Today, we look at the first five of ten common estate planning pitfalls that many people either ignore or misunderstand, and we lay out the real-life consequences of those mistakes. Estate planning is important not in terms of wealth, but in terms of reducing stress and preserving relationships when someone passes away. Whether or not someone is wealthy, a proper estate plan can prevent delayed decisions, misallocated assets, and elevated emotions for surviving loved ones - during a very stressful time.
The first pitfall we tackle is not having a will at all. If someone dies without a will, their state—not their estate—decides who inherits what, based on legal formulas that ignore personal relationships or intentions. These formulas differ by state and often don’t align with what people assume will happen.
Next, we highlight the danger of outdated documents. Many people who think they’re covered by old wills or plans don’t realize that state laws or life changes—like moves, marriages, or children—can render those documents ineffective. We share a story of a family who thought they were protected, only to find out their paperwork didn’t align with their current state’s laws.
Then, we move into beneficiary designations, which can override a will because they’re treated as contracts. If those designations are outdated, such as naming an ex-spouse, the wrong person could end up with assets, regardless of what the will says. This is why reviewing beneficiaries regularly is crucial.
The fourth pitfall is unfunded trusts. Setting up a trust isn’t enough—it has to be funded, meaning the assets need to be formally moved into the trust. Without doing this, the trust is an empty safe, and the probate process still applies. We discuss a case where a well-intentioned trust ended up being completely ineffective because it wasn’t properly funded.
Finally, we address the lack of incapacity planning. Many people forget to prepare for a scenario where they’re alive but unable to make decisions. Without healthcare directives or powers of attorney, families may have to go to court just to pay bills or make medical decisions—adding legal stress to already emotional situations.
We wrap up by reiterating the importance of having clear, updated, and legally valid documents in place—not just for your sake, but for those you care about. In Part 2, we’ll continue with the next five pitfalls to avoid.
ThimbleberryU 139 -Estate Planning Pitfalls and How To Avoid Them (Part 1)
Speakers: Jon Gay & Amy Walls
[Music Playing]
Jon Gay (00:08):
Welcome back to ThimbleberryU, I'm Jon Jag Gay. I'm joined as always by Amy Walls from Thimbleberry Financial. Hey, Amy.
Amy Walls (00:13):
Hey Jag, it's good to talk to you.
Jon Gay (00:15):
Today's topic, and our next episode’s topic as well, is so important, we’ve decided to make two episodes out of it. And we're talking about estate planning pitfalls and how to avoid them.
I can't tell you how many folks I've talked to in this field in various podcasts. A surprising number of people don't have an estate plan. I've seen Amy, numbers from 60 to 70% of people. Is it that high?
Amy Walls (00:40):
Unfortunately, yes, it is. About two thirds of adults in the U.S. don't have a will and even fewer have powers of attorney or trust. And of the folks that do have an estate plan, a lot of those plans are outdated or unfortunately, incomplete. That doesn't mean they failed at estate planning though, it means they just didn't finish.
So, it's kind of like starting the race and not getting across the finish line. Worse, most of the time, they don't know they didn't finish it.
Jon Gay (01:10):
Yeah, or didn't update it. I'm sure we'll get into that here in a few minutes as well. Let's start with a quick reality check. Why does this stuff matter, even if somebody isn't super wealthy?
Amy Walls (01:20):
This isn't about net worth, assets minus liabilities. That's not what this is about. It's about making things easier for the people you care about who are going to take care of wrapping your financial life up when you're no longer here.
And without a plan, one, decisions get delayed; two, emotions run higher, and three, assets may not go where you intended. And the unfortunate result of that is hurt feelings when you're no longer here to understand it.
So, the right documents and the right setup are a way to protect relationships. So, it's not just money here.
Jon Gay (01:59):
You make a really good point there. When someone is dealing with your estate, their emotions are already high because ostensibly, they're mourning, they're grieving. And then to have to deal with stuff that's not properly set up ahead of time just piles right on.
Amy Walls (02:12):
It's a hard situation.
Jon Gay (02:14):
So, we're going to talk about 10 estate planning pitfalls today and in our next episode. The first one, pretty obvious one we're going to dive into. And that is not having a will. What happens if someone dies without a will, Amy?
Amy Walls (02:25):
Well, the state that you live in — not your estate, but the state, writes one for you. It's called intestacy and it follows a legal formula. That formula doesn't take into account who you were close with, who you were supporting, or who you definitely didn't want to inherit anything.
And here's the other piece — I said it's state specific, which also means it is not consistent across states.
Jon Gay (02:54):
Right.
Amy Walls (02:55):
So, in some places, your children will automatically inherit something, even if you have a living spouse. So, what you thought may be going a hundred percent to your spouse automatically may not. They may only get 50%.
Jon Gay (03:10):
And to say nothing of family drama, the spouse or the kids you want, the old joke, “You're out of the will, you're in the will, you're out of the will.” I make the joke, but it can be very serious because your possessions and assets can go to someone you did not want it to go to. We've even heard horror stories of an ex-spouse that because the estate planning was never updated, they end up with stuff that you never intended them to have.
Amy Walls (03:33):
Well, and I think Jag, let's take that a step further because you do bring up a good point. These assets, it may not just be about who you want to leave them to. It may be about, especially if you are married and you are thinking your spouse gets a hundred percent of everything. So, no big deal if I don't have a will.
One, there's delays, but two, if your state rules are different, that spouse that you expected these assets will help protect throughout their life, they don't get as much money depending on what state you're in.
Jon Gay (04:07):
It’s that old cliche when you assume, you make an “ass-et” out of you and me. Sorry, I couldn't resist that one. (Laughter) Alright, second estate planning pitfall: outdated documents. We started to allude to this. Is having an old will better than no will, Amy?
Amy Walls (04:23):
Well Jag, you know my two favorite words are-
Jon Gay (04:25):
It depends.
Amy Walls (04:26):
It depends. I'll vary those up. Maybe let's say “sort of.” So, unless it creates confusion or accidentally leaves someone out. So, estate plans aren't set it and forget it. They're really living documents.
So, this is why if you have one, you've probably been told by people you work with to review them every few years or after major life changes. That's because American adults on average have a major life change every three years.
Jon Gay (04:55):
And that could be marriage, divorce, kids or any other thing, right?
Amy Walls (04:59):
Yes. There are so many things that can qualify, job changes can qualify in that. So, that's why there’re living documents. They're going to need to adjust as your life adjusts.
So, let me tell you a, a quick story. There's a couple I know who thought everything was completely set because they had wills. Their wills were over 10 years old. One, they had guardians named for their kids who are now in college; they no longer need a guardian. That's not so big of a deal because obviously, they aged out of that situation. But they'd also moved states twice.
So, this paperwork gave them a false and a truly false sense of security, because what they thought was going to happen wasn't going to happen. These state laws were different. And so, their old wills really didn't hold up in the same way, but it was caught in time. But if they hadn't reviewed it, their wishes wouldn't have been followed.
Jon Gay (05:56):
That's a powerful story. Alright, number three mistake, and this one surprises me. The mistake is a bad beneficiary designation. Why do beneficiary forms override the will?
Amy Walls (06:08):
Jag, it's a great question, and this we see so often, it's a reason we do annual beneficiary reviews with our clients. So, the answer to your question is beneficiary designations, whether on a 401(k) or a 403(b) where it's called a beneficiary designation.
Or via something like a payable on death designation on a bank account or a transfer on death designation on an asset that is not in a retirement account trumps a will because it's a contract.
Jon Gay (06:41):
Okay.
Amy Walls (06:42):
And unfortunately, what that means is the contract trumps the will, and so, if you have a bad beneficiary, meaning an old, outdated beneficiary on one of these accounts, that contract is going to stand, even if the will says something different. Even if, like you mentioned earlier, it's an ex-spouse and you've been divorced 10 years.
When you fill out that beneficiary designation, think of it like giving someone keys to a lockbox. And once they have those keys, it doesn't matter who they are, they have the ability to now get in. So, if the name is wrong, they're still going to get the money.
Jon Gay (07:21):
I think of the example of a bank account where it doesn't matter what your will says, the bank has a form and it says, “Upon this individual's death, this is who that account goes to.”
Amy Walls (07:31):
If you've added a payable on death designation, yes.
So, another story here, someone I know inherited her dad's IRA. Unfortunately, he had two retirement accounts, one with her as the beneficiary, and one where he forgot to update the form and it listed his ex-wife.
Jon Gay (07:53):
Oh no.
Amy Walls (07:55):
He wasn't remarried, they were the only child. So, the custodian followed the directions of the form, the contract, not what we believe the person's wishes were. Because usually, people aren't trying to give money to an ex-spouse.
Jon Gay (08:11):
Not usually.
Amy Walls (08:13):
And all of this unfortunately, was totally preventable.
Jon Gay (08:16):
Yeah. Okay. So, here's an interesting one. Number four: unfunded trusts. What happens if someone sets up a trust for assets but never actually moves the assets into it?
Amy Walls (08:29):
Oh, Jag, this is so, so common. Let me ask you this, have you ever thought about buying a safe?
Jon Gay (08:34):
No, but for argument's sake, let's say yes. (Laughs)
Amy Walls (08:36):
Okay. So, you buy a safe, you've got it set up in your house, and you are in the process of putting valuables into it, but for some reason, you stick them in a paper bag.
Jon Gay (08:47):
(Laughs) Okay.
Amy Walls (08:48):
To transfer them or a little box or something, that you're going to go stick them in the safe. Well, you set it down next to the safe and never actually stick them in the safe.
Jon Gay (08:56):
Okay.
Amy Walls (08:57):
It's exactly the same thing. The trust only matters when assets have been moved into it. So, you've got to put the assets in the safe to make them safe. You've got to put the things in the trust in order for the trust to be effective.
Jon Gay (09:18):
In case of, God forbid, a fire or a robbery or in this case, what we're talking about, the passing of the individual, the safe is useless if it's empty. I assume you have a story with this one too.
Amy Walls (09:27):
Well, before I jump to a story, I do actually. But a revocable trust, which is kind of the general basic trust level, only helps if it owns your assets. So, this is somewhere people get confused. They'll put a trust in place, and they'll say, “But I don't want the trust to own my assets, I want to continue to own my assets while I'm alive.”
One, when they've gotten to us and they've said this, we understand that they didn't understand what they set up with the estate planning attorney. So, it's important to understand that for a revocable trust, you still retain ownership and can change things while you're alive. If it's a trust for two people and one of them passes away, you're going to be more stuck.
So, creating the trust is step one, funding it is step two.
Jon Gay (10:12):
Okay, got it.
Amy Walls (10:13):
So, someone I know, their mother had done “All the right things.” They created a revocable trust, told their kids about it, and when she passed, the house and her brokerage accounts, taxable investments were still in her name. The trust didn't have anything in it.
So, she set it all up in terms of the legal document, but didn't take the steps to fund it. So, that meant that probate, delays, and legal costs, all things that she thought she had avoided by putting that trust in place were all in play as if she'd never put the trust in place.
So, really, she spent time and money setting up a trust that didn't have any impact or play a role in her life at all.
Jon Gay (11:05):
She bought this big, beautiful safe and it was empty.
Amy Walls (11:07):
Yep.
Jon Gay (11:08):
Alright, fifth one, final one for today: no incapacity planning. I feel seen on this one because I have not done this yet. It's about being alive but not able to act, right?
Amy Walls (11:17):
Exactly, Jag. If you are incapacitated, and I know this one is often harder for people to think about than passing away because they're still here. If you're incapacitated to a certain extent, who's going to pay the bills? Who's going to talk to your doctors. Without powers of attorney and healthcare directives, families may need to go to court to get basic authority to make those decisions for you.
Jon Gay (11:43):
I actually had a physical a couple weeks ago and the nurse said, “Have you filled this out yet?” I think it was called five wishes, seven wishes, something like that. And she gave me a pamphlet to fill out and obviously, it'll be my wife that would be in charge of everything, but I haven't done it yet. So, that is a nice reminder to me to take that off my to-do list and get it done.
Amy Walls (12:02):
Well, and even then, I would suggest doing one that is legal with your state that isn't just for that healthcare provider.
Jon Gay (12:12):
Oh, that's fair. Yeah, absolutely.
Amy Walls (12:14):
And then you can provide them that information. So, someone whose mother slipped into a coma after having a stroke. There was no power of attorney, no healthcare directive, nothing indicating what needed to happen.
And as I mentioned can happen, the family had to go to court just to access their checking account and make care decisions, because without a spouse especially, there wasn't anyone automatically granted that right. So, during a crisis of dealing with their health, they were stuck handling legal logistics on top of the healthcare logistics.
Jon Gay (12:51):
And that kind of brings us full circle to what we talked about at the beginning today, which is when somebody is in a very stressful time, whether it's grief or a healthcare emergency, you don't want to have to have them deal with all this logistical stuff on top of the emotional trauma they're enduring.
Amy Walls (13:04):
No, absolutely not. And especially, if there are multiple siblings who have different ideas about how healthcare should be handled or how the financial decision should be handled, you've just created a quagmire.
Jon Gay (13:18):
Absolutely. Alright, so we're going to leave it there with our first five. We encourage you to come back in a couple weeks for the next five estate planning mistakes and what they mean and how to avoid them.
Amy, if somebody wants to come talk to you at Thimbleberry Financial about this or anything else related to their finances, how do they best find you?
Amy Walls (13:33):
They can give us a call at (503)-610-6510, or find us online at thimbleberryfinancial.com.
[Music Playing]
Jon Gay (13:42):
Excellent. We'll pick this back up again soon.
Amy Walls (13:44):
Sounds great Jag.
Voiceover (13:45):
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker dealer, member of FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker dealer, member FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.