Ep. 20: The Perilous Pitfalls: Navigating The 5 Major Estate Planning Blunders

Hello everyone, my name is Attorney Ted Gudorf. Welcome to the Repair The Roof Podcast. This name comes from President Kennedy’s famous quote, “The time to repair the roof is when the sun is shining.”

In this show, we help individuals and families learn more about all things estate planning and elder law. This is episode 20 – The perilous pitfalls, navigating the five major estate planning blunders. Wherever you on, I am back in my studio in Clayton, Ohio on a beautiful Saturday morning, I thought I would take a few moments and talk about some of the major blunders that I see happening out here with everyone’s estate plan.

Number one, not addressing long-term care. Why is long-term care become such an issue? Well, there’s a few things that are driving this, first understand the basic underlying demographics are that there are 10,000 individuals who are turning the age of 65 every single day. Furthermore, for a married couple, that is 65 years old, there’s a high probability, perhaps as high as 70%, that one of the two of you will need long-term care of approximately three years. That’s a pretty high percentage. Thirdly, the cost of care is skyrocketing. The medical inflation rate is higher than even our current high regular inflation rate. Cost of care that I am seeing out here in the greater Dayton area, on an average basis, you can anticipate that if you need nursing home care, it’s going to be at least $10,000 per month, and possibly today, as high as $15,000 per month if you need 24-hour a day, seven-day a week care, our assisted living facilities costs have gone up. I recently had a client of mine who does not need a whole lot of assistance, has some mild dementia, and at one of our local assisted living facilities is paying $6,200 per month. Compare that to when my own father had to go into assisted living back in the 90s. His cost of care was only $2,100 per month. Today, for what he received, it would be at least $6,200, if not $7,200 per month for assisted living. That’s not the worst of it. The worst of it is that the cost of care is going to double in the next 15 years. So we will be looking at skilled care exceeding $25,000 per month, and assisted living care clearly exceeding $10,000 to $12,000 per month. All too often, when we are doing estate planning, we think more about what’s going to happen when we die, that is what the provisions of our Will or Trust going to be rather than thinking about how we are going to be cared for during our own lifetime in the event that we need long-term care. The long-term care we need may be addressed by simply having dementia. It may be because we get Alzheimer’s. It may be that we simply need some assistance with the activities of daily living, such as staying in a safe environment. Perhaps it’s bathing, perhaps it’s meeting assistance to use the bathroom, whatever our needs are at the time as we age, and we are living longer for the most part. As we age, we are going to need some assistance. The critical thing that we have to do is have a plan.

So how do we plan for long-term care? Well, we have to talk about not only where are we going to live, who is going to provide that care, and what’s it going to cost and is there a smart way to early on plan for paying for care when we need help? Over the last 36 years, after having even gone through this with my own parents, I can tell you that there are some limited options to consider, and of course, like anybody, I have my own biases, the first thing I will tell you is this, if you have a net worth that exceeds perhaps $5 million, maybe you are in a position where you can self fund your care, but most of my clients are not in that position. They may have $500,000, maybe they have a million. They all want to leave some sort of legacy to their children or grandchildren, but in order to do that, they realize that they have to find a way not to go through all of the money that they worked so hard to earn by paying for long-term care. So, how do we go about that? Well, many people in the country today, over 70%, stick their head in the sand and do absolutely nothing, and don’t have a plan and they end up in crisis mode and when crisis mode happens, then everybody has to scramble and figure it out. That’s not the right way to go about this. That is stressful on you, it’s stressful on your family, and it costs you the most money.

A second way you can go about this is to devise a plan to live with your children. Now, I can tell you this, that’s not my plan. As much as I love my two children, I do not want to be a burden upon them, but I have had a few clients over the years be able to do this and do it successfully, but you got to be a special family to pull that one off. Now, I will tell you this, my preferred method of taking care of long-term care if you are currently reasonably healthy. If you have some assets, whether it be retirement accounts or savings accounts or brokerage accounts, where you can allocate a portion for your own care or your spouse’s care. If you are in that situation, I want to talk to you about asset-based long-term care and you should know that I have a separate podcast on asset-based long-term care that goes into more of the details, but I just want to give you a basic synopsis. I pulled a sheet out this morning with some current numbers and it says that if you are 60 years old, and you have $100,000, that you can invest in a long-term care policy, that $100,000 that you have, whether it is paid in over the course of 10 years or paid in lump sum, will give you a long-term care benefit of approximately $379,772 for every $100,000 that you put into the policy. Better yet, if you never use the policy, that $100,000 will pay a $189,886 death benefit for your children. So if you are 60 and healthy, and have available funds, think about investing in asset-based long-term care and by the way, if you do invest in it during your lifetime, and find out that you later need to get the money to use it for something, this particular company will refund you all your money at no charge, no expense, no surrender charge. It’s literally moving money from one pocket to the other. Almost sounds too good to be true, but I can assure you that even at these numbers, the insurance companies are making money because they have the law of large numbers on their side. That makes it doable for them. So what it really means is that asset-based long-term care can be planned for in advance if you are 55, if you are 60, 65, the average age of our client who purchases asset-based long-term care is about 68 years old. But of course, they have to be reasonably healthy. Now, if you, for whatever reason, are not healthy enough to get asset-based long-term care because it is medically underwritten, or two you don’t have the funds for it, then your alternative is to rely upon government benefits. Now, here at our office, we have become experts in the Elder Law area to help our clients acquire Medicaid benefits, and what is called veterans benefits for those who have a wartime service.

So let’s talk briefly about Medicaid and VA benefits. Just remember, first of all, that Medicare, which all of us are eligible for, regardless of our financial situation, does not provide any significant long-term care. Medicare is there in two circumstances, 1 – when we need short-term rehabilitation, and 2 – if we become eligible for hospice services after becoming terminal. Under those two circumstances, Medicare will pay a benefit, but it is not there for the long-term custodial care that most of us will need if we get dementia, or need assistance with the activities of daily living. For those programs, we have to be eligible for Medicaid. Again, I have a separate podcast that I would tell you to go listen to that will talk about Medicaid basics one-on-one and how to qualify for it. But the bottom line is that in order to obtain Medicaid benefits, whether it be passport services at home, waiver services and assisted living, or skilled care in a nursing home, the bottom line is that you cannot have assets if you are a single person of more than $2,000. Just remember, we can do Medicaid planning by creating an irrevocable trust, but we have to do that five years in advance of ever applying for Medicaid. Here is my point, the single biggest blunder that I have seen in my practice is failing to address this long-term care issue. What I can tell you is that if you work with an estate planning attorney, who is also an elder law attorney, who also has access to long-term care policies, you can explore all the options and develop an appropriate plan for you and your family. Let’s talk about the second major estate planning blunder. It is not addressing taxes.

Let’s talk about taxes. First of all, in a prior episode, I indicated to you that the State of Ohio abolished the Ohio Estate Tax back on January 1 of 2013. So as of today, we do not have to worry about that 7% of Ohio Estate Tax. Now, it’s possible if you relocate to another state, that you may have to worry about it because there are still a handful of states that will impose an estate tax. But if you plan on staying in Ohio, you do have to worry about that. Let’s talk about the federal estate tax. As we all know, the federal government will exempt a certain amount of assets from the estate tax when we pass away or during our lifetime when we want to make gifts to our children or grandchildren. What is that amount? That’s the critical inquiry. Well, that amount during my 36-year career has bounced around an awful lot. When I started practicing, a single individual could gift during their life or a death approximately $500,000. Today, that amount exceeds $12.92 million and will go up a little bit next year again, but listen to this, absent some change from Congress, that exemption amount that we can give away is scheduled to be reduced to about $7 million on January 1 of 2026. Obviously, Congress can always change this dollar amount. For 99% of my clients, we no longer have to plan for the estate tax, because our estates do not exceed that exemption amount and again, whether that be 6 million or 12 million per person, 12 or 24 million for a married couple, for most of my clients, that simply does not matter. Having said that, we have to pay attention to the income tax issues. Where are the income tax blunders occurring? Let’s talk briefly about that.

One of the things that I am seeing on the income tax side is later in life, people who are required to file an individual income tax return are not doing so. So when I handle estates when somebody passes away, the first thing I have to ask is, “Has mom or dad filed an income tax return, and if so, for what years, and are there any years that they should have filed but did not?” I have an increasingly number of clients who should have filed but did not in large part because they got dementia, or they got incapacitated in some form or another and now, they passed away and when an individual passes away, and they haven’t filed the tax returns in the past, then the executor of their estate, or the trustee of their trust, or their personal representative, that is if we don’t file for probate, the personal representative is the person who is responsible for filing a tax return. Well, that’s the person who is in charge of the individual’s property, they are required to file any past due tax returns and by the way, if tax returns aren’t filed on a timely basis, there are going to be penalties and interest that is going to be charged. I recently had a case where this happened with an individual, and they had not filed tax returns for over 12 years. While the person who is appointed to handle the estate wanted to ignore filing any returns, we quickly had to advise them that if they ignored it and failed to file the returns and distributed the person’s assets to the heirs, they would end up being personally responsible for paying those income taxes and filing those income tax returns. So there’s personal liability can attach to the person who is handling the estate if the returns are not done. So, one of the things we have to make sure of as a part of our estate plan is that we have individuals and power during our lifetime to be able to prepare and file our tax returns. In the year in which we pass away, more often than not, a tax return will be due assuming that we have enough income that is taxable. A tax return will have to be filed up through the date of death. If it takes a period of time for tax returns to be prepared and filed and the estate administration goes on, the estate or the trust will have to file a tax return for the period of time from the date of death until the time the estate is closed and that is done on a separate tax return, typically a 1041 tax return.

What other kinds of errors do I see with respect to failing to address tax issues? Well, one of the big ones is making sure that we obtain this step up in tax bases for all of our real estate or for our stock. This is a commonly misunderstood area of the tax law. I have to address this just about every week, particularly with my clients who are farmers or real estate owners. So here is the concept, remember and again I have a separate podcast dealing with capital gains taxes, but just suffice it to say this, what you pay for a piece of property and if you make certain improvements, you add the cost of the improvements to what you paid for it, that becomes your tax basis and if you gift that property during your lifetime to your children, their tax basis in that property is your tax basis, so that if they later sell it, and there is a gain, they will have to pay a capital gains tax. Now, the good news is that the highest capital gains tax rate is 20%. It is not the 37% that we pay on ordinary income. That’s the good news. Bad news is if you gift property during your lifetime, and your children want to sell that property, either during your lifetime or after your death, they are going to pay that capital gains tax. But if instead of gifting that property to your children or grandchildren during your lifetime, you hold on to that property until you die, that property will get a step up in tax basis and the value that your children or grandchildren will take will be the value on your date of death and how do we determine that value? Well, it’s easy if it’s cash, right, it’s whatever the cash is worth. If it’s stock, it’s easy to determine the value of stock. On the other hand, if it’s real estate, more likely than not, we want to get an appraisal so that we have established what that tax basis is. As a general rule, if the children sell that real estate within six months of your date of death, there will be no gain realized and therefore no capital gains tax paid. Understanding tax basis and the capital gains tax is critically important when you are doing estate planning, because you don’t want to knowingly do anything that will eliminate the step up in tax basis for any of your stock or any of your real estate.

What are some of the other tax issues? Well, I had one the other day that is pretty common and that is that I had an elderly client who had an IRA, a retirement account, and they were only taking out the required minimum distributions. Well, when they were taking out the required minimum distributions, the only other income they had was their Social Security. When I began to make an inquiry about who was going to be the beneficiary of that retirement account, they indicated that it was going to be their children. When I asked them about their children, they proceeded to tell me that their son and daughter were very successful, high income earners and in a top tax bracket. Well, here we go, we have got a parent in a low tax bracket, we have children in a very high tax bracket, understand that the money in the IRA is either going to be taxed at the parent’s rate if they withdraw the money, or is going to be taxed at the child’s rate upon death of the parent. Oftentimes, that differential can be a 20% tax differential and if we are talking about a $400,000 IRA or a $500,000 IRA, 20% of that can be a substantial additional amount of income tax that unknowingly is going to get paid by the children when mom or dad passes away. More often than not, my elderly clients have never thought about that issue, that is that maybe they should be taking out more than the required minimum distributions and paying the tax on it. Sometimes that makes a lot of sense. Or perhaps it’s the other way around. Perhaps the parent still has a high income tax rate, and perhaps the children have a low income tax rate. Now just remember, the IRA laws seem to always be in a constant state of flux, but under the most recent changes to the Internal Revenue Code dealing with retirement accounts, each one of us has the ability to leave our retirement accounts to our adult children. Let’s talk about adult children here and they can defer the tax on those retirement dollars for up to 10 years. Now, it appears as though even though we don’t have final regulations yet, that our children will have to withdraw an amount each year during those 10 years, but suffice it to say, one strategy to develop a strategy for saving income taxes is for the parent to only take the required minimum distributions and then designate a child to be the beneficiary or better yet a trust for a child and to require that that IRA not be withdrawn for 10 years, or in equal installments over 10 years after the parent dies. Deferring taxes over a period of years, can result in some substantial savings overall for the family. Having a plan, figuring out whether the parents should pay the tax, or whether the kids or grandkids should pay the tax is critically important. One of the interesting things that the new tax law did preserve is our ability to save a lot of taxes by giving our retirement accounts to our grandchildren, because the 10-year period for our grandchildren does not start until the child turns 18 years old. So if we have a one-year-old grandchild, we want to make them the beneficiary of our IRA, we set up a trust for that grandchild, we pass away, think about it, we have up until the child turns 18 plus 10 years after that to defer the income tax that can result in some substantial tax savings for our family. So bottom line is that one of the major blunders that I see is that we are not properly understanding what the tax rules are, we don’t have a plan to save taxes, whether it be estate taxes, more often than not, it’s not the estate tax any longer, but boy, there are a host of issues on the income tax side, both on the ordinary income tax side as it pertains to our retirement accounts, also on the capital gains tax side when it comes to real estate, and our stock investments.

The third area I want to talk about that I think is a major blunder and we spend an awful lot of time at our firm emphasizing the need to avoid probate. Once again, let’s talk a little bit about what is probate. Probate comes in two forms. Under living probate, it means you have no plan during your lifetime and you become incapacitated and can’t manage your assets. If we have no plan in place or an inappropriate plan in place, then we have to go get a guardianship down at probate court. In other words, living probate equals a guardianship. We want to avoid that guardianship at all costs because it involves the probate court, it’s public, it’s costly, it takes time, it can be terribly frustrating. The judge down at the probate court has to approve every single thing that goes on. Living probate should be avoided at all costs, as should death probate. For many of our clients, they end up unwittingly in probate because they make a mistake. Our overall goal is to make sure for instance, if we have a trust based plan, that we have all of the assets titled in the name of the trust during your lifetime and for those assets that cannot be titled in the name of a trust, and the only one that can are your retirement accounts, we need to make sure that we have a proper beneficiary. Seems simple, doesn’t it? I can tell you example after example, a recent friend of mine passed away and as he was on his deathbed, his son found out that his two bank accounts were not in his trust. That son took the power of attorney to the local branch of the bank and presented it. His goal was to get the bank to allow him to withdraw the funds, or put his name on the account or three worst case scenario, make him the beneficiary of the account in the event of his father’s passing. Well, when he presented the power of attorney, unfortunately, the branch personnel indicated they would then have to submit that power of attorney to their legal department before they could take any action and they told him that they would contact him at a later date. Well, some five days later, he got a call from the branch manager, telling him that the legal department told him that the power of attorney could not be utilized without any explanation as to the reasons why. You may be interested in knowing that here in Ohio, financial institutions are not required to recognize a durable power of attorney. In some states, they have to have good cause to do so. For instance, in Kansas, there was a recent case in which a bank was fined over $50,000, because they didn’t have good cause and they rejected the power of attorney. That law doesn’t exist here in Ohio. Bottom line was, as you might expect, what ended up happening in this instance, is that the account did not get changed, the father passed away and now those bank accounts are going to have to go through probate, that probate process will be lengthy, it will be costly and as you might expect, it is totally unnecessary. Had those accounts been placed in the trust during the client’s lifetime, then it would have avoided probate and we would not have had to go through the whole rigmarole with the power of attorney. So you can see whether it is two bank accounts or whether it is a vehicle or whether it’s your house, getting the assets retitled and having the beneficiaries properly designated is critical to avoid probate.

All right, let’s talk about the next major blunder what I call the fourth major estate planning blunder that people make. Bottom line is that I think it is the fact that people work with the wrong law firm. So let’s talk a little bit about who you should hire to do your estate plan. Now, I do have a separate blog that covers this topic in depth and I would recommend that to you, but let me just talk briefly about this. First, the most important thing you need to know is ask the person you are looking to hire, are they board certified in estate planning? Are they board certified in elder law? Or do like me, did they go back to law school and get a post doctorate degree, an LLM degree in estate planning and elder law? If they do, and that’s all they do, you can at least have some assurance that they meet the minimum requirements to be able to do your estate plan. Well, why is that critically important? Estate planning is complicated and it involves everything that you own and it also involves everyone that you love. We need to get this right, we do not have the luxury of making mistakes when we are doing estate planning. So we have to make sure that the person knows what they are doing and the way that public knows best is to make sure you are working with somebody who is board certified. Now in Ohio, there are 55,000 lawyers, but you know what, there’s less than 200 who are board certified in estate planning. It’s also critically important though, that we just not finding somebody who does estate planning, in my view, we have to find those people who do both estate planning and elder law planning because my clients almost all need to do both. That Elder Law component focuses in on long-term care.

The second thing you want to ask, Well, how do they bill? Are they going to quote you a flat fee in advance of doing any work? Or is this a situation where the law firm is going to bill you hourly and not tell you how many hours it’s going to work? It has been my experience over my career, I have been able fortunately to avoid any and all fee disputes by requiring that our fees be flat fees quoted in advance. That’s the only way to go in my view.

Number three, you want to make sure that the firm will support the plan once it’s built. Here we have a maintenance program called our legacy club. That legacy club has a number of components to it. Not only do we submit a written annual review of your plan to you, but we invite you to our continuing education workshops. We invite you to an annual one-on-one meeting with one of our attorneys. We offer to you the ability to host a family meeting with mom and dad and all the kids, we offer the opportunity to make changes to the plan at no additional cost if you are a member of our legacy club. Maintenance is critically important.

Next question for the law firm. Do they help you support the plan in the event that you need to go into a nursing home? That is do they have the capability? Do they have somebody on board who can file a Medicaid application? Do they have somebody on board who can file a veteran’s benefits application, or to help you negotiate with the long-term care insurance company to make sure those benefits are being paid? Do they have somebody on staff who has some knowledge about what facility to choose? Do they support it if you have an elder law event? Does the law firm have a process in place for you to walk through as you are preparing your plan? You know, here at Gudorf Law Group, we have a clearly defined seven-step process. It starts with filling out a client organizer, attending a goals and responsibility conversation, telling us what are your goals and who do you want to put in charge of the plan. Number three, after we have that conversation, we then have a meeting to design the plan, to sign the plan, to review it and sign it and then we coordinate with your other advisors because we got to make sure everybody on your team is on board, whether it’s your financial advisor or your CPA, we have to communicate and we do that through what I call a one-page design chart. It’s a diagram of your estate plan and we share that with your other advisors. We also have an asset alignment workshop where we teach you how to retitle assets into the name of your trust. In addition, we have the Legacy Club, which is the maintenance program. Make sure you are working with the right law firm.

The fifth blunder that I want to talk briefly about is not covering all of the contingencies that could happen. As we do our plan, we think we know how life is going to play out, but there is no certainty, of course and oftentimes, things happen along the way that surprises. What are some of those things? Well, you know, my family, what happened was, my mom died first. I don’t think anybody expected that. So if your spouse dies before you do, what are the plans? You may say, Well, I am fine if that happens. Well, then what if the reverse happens? Is there going to be somebody there to help your spouse and you now have the ability to select that team. It’s important that we understand what may happen and have a contingency. What if a child predeceases you? Or what if a child gets divorced? What’s going to happen? You know, let me give you an example. If we have a retirement account, and we say it’s going to go to our spouse, whereas spouse dies before we do, and then it’s to go to our children. What happens if that child has died also before we do? Is it going to go to their minor children in lump sum fashion, are we going to create a taxable situation that we don’t want to be in. So making sure that we are addressing contingencies within our estate plan is really important. It can be as simple as a medical power of attorney. Oftentimes, I have seen folks come in and they will just name their spouse, and they won’t name their three children or their four children. We need to make sure that we have those contingencies in place. But hopefully, by listening to this podcast, I can help you prevent running into one of these pitfalls, because running in one of these pitfalls, could be disastrous to your overall estate plan and we want to avoid that at all costs. So hopefully, this will provide you with some clarity and some confidence with respect to your ability to move forward and not procrastinate with respect to getting your estate plan done. Well, I have enjoyed talking to you today and I hope to talk to you in the near future. If we can help, please give us a call. Thank you.

Until our next session, just remember the time to repair the roof is when the sun is shining. To get started with your estate plan, you can go to gudorflaw.com/getting started. For a free copy of our recently published book called The Ohio Estate Planning Guide, go to gudorflaw.com/book.