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Is your estate plan going to fail?

Even well-drafted estate plans can fail, meaning they fail to achieve your goals when the time comes. Those goals are generally 1) to distribute your assets to your heirs and beneficiaries; 2) to pay your creditors and taxes; 3) to prevent undue losses of assets or diminishment of the estate.

The problem is generally not that your lawyer didn’t do a good job creating the estate plan. Instead, there is often a lack of follow-through by the person who set it up.

How big is the problem? According to Forbes, it’s hard to say because there isn’t a lot of data. However, a 2007 book called Estate Planning for the Post-Transition Period reported that 70% of estate settlements are followed by a reduction in family harmony or by asset losses. Further, surveys of estate planning attorneys reveal that a high percentage of estate plans fail.

There are two main reasons why estate plans fail. First, you could fail to follow through on the plan or fail to update it when circumstances change. Second, your heirs and beneficiaries may not be prepared to receive or handle the money they receive.

Lack of follow through

Even when an estate plan is drafted well, there may still be business for you to complete before the plan will be effective. For example, trusts are invalid unless they are funded. If you don’t take the time to physically put your assets into the trust, they will not be in the trust when the time comes. They will be subject to the expense of probate.

Another piece of business is notifying those whom you have designated as power of attorney or health care proxy and giving them a copy of the forms. If you should become incapacitated, it will be too late to make these documents available. You should also discuss your expectations with the designated people.

A very common lack of follow-through is failing to change or update your estate plan when circumstances change. For example, you would want to update your plan if you got a divorce or if a new child were born. You might update your plan if you experienced a significant change in assets. If your plan is obsolete when you die, it won’t be of much assistance to your heirs and beneficiaries.

Lack of beneficiary preparation

In order for the asset protection aspect of your plan to be effective, your heirs and beneficiaries would ideally be educated on how to manage the wealth they are about to receive. Otherwise, the wealth could be wasted on bad investments, improper spending, fraud or simple neglect.

Ideally, you should communicate with your heirs and beneficiaries and seek buy-in from them about your plan.