, whether an attorney does it or you do it yourself, is not going to have any impact on your beneficiary designations on life insurance and IRAs and any type of vehicle that has a beneficiary designation.

That will overrule or run on its own, outside of what your will says.

PW: Right. You may have transfer on death accounts. Or joint accounts would be another thing.

RP: Which, you were asking kind of common things, too. One of the other things that I see is, people say, “Well, I’ve got three or four kids. I’m going to leave it to my oldest child.”

“I’m going to tell my oldest child what I want done, and I’ll leave it to that child. And that child will then distribute it out to the brothers or sisters.”

PW: Yes.

RP: So they’ll add them to bank accounts; they’ll add them to everything.

And in reality, what you’ve just done is left everything to one child.

PW: Right. And I’ve seen it where they leave it to the children and say, “Okay, take care of the grandchildren.”

RP: Right.

PW: “I’m going to leave it to the children, and you guys take care of the grandchildren as you see fit.”

And you may have a child that on the surface looks pretty good, but they won’t necessarily do, because they don’t have to.

RP: They don’t have to.

PW: They were the beneficiary.

RP: Right. Yeah.

No, I’ve had numerous cases over the years where, yeah, one child was left everything. And I firmly believe the intention of the decedent was to leave it to all the kids, and they expected their one child to divvy it up.

And the one child decides they’re not divvying up anything. They’re going to keep it all.

PW: And you don’t have the gifting issues that we used to have in the state of Tennessee.

RP: Right. Used to be, if you left it to a specific person and then expected them—say, it was a $100,000 you’re going to have them divide it up between their brothers and sisters, that they were technically making gifts, because they own it.

PW: Right.

RP: You still have, from a federal standpoint, you still have to address it.

PW: You have to track it. Yeah, you have to track it. And you have to file paperwork on that, anything above the $15,000 gift limit.

Gifting Limits for Estates

So that’s something you have to think about, how much can I … I get that question all the time, “Hey Paul, how much can I gift per year?”

Well, you can gift a lot, but it’s when do you have to actually file a gift tax, a form? And then track those types of things.

Because that gift above that $15,000 level goes against what you can give at death, is basically what it is.

And for most people, as it stands right now, we don’t have an estate tax that they’re going to have to worry about for most people, because the limit is so high.

RP: As of right now, yes.

PW: Yeah. It’s over 10 million, just per person.

So just to give you an idea, but who knows? Who knows where that’s going to land?

Okay. So mistakes that people make. We talked about not doing any type of planning whatsoever.

Talk a little bit about some of the documentation. Well, there’s all kinds of stuff.

There’s so many directions I want to go. The documentation that goes with a will, powers of attorney, those types of things come to mind.

RP: Yeah. So, I mean, normally if we’re—I mean, just kind of the most basic planning, it’s going to be a will, since you’re leaving your things to who you want, and you’re going to have somebody who’s in charge of it.

Power of Attorney and Advanced Care Plans

But while you’re living, we always do the healthcare power of attorney.

We do a durable power of attorney. We do an advanced care plan.

PW: So go through those one at a time.

RP: All right. So two of them are kind of tied together.

So a healthcare power of attorney and advanced care plan, they’re both dealing with caring for you. And so your healthcare power of attorney is you picking your agent that you want to be in charge of managing your care when you can’t.

PW: Okay. So they make decisions on your behalf.

RP: Yes. That are all health.

So we are not talking about financial, we’re talking about health. They would make healthcare choices for you.

We typically always put in there HIPAA language that would also allow them to talk with your doctors to make informed medical choices, to know what your past medical history is.

PW: So the doctor, otherwise, can’t give away information, so that allows them to give the information to the person named.

RP: And if you think of your health care on a spectrum, kind of on a line, you’ve got regular healthcare choices. They may be critical ones.

But at some point it gets to an end of life choice, right? And now we’re talking about you’re in a terminable condition.

Do you want life support? Do you want feeding tubes?

And that’s where the advanced care plan comes in.

You choose your agent. I typically encourage clients to have the same agent for all their healthcare choices, so there’s never an issue about who’s in charge.

But on the advanced care plan, you actually select what you want done at the end of your life.

How Do Advanced Care Plans Work?

PW: So I remember when I went through that process with you. It was pretty cut and dried for me.

Would you say that that is the case? It’s the situations where you don’t want to be put under care or have certain things done to you are pretty obvious.

RP: Yes. I mean the actual format that the state gives you really gives you four conditions that you get to choose if they’re “Unacceptable” to you.

First one is—this is kind of boiling it down—but it’s, essentially, you’re in a coma and you have little chance of ever waking up.

You have an end-stage Alzheimer’s condition, and you’re at the very end where you can’t recognize loved ones.

If you have an end-stage condition, say, like cancer where the doctor says there is no more treatment.

And the fourth one is you’re dependent on somebody for all of your daily activity, and no amount of rehabilitation is going to help.

And so most people in those conditions, large majority, will say, “I don’t want feeding tubes. I don’t want life support.” Because all you’re doing is prolonging the condition for a period of time.

PW: Right. And the expense of that condition. And the reality of it is running the whole estate dry.

RP: Correct. But here’s the nice thing about that form.

PW: If medical insurance wasn’t covering it, right?

RP: But here’s the nice thing about that form. If you are—which, I’ve got clients that will make these choices—there are some clients that will say, “If I’m in those conditions, I want everything done for as long as possible.”

And that’s the nice thing about the form is you get to tell your loved ones what you want done so they know what to do.

Durable Power of Attorney Versus Springing Power of Attorney

PW: Okay. And then you had the … well, we talked about durable powers of attorney. They got the healthcare powers, and—

RP: And it’s also financial then.

PW: And then you’ve got the financial side. So like, springing powers of attorney.

RP: Yeah, springing. So kind of what your choices are there is—because we’ve talked about the healthcare part of it. Your durable power of attorney is you appointing someone, essentially, with the ability to sign your name.

And so you really have two different choices there. You can either make it active: you sign it, and I’ve appointed, you know, if I’m appointing you, I just appointed you. You’re now it.

PW: And you’re able to do that even if you’re not necessarily in dire condition.

RP: Correct. Now if I make it active at the time of signing, then—

PW: I wanted you to define that for them.

RP: So, hypothetically, your agent at that point could go out and take a loan out in your name or purchase a car.

I mean, practically speaking, they probably can’t. But legally they could.

The other option is to say I want to make it springing. So I only want it to come into play if I am incapacitated.

And we generally will define you being incapacitated with at least one doctor. Some clients want two that will sign off that you’re not able to manage your affairs.

PW: All right, so then only at that point can somebody be making these decisions on your behalf.

RP: Right. Which has got positives and negatives.

It’s not always easy to get a physician to sign off that you’re not capable of managing your affairs, which does put at least a hurdle in front of your durable power of attorney from exercising the power.

PW: Now what comes to mind is the conservatorship issue. When you started talking … because it was all in the news. And what is that?

RP: Well, and you talk about it being in the news—you have all the Britney Spears, and I mean, just all the stuff that’s out there with conservatorship.

PW: Oh yeah, sure. I guess it was back in the news, and it wasn’t that long ago. I didn’t even think about that.

RP: So basically it’s this: if you cannot manage your affairs because you’re incapacitated, which could be either physical or mental, at that point, if someone believes that you’re in that condition, they can file in court.

And if the judge agrees with them—which has got certain things that have to be done, like providing medical proof, and you have a hearing and there’s a trial, essentially—but at the end of the day, if the judge agrees, the court can appoint a conservator.

The conservator then can manage, basically, your physical being and also your financial affairs. In the state of Tennessee, I will say this, the conservatorship order has to clearly define what powers are taken away from you and what powers the conservator has.

PW: So in essence, doing some of this planning ahead of time could prevent that from happening?

RP: Correct.

Plan Ahead to Appoint Someone Trustworthy

So if you do a healthcare power of attorney and durable power of attorney, you’re at least appointing your agents.

PW: Who you really think is trustworthy, rather than who the court decides.

RP: Right. Now, I always point out to clients, you signing a healthcare power of attorney and durable power of attorney doesn’t take any power away from you, where a conservatorship does.

So if you really are in a bad mental condition, but you don’t recognize it, and you’re out causing, maybe, chaos for yourself, at that point your healthcare power of attorney and durable power of attorney can’t really stop you from doing anything, which is where a conservatorship comes into place.

But if you’re in a condition where you just cannot manage your affairs, it’s the power of attorney and healthcare power of attorney gets rid of the need to ever have a conservatorship.

PW: Yeah. That would be scary to be in that situation.

And so I think, the springing, that to me has always been, “Okay, so it only gets into force if I’m not able to do these things.”

RP: Right.

PW: And then beforehand you get to choose the person that is really, really trustworthy.

RP: Correct.

PW: Rather than somebody that is appointed that just happens to be close from a biological standpoint, to put it that way. Yeah, that’s interesting.

Whether Or Not to Create a Trust

So, let’s do this. Let’s take a quick break, and after we come back let’s talk a little bit more about, just, I want to get into some other aspects of estate planning that are interesting from a trust standpoint.

Taking care of kids that are not that able to take care of themselves or we don’t necessarily trust will take care of money that they get in mass all at once. Because that so often is the case is people that have never managed money before.

We’ll talk more about that in just a second. Listening to “The Investor Coaching Show” right here on Supertalk 99.7 WTN.

Paul Winkler, along with Robert Pautienus of Fidelis Law, is where his … Your operation is down in … Where are you now?

RP: We actually moved. So we’re—

PW: I know you moved. I was just thinking that as I was talking.

RP: So we are still in Brentwood. We just moved down to the Mallory Lane exit.Sorry, Moores Lane off of Mallory.

PW: All right, gotcha. I haven’t been down to the new office—new digs—yet, so I’ll have to check that out soon.

Hey, let’s talk about something that is near and dear to my heart. You know, you’ve got trust work.

Trust work can kind of be a little bit of a scary thing. If you set up a will, you can have what’s called a testamentary trust, which is a trust that’s actually created.

Talk about that just a quick second.

RP: Yeah, you can create a trust that essentially springs out of your will.

And so when your will gets probated—it goes through the court process—as an end result, a trust will get created.

And depending on what parameters you put into that trust—for example, let’s say, you said, “If my child is below the age of 30, then I want a trust created.”

If you die and your child’s 32, no trust is ever created, because they’re above that age. If they’re below that age, then the trust would get created for them.

So you can make it flexible in order to kind of achieve whatever objectives or goals that you’ve got.

PW: Do you find a lot of people will set up their estate such that it’s, “Okay, the child gets 25% of it at age 25, and then they get 33% of it at age 35, and then 50% at age 45, and then 100% of whatever’s left at age—”

RP: Yeah.

PW: Do you see that a lot?

RP: Definitely, because if children—it depends on the age of the children.

But most people, when they’re looking at their planning, will say, depending on the amount of money that’s going to pass, if my child’s below 25, 30, somewhere in there, that they typically don’t want a large sum of money going to that child.

One thing that’s become a little more in vogue over the last years is not necessarily doing the disbursement at certain ages, but instead setting it up so that, maybe, at 25 the child becomes co-trustee of their funds with somebody that you pick to be their co-trustee.

And then at, say, 30 or 35, they take over as their own trustee of their funds, which then remain in trust. But they have the ability to pull it out whenever they want.

Corporate Trustees Versus Individual Trustees

PW: Well, why even mess with the trust?

RP: Excellent question. One, because it’s been created by the grantor, it’s been created by you, and you’re leaving it for your children. As long as they leave it in that trust, it provides them some protection.

They’ve got some liability protection from either divorce or third-party creditors. So there’s certain things that you can give them through that trust that they can’t create for themselves.

PW: All right.

So that’s interesting. You’re not finding that they’re distributing over every 10 years or something like that, and doing it …

Because I was wondering, when you do that, you have to have somebody that’s the trustee, and then you’re dealing with either corporate trustee.

And maybe that’s a good topic. Corporate trustee versus individual trustees, pros and cons?

RP: So typically, most of my clients end up doing an actual individual.

So usually it’s either family or friend. Doesn’t have to be family. It’s whoever you trust that could manage the funds.

I always point out to the client, they’re not managing it in the sense of, they shouldn’t be day trading or doing anything like that.

They’re going to use a financial advisor, they’re going to use …

PW: Right, fiduciary responsibility. They better keep the beneficiary of the trust’s interests first, in other words.

RP: Right. But they’re the ultimate gatekeeper as trustee on what funds are dispersed out for.

So let’s say my trust says that my child can have funds for educational purposes until the age of 25.

If my child comes and says, “I want to go to college,” the trustee says, “Okay, that’s more than reasonable. We’re going to disperse funds out.”

If the child shows up and says, “My education is going to be traveling the world for the next couple of years.” And—

PW: That sounds good. Well, not right now, it doesn’t sound any good.

RP: Then the trustee has the ability—this is why you need to pick someone that you trust, kind of, with common sense—the trustee has the ability to say that’s not a valid educational purpose, right?

But I definitely have lots of clients that will say, “I don’t really have a family member, either because of age or just, I just don’t trust any of them. And so I just don’t really have anybody, friend or anything else, that I can put in that position.”

And so they’ll name a corporate trustee, which are usually either banks or trust companies.

PW: Now you’re talking about expense, number one. And a lot of times you’re dealing with conflicts, because I’ve found some very conflicted situations in my past where the bank was the trust department, and they were the investment.

And you’d go, “Man, if that were a separate trustee, I would fire that investment.”

And I remember one situation I had, oh my goodness. The bank had a very undiversified portfolio.

And they got everybody but my client to sign off not to hold them liable for the bad investments that they were actually doing, because some of the stocks in the portfolio had dropped so significantly that they didn’t want to be sued.

And so it’s just stuff like that. You got to be really careful with that.

When Is a Trust Needed?

And then the expense every year of administering that. In some situations, it can be warranted.

When you’re talking about smaller amounts of money—because a lot of people: “I want to have a trust!” How much money you got?

And they tell me, and I’m like, “You don’t have enough money to warrant having a trust.”

Do you typically have certain dollar numbers where you see where people—

RP: One, like we were talking about earlier, if most of the money is tied up in IRAs and those types of things, that makes it difficult.

But I do think from a dollar standpoint, depending on how many people that you’re leaving it to, anything below $50,000–$100,000, it just doesn’t make a lot of sense to tie something up in a trust. Unless you’re doing it for the specific purpose of maybe the age of the person, and you’re going to hold it just for a few years.

PW: Right. And then the individual trustee aspect, one of the benefits of that is that the person who is the trustee would know the person, they know the circumstances, and it can be helpful from that standpoint.

The issue that you have, of course, is that that person may not be around forever. Whereas a corporate trustee, they have longevity.

RP: Yeah. And I’ll say, when you mentioned corporate trustee, what I’ve generally found is corporate trustees are going to be much more conservative on the disbursement of funds. Which could be because if it’s a bank or a different trust department that’s also managing the funds, they don’t want to release it.

Or if it’s an independent trust company that’s only just serving as trustee, they have fiduciary responsibilities, and there’s obviously always kind of the fear of being sued.

And so generally family members, I find, are a little more liberal in the sense of knowing what’s going on and maybe making choices based on the circumstances versus just strictly, what’s the most conservative thing to do?

PW: Right.

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*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.