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Creating a will

Common mistakes and how you can avoid them

Many people plan to leave assets to their children when they pass away. Creating a will is part of the solution, but few discuss the nuances of their will with their children. It’s time to start the conversation. For starters, have you told your children:

  • Where you keep your will?
  • Who your executor is?
  • How you plan to divide your assets?
  • Who you want to receive certain items of sentimental value?

Additionally, have you asked your children how they feel about your wishes stated in your will? If you answered “no” to any question above, it’s crucial to start the conversation with your children now to help avoid problems when creating and distributing wills. Here are some of the most common issues we’ve seen regarding wills and possible ways you can prevent them:

1. Knowledge is power – make sure everyone has it

You may have strategically structured your will to protect your family in the long term – but if your beneficiaries don’t completely understand the design of your will and the reasons behind its structure, their financial decisions could have extreme consequences.

Example

A widowed mother has $400,000 in assets. She’s concerned about her health and anticipates that she’ll eventually live in a nursing home. She fears that the cost of long-term care will diminish the amount of money she can leave to her daughter and grandson.

To avoid this problem, the mother hires an attorney and executes an elaborate estate plan designed to protect her assets from the costs of long-term care. Her plan effectively supports her desire to leave her assets to her daughter and her grandson.

Some years later, the mother enters a nursing home. Since her assets have been protected, her daughter now owns and controls all $400,000. Since the mother has no assets, her expenses are covered by Medicaid. Unfortunately, the daughter passes away before the mother, and the daughter hasn’t created a will of her own.

Because the daughter dies intestate, the state orders that her son receive only one-quarter of her money. The rest is awarded to her surviving mother. The mother gets back $300,000 of the $400,000 she was trying to pass on. Now, because the mother has money, Medicaid claims it as reimbursement for the expenses it paid on her behalf.

Although the mother created an estate plan to shelter her assets, her efforts were thwarted because her daughter didn’t create an estate plan of her own. If her daughter had written even a simple will – naming her son as sole heir – he would have gotten the entire $400,000. Instead, he got only a fraction.

Take the time to teach

When you are creating a will, ensure the people to whom you’re giving your money understand what you’re doing – and why. Make sure they understand the steps they must take to capitalize on your strategic plans. Otherwise, your efforts might be for naught.

2. Reconsider equal division of assets

Dividing all assets equally among your children might have negative consequences.

Example

A parent leaves her two children all assets equally – including a condo. The son, who lives far from the condo, wants to sell it and split the money with his sister. The daughter, who lives an hour’s drive from the condo, wants to keep it, as her own family enjoys using the condo on weekends each summer.

The son then offers to buy out the sister, but she refuses. In order to get the condo, the son sues the sister – creating significant tension and family issues.

To avoid this, the mother could have either:

  • Left the condo to one child and an equivalent amount of assets to the other child.
  • Sold the condo and given equal amounts of the cash proceeds to each child.

Splitting hairs or splitting dollars?

When it comes to assets, dividing money is usually easier than dividing objects. Rather than leaving property to everyone equally, consider having your will instruct that all your assets be liquidated, with the resulting proceeds divided equally. It’s easy to split dollars – it’s not so easy to split houses, televisions, cars, jewelry and furniture.

However, if you decide to not liquidate your assets and give individual items to your heirs, it’s crucial to tell all beneficiaries your intent (i.e., who will receive what). This includes telling all beneficiaries what the other heirs will receive as well. Consider writing these intentions down on a letter of intent and attach it to your will. This can help prevent family issues surrounding who thought they were going to get which assets.

3. Account for less financially savvy heirs

Sometimes, parents find themselves in a situation where one of their children is ill-equipped to handle finances. Worried that this child may use their inheritance in less-than-ideal ways, these parents might be tempted to omit this child from their will, leaving all assets to their remaining children. While this may seem like a simple solution, it can often place a burden on the children who received the inheritance.

Example

Parents of three children created a will before they passed. Due to the son’s frivolous spending habits, he didn’t receive any of the inheritance money. Instead, all assets went to the two daughters. Feeling guilty that their brother didn’t receive any money, the two sisters begin to financially support the brother, just as their parents had – unfortunately repeating the cycle.

Trust: A good place to start

One solution would be to place the child’s inheritance in a trust. You can then set restrictions around the trust, delegating how much money the child can access at a given time.

4. Understand reasoning of asset allocation

Sometimes, good intentions can have unintended consequences. When creating a will, it’s crucial to analyze the reasoning behind your allocation strategies and try to see the situation from your heirs’ point of view.

Example

A mother has four children. One of her children makes a significantly higher salary than the others. Because of this, in her will, she leaves most of her assets to the other three children, and much less to the child with more money. Her intent isn’t malicious, she just wants to give more to her other children because that child “needs it less.”

This can cause unnecessary animosity between the siblings and even cause confusion and anger from the child who was disinherited. If the decision wasn’t discussed beforehand, the child may feel like they are being punished for being successful. They may even dispute their right to the assets in court – bringing a slew of legal costs to your family.

Think ahead. Talk it out.

Envision how your children will react to your estate decisions. Will they be angry? Pleased? Hurt? Put yourself in their shoes for a moment and analyze your decisions from all angles. Then, discuss your opinions with your children prior to writing your will. You don’t have to change anything based solely on their opinions, but it can be a great starting point to tailor your will to help ensure the outcome you hope for when you pass away.

Creating a will can be complicated, but with a little bit of planning and forethought, you can avoid making some of the most common mistakes seen in estate planning.

 

Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.

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