Whether your estate plan is simple or complex, many details can get overlooked and may undermine your plan’s effectiveness. The following is a list of the most common estate planning mistakes to avoid:
- Titling property jointly with your children as a substitute for a will. Unlike a will, a transfer of an interest in your property is irrevocable, which may prevent you from changing the disposition if circumstances change before your death. Also, titling your personal residence jointly can result in partial loss of the capital gain exclusion if it is sold before your death.
- Failing to plan for the possibility of children getting divorced or having problems with creditors. Parents often have cause to regret having made outright gifts to their child when the child subsequently divorces and the ex-son- or daughter-in-law is awarded an interest in the gifted property by a court, or when the property is taken pursuant to a legal judgment against the child. Such problems can be minimized through proper use of trusts or a business entity, such as an LLC.
- Failing to make sure that all your assets will be passed on in accordance with your wishes after you die. Many types of assets (life insurance, IRAs, brokerage accounts) can pass to your heirs or others based on beneficiary designations. The provisions of your will cannot change a beneficiary designation. Remember to account for things you’ve already designated. You should review your will, as well as all beneficiary designations, when formulating your estate plan.
- Underestimating the true value of your estate for Federal estate tax purposes. For instance, many people are unaware that the proceeds of life insurance on their lives are includable in their taxable estates if they own the policy. This could bring the total value of their estates to more than the amount sheltered from estate tax by the estate tax exemption—$10.68 million per married couple in 2014, which is annually adjusted for inflation.
- Failing to consider state death taxes in light of recent changes in the law. Many states have “decoupled” their death tax from the Federal estate tax, which means your estate could be subject to death tax in a state even if no Federal estate tax is due. This could result in an unpleasant surprise at your death, one that might be avoidable with proper planning. The laws of each state where you own property should be carefully reviewed to determine the potential exposure to state death taxes and how to minimize them.
- Being uninformed about recent legislation affecting the gift tax and estate tax amounts. As of January 2013, the American Taxpayer Relief Act (ATRA) provides a 40% tax rate and a unified estate and gift tax exemption of $5.34 million per individual and $10.68 million per married couple (adjusted annually for inflation). You can make yearly gifts up to the annual exclusion amount ($14,000 per person for gifts made by an individual and $28,000 for those made jointly by husband and wife) that don’t count against your $5.34 million estate and gift tax exemption.
- Failing to maximize the benefits of the income tax basis “step-up” at death. Low-basis/highvalue assets should generally not be given away during your lifetime, since the basis for capital gain computation purposes will be increased to fair market value at death. If the asset is given away, the basis remains at the property’s original cost.
- Not recognizing the difference between the amount that can be transferred free from gift tax during yourlifetime and the amount that can pass free from estate tax upon death. The maximum amount that can be given away during life without incurring gift tax is $1 million, whereas the amount sheltered at death is currently $3.5 million in 2009. The estate tax is schedule for appeal in 2010. Without further legislation, the estate tax will be reinstated in 2011 at levels in effect prior to passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). You can make yearly gifts up to the annual exclusion amount ($13,000 per person and $26,000 for gifts made jointly by husband and wife in 2009) that don’t count against your $1 million gift tax exemption.
- Failing to indicate your desired funeral arrangements. A prearranged funeral can greatly relieve family members from additional stress after your death.
- Failing to plan for disability. In the absence of adequate medical care directives, powers of attorney, or trusteeship of assets, costly and time-consuming court proceedings may be required in order to appoint a guardian or conservator to act on your behalf if you become disabled.
- Not reviewing and updating your estate plan on a regular basis. Changes in the law and in your personal financial and family situation over time make it essential that you periodically review your estate plan to make sure it still carries out your wishes.
Be sure to consult with your qualified team of tax, legal, and financial professionals. Early and thorough planning can help you avoid these common mistakes, meet your financial goals, and leave a lasting legacy for your loved ones.