Gerald Eidelman, J.D. LL.M.
Estate planning can often feel like you’re trying to navigate challenging terrain. This essential process involves dealing with legal intricacies, making complex decisions, and avoiding costly mistakes. Its purpose is to ensure the well-being of your loved ones and protect your hard-earned assets for the future. However, without careful thought and professional guidance, it’s easy to fall into common pitfalls that may result in unfavorable tax outcomes or disputes among heirs.
Estate planning is a strategic way to maintain control over decision-making, even when you’re no longer around. The primary goal is to ensure that your assets are distributed according to your wishes and that your loved ones are well taken care of. By taking a proactive approach to managing your wealth, you can spare your family the burden of legal processes and protect the value of your estate from erosion.
However, despite having the best intentions, it is common for people to make mistakes when it comes to estate planning. These mistakes can include misusing jointly held properties, not having sufficient liquidity, selecting an inappropriate executor, and various other errors. Unfortunately, many individuals make these mistakes without even realizing it. This can complicate the estate planning process, decrease the value of the estate, and even result in disputes among family members.
Here are 10 common estate planning mistakes you should avoid.
1. Jointly Held Property Errors
One important factor to consider in estate planning is the potential misuse of jointly held properties. It is not unusual for parents to add their adult child’s name to the title of their home, thinking that by doing so they are protecting their home from creditors or that it is a simple way to pass their property to their child after death. What parents sometimes fail to realize is that adding your child to the title of your home gives them equal ownership with you. Instead of protecting the home from your creditors, you are now exposing the property to your child’s creditors as well.
Another way this well-intentioned act can backfire is that when you put the child’s name on the deed you have given them a taxable gift. Further, because you gifted the property during your lifetime, your child misses the step-up in basis that occurs upon a parent’s death. This leaves your child to pay long-term capital gains taxes which would have been avoided if the child received full ownership at the death of the parent.
To avoid potential issues, it is crucial to consider the potential consequences of joint ownership in estate planning. In certain situations, utilizing a trust can offer greater benefits. It’s worth noting that any form of joint ownership takes precedence over a will or trust document. Therefore, to ensure the effectiveness of an estate plan, it is essential that property ownership aligns with the intentions outlined by the individual.
It is highly recommended you seek professional advice when it comes to navigating the complexities of property ownership in estate planning. Consulting with experts in the field can help ensure that all aspects and considerations are properly addressed.
2. Life Insurance Problems
When utilized effectively, life insurance can serve as a valuable asset in estate planning. It provides essential financial support to surviving family members, enabling them to meet living expenses. Moreover, it can add liquidity to an estate or even enhance the impact of a charitable bequest. However, if a life insurance policy is arranged without proper consideration, it can lead to various financial challenges.
Improperly-organized life insurance can result in inadequate coverage amounts or inappropriate policy types. Insufficient coverage could leave beneficiaries in a financially vulnerable position following the policyholder’s passing. On the other hand, excessively large policies may incur unnecessary expenses or potentially even estate tax complications.
Another frequent error is selecting an inappropriate life insurance policy type. There are three main options to consider: term life, whole life, and universal life insurance policies. Each of these options has its own advantages and disadvantages. The ideal choice largely depends on the individual’s personal situation, financial objectives, and the needs of their beneficiaries. Opting for an ill-fitting policy can lead to increased premiums, squandered resources, or coverage that terminates prematurely.
Effective life insurance selection is essential when it comes to estate planning. It is important to ensure that your life insurance is arranged correctly to fulfill its crucial role. Regularly reviewing and updating your policy, selecting appropriate coverage, choosing suitable policy types, and aligning it properly with your overall estate plan are all key aspects to consider. By paying attention to these factors, you can maximize the benefits of life insurance in estate planning.
3. Not Having a Valid Will
While it may seem hard to believe, one problematic estate planning oversight is not having a valid will. This is one vital document you cannot afford to skip. If you pass away without a will, your assets will be distributed according to state laws, which may not align with your intentions. By having a will in place, you have the power to determine how your property is passed on after your death. This ensures that your wealth goes to the individuals and causes that are important to you. Without a will, your preferences are not taken into account and state law will dictate the distribution of your assets.
Maintaining an up-to-date will is crucial for ensuring its effectiveness. While a will may meet all goals for property dispensation initially, it should not be considered a fixed document. Instead, it should be regularly reviewed and adjusted to reflect any changes in your life and financial situation. For instance, significant life events like the birth or adoption of a child as well as changes in marital status necessitate a thorough evaluation of your will. By keeping your will current, you can ensure that it accurately reflects your wishes and protects the interests of your loved ones.
Another often overlooked issue with wills are the modifications in tax legislation. These tax changes can have an impact on your estate, necessitating a reassessment of your will. Additionally, adjustments may be needed in cases of substantial alterations in income or beneficiaries to ensure equitable distribution. It is prudent to regularly review and revise your will if there are significant changes in the needs, circumstances, or goals of either yourself or your beneficiaries.
4. Lack of Cash Flow
Underestimated by many, liquidity, or the absence thereof, holds significant importance in estate planning. Liquidity refers to the ability of an estate to pay its debts, taxes, and other expenses quickly and easily. Liquid assets are cash or those assets that can be quickly converted to cash such as checking accounts, savings accounts, money market funds, and marketable securities. Conversely, illiquid assets are those that cannot be easily converted into cash, such as real estate, businesses, and personal property. A considerable number of individuals are unaware of the substantial expenses involved in settling their estates. These expenses encompass various aspects such as taxes, legal fees, and administrative costs. It is crucial to note that these financial obligations can accumulate rapidly, often necessitating immediate payment.
One issue is the recent increase in inflation which has led to a significant rise in the need for liquidity within an estate as well as the need to maintain the standard of living for family members. As a result, it is crucial to include sufficient cash flow in estate planning to cover these expenses. This involves regularly analyzing the cash flow requirements of both the family and the estate to determine if the available funds are enough to meet the necessary costs.
The costs associated with managing an estate can be significant and diverse. Among the most prominent expenses are federal estate taxes and state death taxes. Additionally, one must also consider income taxes at both the federal and state levels. Furthermore, property taxes (typically spanning two years due to the average duration of estate administration) contribute to the overall financial burden.
Additional expenses can arise during the probate process and administrative tasks, including fees for probate, attorney, and/or CPA services. Settling outstanding debts also adds to the financial responsibilities of the estate. Furthermore, funds may be necessary to support the well-being of the family and to sustain any existing family business.
Large estates often face numerous costs and taxes, which can create financial strain if there is a lack of liquidity. This may lead to the sale of assets at disadvantageous times or prices. It is crucial to address this potential challenge by implementing comprehensive estate planning that considers liquidity needs. By doing so, a smoother transition can be achieved – and financial strain can be minimized during difficult times.
5. Choosing the Wrong Executor
Being an executor of someone’s estate involves more than just a ceremonial role. It carries significant responsibilities and complexity. It is crucial to clarify that it is not merely an honor. The executor will have to handle various challenging tasks that demand time, effort, knowledge, and integrity.
The executor’s role can be broken down into a three-step process:
1. Collection of all assets: The executor will be responsible for gathering all the assets owned by the deceased individual. This includes bank accounts, investments, real estate, personal belongings, and any other valuable items.
2. Payment of all obligations: Once all the assets have been collected, the executor must identify and settle any outstanding debts or obligations owed by the deceased. This may include paying off loans, credit card bills, taxes, and funeral expenses.
3. Distribution of remaining assets: After all obligations have been taken care of, the executor will distribute the remaining assets to the beneficiaries named in the deceased individual’s will or according to applicable laws if there is no will. This involves ensuring a fair and equitable distribution of assets among the beneficiaries.
It is important to note that being an executor requires careful attention to detail, good organizational skills, and knowledge of legal and financial matters. Additionally, the executor should maintain open communication with beneficiaries and seek professional advice when necessary to ensure compliance with legal requirements as well as efficient administration of the estate.
Before you complete your estate plan, it is a good idea to have a discussion with your family members about the executor you have chosen and the overall plan. This open conversation can help set expectations, promote better understanding, and potentially reduce the chances of disagreements or legal disputes in the future.
6. Making No Gifts To Reduce Estate Taxes
A common estate planning mistake is not taking advantage of the yearly tax gift exemption. This simple approach can reduce estate taxes. The IRS allows gifts up to $17,000 each year (per spouse and per individual recipient) to be exempt from estate tax. This can provide a significant benefit to a beneficiary.
You can also make gifts over the tax exemption amount during your lifetime. The Tax Cuts and Jobs Act, enacted in 2017, effectively more than doubled the amount that can be gifted before a gift tax or federal estate tax is applied. Once that limit is reached ($12.92 million for individuals and $25.84 million for married couples in 2023), additional gifts over the exemption amount are taxed.
This tax reform is temporary and set to expire on January 1, 2026. After this date, the estate tax exemption will be less than half of what it is today. Further, keep in mind that Congressional bills have been presented which would bring estate tax exemption amounts even lower.
7. Improper Handling of Assets
Improper handling of assets in estate planning can have significant repercussions. This occurs when assets are bequeathed to the wrong individual, transferred in an unsuitable manner, or at an inappropriate time. For example, if a large or complex estate is left outright to a spouse who is unprepared or unwilling to manage it, there is a risk of mismanagement and potential financial loss. A comparable risk emerges when a significant estate is bequeathed directly to a child or a teenager as they may lack the necessary level of maturity or financial knowledge to effectively manage such a responsibility.
Another frequently-made mistake is neglecting to transfer assets into a pre-existing trust. Revocable trusts are commonly set up during an individual’s lifetime with the intention of avoiding probate and fulfilling various objectives. However, if the assets are not properly retitled into the name of the trust, these goals cannot be accomplished. Typically, when a trust document is created, attorneys tend to only transfer real estate into the trust, as there is a legal document that needs to be filed with the county for this purpose. The trustee is responsible for retitling various assets, such as stock certificates of closely held businesses, bank accounts, brokerage accounts, retirement accounts, and life insurance policies, in accordance with the plan’s parameters. It is important not to overlook these transfers, as failing to do so may result in assets remaining titled in an individual’s name, making them subject to probate. Additionally, improperly selecting transfer on death or payable on death beneficiaries can override the trust document. Regularly ensuring that trusts are adequately funded is a crucial aspect of effective estate planning.
8. Poor Business Planning
Neglecting to prepare for the effective transfer of a business upon the owner’s death can leave surviving spouses and heirs paying unnecessary taxes and incurring legal expenses that could have been avoided with proper estate planning. It is not unusual for businesses to be sole proprietorships even when the owner is married. Sole proprietorship can simplify tax filings and provide more effective management of day-to-day operations. Unfortunately, failing to plan for the transition of ownership after death can diminish the value of the business due to decreased productivity or the loss of vital expertise and networks. Hence, it is essential to proactively address pertinent business intricacies well in advance to ensure the protection of the business. It is crucial that documents be prepared outlining the conditions for transferring business ownership. It helps prevent potential conflicts among heirs and surviving spouses.
9. Keeping Bad Records or No Records
The absence of well-organized records can present considerable difficulties for the executor, resulting in time-consuming searches and potentially high expenses. To mitigate these challenges, a safe deposit box serves as a valuable resource for securely storing crucial estate and financial documents. It is imperative for the executor to not only be aware of the location of the box but also to possess the necessary access to retrieve the documents when needed.
It is highly recommended to not only safeguard important documents but also to keep an updated record of names of advisors and contact details. This information should be easily accessible to the individual’s surviving family members, providing them with guidance on whom to reach out to in the unfortunate event of the individual’s passing.
10. Not Preparing an Estate Plan
Creating a comprehensive estate plan is essential for individuals to ensure their assets are distributed according to their wishes upon their passing. Additionally, an estate plan can help minimize tax obligations and provide protection for beneficiaries. However, constructing such a plan is a multifaceted endeavor that necessitates meticulous consideration and expertise in various domains.
Building a strong estate plan begins with assembling a skilled team of professionals. This team typically consists of CPAs, attorneys, life insurance agents, trust officers, and other financial service experts. Each member contributes their unique expertise and perspective to ensure a comprehensive and effective plan.
Ready to Start or Improve Your Estate Plan?
Estate planning plays a crucial role in protecting your wealth and facilitating the smooth transfer of assets to your loved ones. However, it can be a complex process, and errors can lead to significant financial and emotional difficulties. To prevent such issues, it is essential for individuals to acknowledge the intricacies of estate planning, make thoughtful decisions, keep well-organized records, and regularly update their plans to accommodate any changes in personal circumstances or legal requirements. Enlisting the expertise of a proficient team of financial professionals can transform estate planning into an indispensable tool for safeguarding the future of your loved ones. That’s where we come in. Reach out to us today to create or update your trust or estate plan.
Gerald Eidelman, J.D. LL.M.
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