5 Estate Planning Failures to Learn From

This is a must listen episode that could save your family's financial future. Seriously. Estate planning is important. We know that. But what happens when things go wrong - or very wrong? In this episode, we share stories of oversight and missed opportunities, each one with a powerful lesson in what not to do. Learn how simple mistakes today can cause chaos tomorrow and discover the steps you can take to avoid some of these pitfalls. Don't let your hard earned legacy become a cautionary tale.

[00:00:58]
Welcome to the Retired-ish podcast. I'm your host, Cameron Valadez, Certified Financial Planner® and Enrolled Agent, and today I wanna share with you five different stories that I have culminated from either our firm's own experiences or experiences from other families and professionals that have shared them with us or have been published publicly.

Now these stories won't apply to everyone, but even if just one resonates with you, my goal is that it helps you become more educated on the possible issues so you can try to avoid these types of situations. These are failures in estate plans and not necessarily because the plans were drafted incorrectly, but can be caused by a lack of clear communication with these families' estate counsel and their advisors, or simply due to the changes in estate and tax law over time or even the changes in people's lives over time and a lack of attention to maybe an outdated estate plan.

[00:01:59]
So our first scenario or story of estate planning failure is when you have multiple executors that are disagreeing. Many times, we have sat with someone and reviewed their current estate plan, and it shows their children were named as executors or trustees if there's a trust involved, or it might even be one of their best friends. And while this isn't a mistake by any means, we should have a better understanding of the thought process that went into choosing those specific individuals, choosing whether or not those individuals are going to be able to serve on their own or have to act together and agree on decisions. Or maybe the preference for choosing an individual versus a professional entity to be the executor or trustee, like a bank or a trust company. Because based on the complexity and size of the estate, a bank or trust company can serve as what we call a corporate trustee if there's a trust involved.

[00:03:04]
This is a story of two siblings that got along perfectly until they didn't. In this case, their father, the testator, had decided via his will that he would name both of his daughters jointly to be executors of his estate. Their relationship became muddled due to end of life or long term care decisions for their father. These are unique circumstances that had come up that had nothing to do with his will per se. In this situation, each executor is entitled to hire their own estate attorneys. They are joint fiduciaries. And in this case, the sisters not only hired their own attorneys, which were very expensive, by the way, but decided that every decision that they needed to make jointly would be made with the help of both attorneys. So what ended up happening is that anything from accounting to court filings to tax returns basically became a matter of litigation. The estate was worth around $10,000,000 and the attorney's fees, not including any executor fees, were almost 5% of the 10,000,000, which is half a million dollars. And just so you're aware, neither executor pays for these fees out of their own pocket. They are an expense of the estate for the administration of the estate. But if the executors or trustees are also the beneficiaries of an estate or a trust, then these expenses do reduce their inheritance. So in many cases, it does technically come out of pocket.

[00:04:40]
So what is the lesson we can learn from this scenario? Well, sometimes people and even their estate attorneys in some cases don't put a lot of thought into the agents that they're selecting, such as these executors or trustees that they name to carry out their wishes, and it can significantly backfire on the entire estate plan. Rather than the decision being completely rational, sometimes it's more of an instinctual reflex. For example, I want everyone to feel equal. I don't wanna cause any hard feelings. These are my adult children who are really smart and have a good head on their shoulders, so who better to do this for me? Right? Or it could be that you go online and you try to do more of a DIY approach without any legal counsel to save money at the onset, and you fail to think through these potential outcomes because maybe this is the first time you're doing any estate planning and you don't really have any of that experience. You don't even know what the possible outcomes could be.

[00:05:42]
We also find that some estate planning attorneys don't necessarily go that deep into the selection of agents and fiduciaries, and maybe that's because it can be such a sensitive subject. For example, they may not feel comfortable questioning you or the client's decisions, and rather they take the approach of, "Hey, you tell me what to do, and I'll make it legal and binding on paper for you", rather than also advising at the same time that the documents are being drafted, which I definitely think should always be done. We shouldn't always choose the easiest answer with the least potential friction. Think about it. Every day, people are interviewed when they're applying for a job. You interview people when you're looking to have work done on your house. So the question when thinking about an agent to serve in your place really becomes, what is the ability, the willingness, and the skill set of this individual or these individuals to carry out these duties? Do you even really know what they're going to be asked to do when you're gone? More importantly, do they know? Especially when multiple agents are named together to work jointly, as in the case we just went over. What is their propensity to be collaborative? Could issues arise if there's a lack of detail in the legal estate planning documents?

[00:07:08]
A good example of this I have talked about in previous episodes that happens time and time again is when property is left to multiple beneficiaries without any detail as to how that property is to be handled. It's almost inevitable for one of the beneficiaries to maybe want to keep the property such as a family home that they grew up in, One may wanna sell it and do what they want with their proceeds, and you may have another that wants to turn it into an investment property. Now no one agrees and the family starts to resent each other and everybody's stressed out. Money is spent unnecessarily and it's just a mess. Meanwhile, maybe you listed only one of your three children as executor or trustee, maybe the oldest child or the one that understands finances better than the others, and that person ultimately distributes the assets of your trust and or estate. Now the other siblings are really on edge because they are wondering why brother or sister is in charge and not them. You know, the list goes on. The bottom line is that the whole reason you put together this estate plan was to avoid these problems, and sometimes they crop up anyway. So lessons learned.

[00:08:23]
Our next lesson is a question of who has the power to make decisions. So we just talked about designating fiduciaries or agents to act on your behalf when you're gone and the process that goes into that. In this particular situation that a colleague of ours eventually got involved in, there were multiple what we call dynasty trusts that were created for a very large family. As a quick sidebar for those of you unfamiliar with a dynasty trust, it is essentially a trust or series of trusts that is designated or designed to pass money down through multiple generations, so generational wealth, and mitigate or eliminate potential estate and other transfer taxes, so estate taxes and maybe, what we call generation skipping transfer taxes. They are typically used by higher net worth individuals or families. At the same time that our colleague got involved with the family, there were 50 something odd individual beneficiaries of these dynasty trusts. These could be children, grandchildren, cousins, you name it. There was a particular document in their estate plan that required what is called a corporate trustee to be in charge of managing and administering the trust, and the beneficiaries largely disagreed with that corporate trustee's investment philosophy when managing the money in the trust, as well as their investment selection. Now corporate trustees are usually, but not always, very large banks, and they sometimes work as a trustee alongside an individual trustee maybe in the family, but sometimes they are used so that there's no family involved in distributing the trust assets, and there are some families that will do that on purpose because they want to avoid some of that friction we talked about earlier. So anyways, this corporate trustee had already been involved with these trusts doing what they do for decades, And the question becomes, the family knows that they need the help of a corporate trustee because of the sheer complexity of these trusts and the amount of money and various beneficiaries involved, but how do they go about facilitating that?

[00:10:51]
In this case, the corporate trustee that the beneficiaries no longer wanted did not want to voluntarily resign from being a trustee. So the family was looking at ways to either entice the corporate trustee to give up the management of these very large trusts, or they wanted to try to just remove that corporate trustee entirely on their own. However, the family's estate documents did not specify either an individual, such as a trustee appointor or maybe what is called a trust protector, that would have the ability to make these decisions or even a group of individuals that could make these decisions. So this family was considering all 50 something beneficiaries having to agree to remove the corporate trustee. As you can imagine, this can be tough. In this case, not even all of them were in the same country. What ended up happening is that after significant time trying to resolve this out of court, the family ended up in court trying to reduce the number of beneficiaries that were going to have to agree to this. Essentially, they were trying to add provisions or make amendments to an irrevocable trust, which, like I said, is very tough.

[00:12:12]
This is a very time intensive and expensive process. This family finally got through all of it, but had to rely on all the state's default laws and the assistance of many attorneys. So the lesson learned is to really think about what could come up after you're gone and what flexibility you want your trustees or beneficiaries to have. Do you want them to be able to make only certain changes after you're gone? And if flexibility is wanted, which individuals do you trust to be able to make those important decisions? If you already have estate documents in place, especially if you've had them in place for many years, you want to reread and revisit them to look for any potential holes where this type of language might be missing.

[00:13:04]
Now I have another similar story that I dealt with in practice personally with a client that came to us in, I believe, it was around 2015 or 2016, and they also had a dynasty trust that began many, many decades ago. In fact, if I recall correctly, the trust documents they had were created with a typewriter. Pretty crazy, huh? And the reason they had sought us out was for very similar reasons we just discussed. They actually had a corporate trustee that was a very large bank that I won't mention by name and another large well known bank investing the assets in the trust. Basically, this client thought that they weren't doing a very good job investing the trust assets, and they also saw some changes recently to the distributions that they were receiving as living beneficiaries of this trust over the last year or so. These two things together were concerning them, of course, because they didn't understand why that happened, and when they asked the corporate trustee, they didn't have a very clear response. So my firm ended up diving into this dynasty trust pretty deeply and had our team go through tons and tons of documents. Many of them were very hard to read, again, because they were so old, and a lot of the language was very outdated compared to a state law nowadays, and so it was fairly complicated to deal with. But what we ended up finding was that the corporate trustee that was responsible for administering this trust, basically meaning that they did a lot of the reporting of the trust assets, they did the accounting of the trust, they kept track of what distributions went to what beneficiaries and when, they did the accounting for trustee fees, and the family trustee that was working alongside the corporate trustee, yada yada yada. We found that once one of the beneficiaries along the line, who was also a previous trustee, passed away, the corporate trustee inadvertently changed the trust distributions from what we call per stirpes to per capita. And for those of you unfamiliar, per stirpes in the estate planning world refers to things passing down the tree. So let's say lineal descendants. So if I'm not around, my share goes to my kids, right, and then their share goes to their kids, so on and so forth. Per capita, on the other hand, is essentially the opposite, not in that it moves up the tree, but if you imagine a family tree, it sort of goes to the side, down the branches, if you will. So if I have siblings and something happens to me, my portion, instead of going down the tree to my children, it will actually go sideways to my siblings, my brothers or sisters, so on and so forth.

[00:16:06]
So in the original trust documents, it said that the money was essentially supposed to pass per stirpes, and that had been happening correctly for many, many years until the death of one of these beneficiaries recently. Once that happened, the corporate trustee, for whatever reason, changed the distributions and started sending them out sideways or per capita and not per stirpes. So as you can imagine, the wrong beneficiaries were getting the wrong amounts of money. Some were getting more, and some were getting less than they should have, and this actually went on for years. And what I want you to realize also about this is that those who were getting the additional money had to pay taxes on that additional money that they shouldn't have received. So those tax dollars are completely gone. They can't get those back.

[00:16:57]
Similar to our previous scenario, this had been going on for a while, and this particular client just hadn't been able to figure out exactly what was going wrong until we dove in through hundreds and hundreds of estate planning documents. As you can imagine, they found legal counsel and tried to remedy this very complicated issue. Now they have an even bigger issue, which is similar to our previous story, where they now want to remove this corporate trustee because of all of the issues that have been caused and the monetary mistakes that were made. But, as you know, it's not that easy. Especially with these ancient estate planning documents, and this corporate trustee did not want to give up the management of this trust because, of course, they were making good money to manage the trust. And ultimately what it came down to, very similarly, is that they had to get all of the beneficiaries to agree to remove this corporate trustee because they also would not voluntarily resign. And while there were not 50 something beneficiaries, two of the four beneficiaries lived on the other side of the country from the beneficiary who was also the current trustee alongside that corporate trustee, and those two that lived on the other side of the country were very unresponsive during this process. Not to mention the fact that those same two beneficiaries were the ones actually getting more money than they should have due to the error. You can imagine that once this is brought up to them that all of this is wrong and they've been getting more money than they should have because of a mistake, they don't really want to get this fixed, especially when they have to spend money to get an attorney to get it fixed in order for them ultimately to get less money or have to pay money back.

[00:18:46]
Together, these beneficiaries have had to spend money on attorneys and other legal fees. They've had to hire forensic accountants to go through all of the payments that were made over those years. They had to pay more attorneys to review all of the older estate planning documents that were done in a different state where that was originally created, and they had to interpret them. I mean, it has just been an absolute nightmare for the whole family. This obviously caused many, many issues and cost a lot of money and is still going to this day, believe it or not. And keep in mind that it is very hard or next to impossible for the four beneficiaries to do any sort of future planning for their money that they should have been getting from this trust. They basically had their hands tied.

[00:19:32]
So, anyway, this stuff is really important. This story actually points more to the fact that you should probably have some sort of checks and balances in your financial life, or at least when it comes to your estate plan. You can do that by getting a second opinion or getting a second pair of eyes on whatever you're doing. That may mean getting more than one professional involved with a different expertise, such as an estate planning attorney, maybe a tax advisor with estate planning experience, or even a financial advisor that understands estate planning. Establishing a team that incorporates family and various professionals could be a good thing because it serves as that checks and balances to help make sure that you can hopefully catch these issues early on so they don't become extremely expensive and ruin the point of estate planning in the first place.

[00:20:25]
Moving on. This next estate planning failure is more relevant today than ever, I think, and can affect nearly everyone's estate plan no matter what the value of your estate is and has to do with the digital world that we now live in in the 21st century. In this situation, a partner in a business named his business partner to be his successor trustee for his personal trusts rather than, say, an immediate family member. He had the trust assets held at multiple different financial institutions, which is pretty common, and had different bank accounts for the successor trustee to be able to make distributions to beneficiaries when the time came. In today's world, nearly all of those records are electronically kept, and the login credentials to the various accounts and assets are specific to whoever the current trustee is that is in charge of managing the assets in the trust, which before the death was also the individual who created the trust, also known as the grantor of the trust. This is a very common setup when you create what's called a revocable living trust or a typical family trust. Now the current acting trustee or trustees, if there are multiple, are recognized as the owner of the trust accounts by the various financial institutions. They are the ones authorized to act on the trust and the assets that are held inside. So what happened was the creator or the grantor of the trust passed away, and soon after, the business partner who was named the successor trustee also passed away. None of his digital records, such as the login information and passwords, etcetera, were accessible to the beneficiaries or even the next successor trustee that now had to step in and manage the trust on behalf of the trust beneficiaries, since now the original trustee and that original successor trustee were no longer alive.

[00:22:29]
The business partner did not make any arrangements for this information to be available in the event of his passing. Therefore, everything was basically frozen. The trust and estate were at a standstill since no one could get any information, nor was anyone authorized to do anything. So naturally, attorneys got involved, the financial institutions, legal departments got involved, and had to work with the widow and her attorney because she was named executor of the estate. In order to access those records and then ultimately unfreeze these assets, she had to re register them to the successor trustee. The beneficiaries were left without access to the assets for several months, and there was money spent on fixing the issues that largely could have been avoided, meaning some of the money that he worked hard to earn and pass down to the family basically vanished due to those expenses. During that time, beneficiaries also had to rely on credit cards to pay for some of the necessary expenses.

[00:23:30]
The lesson learned here is that digital record keeping by trustees is common nowadays. So when you're choosing trustees, you'll wanna keep that in mind and make sure that they have a process in place to make those records accessible. Also, security protocols at large financial institutions can be biometric now, and these things are designed to protect the accounts from things like fraud, but they can have negative consequences as well in situations like this. In fact, your state's specific laws may be very clear when it comes to digital records and how you can legally get access to them. So you'll wanna have that discussion with your estate attorney when setting up your estate plan initially so that your named trustees and beneficiaries are able to legally obtain that information. And if your estate planning documents are old enough, there might not be any language in there about what to do with digital records.

[00:24:32]
Our fourth estate planning blunder has to do with retirement accounts and is also very relevant to many people today because there are less and less employer provided pensions, and more people are having to save on their own for retirement via vehicles like IRAs and 401(k) plans and the like. In addition, due to the recent changes in tax and retirement legislation from the SECURE Act and SECURE 2.0, things can get much more complicated when passing retirement accounts and you have a trust involved. This one gets a little into the weeds on trust accounting, I will warn you, but bear with me. I will try my best to explain it in Crayon. This one is so, so important because it can be a very expensive mistake that can quite easily be avoided. In this situation, a trust was set up and funded primarily with money in IRAs. Once the creator of the trust passed away, the IRAs became what we call inherited IRAs, which have their own set of rules, by the way. Those inherited IRAs then became assets of the trust.

[00:25:47]
Inherited IRAs have what are called required minimum distributions, which are basically amounts that have to be paid out to the beneficiary and subject to taxation. Otherwise, they are subject to penalties, but more on that in a minute. The trust had never been updated since the passing of the recent SECURE Act and SECURE Act 2.0, and so the distribution of the inherited IRA money had to follow the specific terms of the old trust language. It was set up to accumulate income rather than automatically allow income to pass directly through to the trust beneficiaries. Accumulation trusts, we call them, do not necessarily have to distribute income every year to the beneficiaries. Therefore, this trust had to abide by what is called Fiduciary Accounting Income to determine what gets paid out of the trust and what stays to accumulate inside the trust. In other words, this method defines what is considered income and what is considered principal for the beneficiaries. It's determined by language in the trust as well as the specific state's trust accounting laws. In this case, the trust did not allow for any discretionary distributions of principal to the beneficiaries. This basically means that if there's, say, $400,000 invested in a trust, the trustee can't just say, "We are going to send out all 400,000 or any lump sum amount of their choosing to the beneficiaries in a given year". That would be discretion, and a lot of that amount would be principal, not just income. In addition, it said that any required minimum distributions that these inherited IRAs have were not required to be sent out to the beneficiaries, and this is where trust accounting gets a little tricky.

[00:27:56]
Just because the inherited IRA may have earned, let's say, $10,000 in income during the year, doesn't mean that's the amount that could have been sent out to the beneficiaries so they can use it and spend it. In this case, and keep in mind certain states have different laws around this, the trustee chose to follow the default state rules that said 10% of the required minimum distributions would be considered income and 90% would be considered principal. So this meant that 90% of the required minimum distributions were not available to the beneficiaries. Obviously, the crappy part is that they can't use the money yet, but what's worse is the tax treatment of that money. Money that is earned in an irrevocable trust and that stays in the trust or accumulates in the trust and does not get sent out to the beneficiaries is subject to trust tax rates, which get really high really fast when compared to tax rates and brackets for an individual. So the amount that doesn't go out to the beneficiaries was getting taxed at alarmingly high rates, which over time significantly reduced the value of the money that was passed down. The lesson to be had here is that trust documents can override a state's default laws on trust accounting. In addition, after the SECURE Act and SECURE Act 2.0, there are other ways to structure a trust to avoid issues like this and provide the ability to pass the assets directly through to the beneficiaries. In fact, depending on your situation, you may avoid getting the trust involved at all with your retirement account and label these beneficiaries on the IRA account paperwork if that makes sense for your estate plan.

[00:29:57]
Our last estate planning failure has to do with having an outdated estate planning strategy. This one relates specifically to the formerly popular A-B Trust strategy. This A-B strategy was used commonly when the federal estate tax exemption was much lower, and it was more common for family estates to exceed that threshold and therefore become subject to what are called Estate Taxes, which have very high tax rates up to about 40%. While there are federal and possibly state level estate taxes depending on where you reside, the federal estate tax exemption today is relatively high at just shy of $28,000,000 for a married couple. In a nutshell, this generally means that if you and or your spouse pass away with less than the exemption amount, you won't owe any estate taxes, or your beneficiaries won't have to pay these estate taxes. However, if you gift assets away during your lifetime, this exemption can also be affected. When this exemption amount was much lower in previous years, so lower than the 28,000,000, for example, it was only $675,000 in the year 2000. Back then, people would commonly use this strategy to try and avoid or mitigate federal estate taxes. However, this strategy can still be useful today if you're subject to state level estate taxes, or you have a blended family, or some special needs planning. And tax laws could change, and the estate tax exemption could be lowered back down in future years. We just don't know.

[00:31:48]
Alright. Now that we have a basic understanding of why someone or a family would use this type of strategy, here's what happens all the time. A family has an A-B trust that they set up years and years ago when the exemption was much lower, and they figured there is a high probability that their heirs would owe these estate taxes. However, with this strategy, once the first spouse passes, a portion of the assets are put into an irrevocable trust. This is the B trust. Assets inside the B trust won't get what we call a step up in basis once the second spouse dies, leaving the heirs with a potentially large capital gains tax liability. I know that might sound a little confusing, but here's an example. Let's say the B trust is funded with an investment property that's worth $350,000 at the time of the first spouse's passing. Then the second spouse dies fifteen years later, and the property is worth, say, $800,000. There is a $450,000 gain on that property. And if the heirs were to inherit it and sell it, they would owe capital gains taxes on that gain. If they still have to pay taxes, why would anybody do this? Well, capital gains taxes are much lower than the estate tax rates. As I just mentioned, those estate tax rates can get up to 40% very easily, and the capital gains rates can vary from 0% all the way to 20 something percent. Subjecting the property to capital gains taxes versus the potential federal estate taxes was still a good bargain. So in this case, the estate tax exemption is now much higher than their projected net worth at death. Therefore, it doesn't make sense to use the A-B trust structure. It's simply not needed. Not only that, but it actually hurts them. By keeping that A-B structure, they are subjecting some of their assets to capital gains taxes when they could just get rid of the A-B trust. Then their assets would receive that step up in basis at their deaths, and their heirs likely wouldn't owe estate or capital gains taxes. However, they never updated their estate plan, so they missed the opportunity to protect part of their assets from unnecessary taxation when the whole point of utilizing the strategy was to eliminate taxation. Go figure. The big lesson here isn't knowing estate planning strategies inside and out. It's updating your estate plan and monitoring it regularly with the ongoing changes in regulations.

[00:34:38]
My hope is that you can refer back to these stories and learn from other people's mistakes. Even if you don't have an exact matching situation, and you likely won't, there are still some important takeaways that will likely pertain to you. So to summarize these key takeaways, taking the path of least resistance when setting up your affairs is typically not the best option. Think outside the box what could happen after you're gone. Communicate clearly and frequently with your professional advisers about what you want to have happen with your money and your legacy. Have a team of professionals for efficiency as well as a system of checks and balances. Have a plan for trustees and successor trustees to be able to access the necessary digital records and information for your various assets and debts. Revisit your old estate planning documents regularly. Laws change, and the lives of the individuals involved in your estate plan also change. And on that note, read your estate plan. Don't assume things were originally done the way you intended.

[00:35:45]
That does it for today's show. If you find the topics discussed actionable and insightful, do yourself a favor and please subscribe to or follow the show on your podcast app. That way, you can get alerts each time a new episode drops. Also, be sure to check out our free Retired-ish video newsletter to get more useful information on retirement planning, investments, taxes, estate planning, etcetera once a month straight to your inbox. The newsletter will often dive deeper into some of the topics discussed on the show as well as useful guides and charts available for download. For those of you interested in a second opinion on your estate plan, feel free to reach out to our firm Plannable Wealth and schedule a consultation. I will make sure to include a link to do so in today's episode description. As always, you can find links to the resources we have provided in the episode description right there on your podcast app, or you can head over to retiredishpodcast.com/69. Thanks again for tuning in and following along. See you next time on Retired-ish.

[00:37:07] Disclosures
Cameron Valadez is a registered representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

Neither LPL Financial nor its registered representatives offer tax or legal advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tax and accounting related services offered through Plan-It Business Services DBA Planable Wealth. Plan-It Business Services is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax and accounting related services.