By Alan G. Orlowsky, J.D., C.P.A.
Unfortunately, many people believe that as soon as their estate planning documents are signed, witnessed, notarized, and locked away, their estate plan is final. They often overlook various post-document-signing tasks. Omitting these tasks can undo an otherwise brilliant plan, possibly resulting in higher estate taxes and the delays associated with probate.
Here are four of the most important ongoing tasks that people all too commonly omit:
The most common estate planning omission I encounter is the failure to transfer probate-type assets to a revocable trust. Trusts are used to (a) pass assets directly to beneficiaries without the costs and delays of probate, and (b) help minimize estate taxes. Probate assets may include real estate, automobiles, partnership interests, stocks and bonds, savings accounts, and other financial assets that would normally pass through the probate process before they are distributed to your heirs unless you properly retitle them in the name of a trust (revocable or irrevocable) prior to your death. Properly titling your assets is critical, not only immediately after you execute your trust, but any time you acquire new assets.
I recently was involved in the administration of my client’s mother’s estate. We’ll call my client Darcy and her mother Stella. Prior to Stella’s death, I advised Darcy to transfer Stella’s Series E savings bonds into the latter’s revocable trust. Darcy believed that the bonds were worth less than their face value of $25,000 and, therefore, could be distributed after Stella’s death by filing a small-estate affidavit, which allows assets worth less than $100,000 to bypass probate. I counseled Darcy to play it safe and spend the small additional time and money to transfer the bonds to trust anyway. Unfortunately, she procrastinated, and Stella died before she completed the task. We learned that the bonds were very old and their value exceeded $100,000. Thus Darcy, who was the executor of the estate, had to open a probate estate in order to transfer the bonds to Stella’s beneficiaries. This cost thousands of dollars in probate costs and attorney’s fees. Moreover, the probate filing extended the time of administration by almost a year.
Transferring assets into a trust usually requires nothing more than titling or retitling the assets — a relatively simple task. With a bank or brokerage account, you simply contact your bank or brokerage house and request change-of-ownership forms. Then simply complete and submit the forms, and the accounts will be retitled in the name of the trust.
To retitle partnership interests, stock certificates, or personal property such as automobiles, you will have to execute an assignment of interest. These documents are fairly simple — if the partnership does not provide one, your attorney can give you a sample that you can use to draft one.
To retitle real estate, you will probably have to file a quitclaim deed with the County Recorder’s office. If the property is in a land trust, you may need to ask the trustee to close the land trust and then deed the property to your revocable trust. If you want the land trust to remain open, however, then you would execute an assignment of beneficial interest to change the beneficial owner of the land trust to your revocable trust. Either method accomplishes the retitling. Your attorney can advise you on these procedures.
If you are married, and you and your spouse each have a trust, I recommend that you review the retitling of your assets with your estate planner, because complicated tax laws will affect this process.
Non-probate assets are those that pass to named beneficiaries outside of the terms of a will or trust. Such assets most typically include IRA accounts, 401(k) plans, life insurance proceeds, and annuities. Most people have one or more of these assets and have named primary as well as contingent beneficiaries. Over the years, as a result of a death, divorce, birth, or falling-out, beneficiary designations need to be updated.
Many people forget who they have named as their beneficiaries, however. Worse yet, many people mistakenly believe that if you subsequently change the name of a beneficiary in a will or trust, then that new designation will apply to their non-probate assets as well.
For example, I was involved in a probate matter where a woman had failed to remove her ex-husband as a beneficiary of her $1 million IRA. Upon her death, contrary to her desire that her son inherits the IRA, it was passed along to the ex-spouse!
Failure to review and revise such beneficiary designations periodically is lethal to otherwise good planning. Ideally, you should review them yearly, and also when there is a change in your family or financial status — including divorce, death, marriage, birth, a large inheritance, etc. To revise one or more beneficiary designations, simply contact your broker, plan custodian, or agent and request the necessary change-of-beneficiary forms.
Although life insurance is a non-probate asset, which I could have included directly above, I chose to discuss it separately because of its significance in estate planning.
Insurance is unique because of its ability to provide significant liquidity precisely at the time it is needed: upon your death. If your estate consists mostly of illiquid assets such as business interests or real estate, for example, your heirs will need a source of cash to pay the estate tax, to avoid having to liquidate the assets hastily. Life insurance proceeds can provide funds for that purpose, as well as for the support of young families.
Because life insurance is an asset that typically has value only at death, policyholders often fail to change the policy’s beneficiary designation to a revocable trust or an irrevocable life insurance trust (ILIT). This omission is murderous to an estate plan. Literally, failure to transfer a $1,000,000 life insurance policy to trust can result in an additional estate tax bill from the IRS of up to $400,000.
If you have prepared a gift trust or insurance trust for the benefit of family members, you may be required to prepare yearly Crummey notices (named after the 1968 case Crummey v. Commissioner of the IRS) to notify trust beneficiaries that you have made a gift to the trust. These notices ensure that those gifts qualify for the yearly $15,000 annual gift tax exclusion.
If you neglect to prepare and send Crummey notices to all beneficiaries (and save copies of them for possible IRS examination), the gifts will be drawn back into your estate and taxed, perhaps defeating the purpose of your trust!
In my experience, these notices are frequently ignored, improperly prepared, lost, and misplaced. Ask your estate-planning attorney to “calendar” your Crummey notices and remind you to prepare them each year.
It would be great to say that once you have signed your will, trust, and other estate planning documents, you are finished. But it is important to remember that estate planning is a lifelong proposition (and the longer the better). As such, the biggest omission of all is not to continue planning once you have started.
Often good estate planning requires more time and resources than we would like to allocate to the process. However, if you do not want your family to inherit your mistakes, you must take care of even the seemingly trivial details which, if neglected, can defeat an estate plan and ultimately hurt those you leave behind.
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for over 30 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.
Updated November 2019