Nine Major Estate Planning Mistakes To Avoid
There are nine major estate planning mistakes that are often made. All of these mistakes are easy to avoid, as long as you know how to recognize them! It is important that you consult with an attorney in your state in order to review whether or not each of these issues pertains to you.
Mistake 1 - Not having an estate plan.
Many people believe that as long as they hold title as joint tenants that this is all that is necessary. As we know, one of the major issues in many states is to avoid probate. This will obviously vary depending upon your estate, but in most cases, it is a very lengthy process to go through probate and very often it is wise to avoid it.
As we know, holding title as joint tenants usually avoids probate - but only upon the first death! If, for example, a married couple holds title as joint tenants, and the husband passed away, then the wife would automatically inherit his half. However, in the event that they had three children, and the mother passed away, the children would usually have to go through probate in order to transfer the title of that asset over to them.
I know some advisors recommend that their clients put their children on as joint owners after the husband passes away. However, this is also a major potential problem due to step-up in basis considerations, and, very often there are liability or control issues.
Mistake 2 - Believing that having a will avoids probate.
In most cases, having a will guarantees probate. As mentioned earlier, probate is not necessarily a bad thing, depending on the state in which you reside. In most cases, avoiding probate is a major issue. There are usually many legal fees and a significant amount of time is also required in many states in order to go through probate.
In order to avoid probate, the two most common ways are holding title as joint tenants (see Mistake 1) and holding title in the name of a trust (see Mistake 3 below). It is also important to note that, in most cases, beneficiaries of life insurance policies, retirement accounts, and annuities, are also not subject to probate.
Mistake 3 - Believing that establishing a revocable living trust will reduce estate taxes.
It is correct that anything that is held in trust will usually avoid probate, but it won't reduce estate taxes. As of the date of this article, an individual can have up to $1 million in his or her estate without paying any estate tax. If it is a married couple, they can have up to $2 million in their estate without having to pay any estate tax. However, a separate trust must be established at the date of death of the first spouse to create an exemption trust. Although this is often part of a living trust, it is not necessarily so. It is important to review the living trust to make sure that the exemption trust is included.
Mistake 4 - Not having your estate updated on a regular basis.
It is best to have your estate plan reviewed at least once every three years to make sure that everything is current. Very often, someone has many changes in their life during a three-year period of time. This can include death, divorce, new children or grandchildren and changes in desired beneficiaries.
In addition to this, the individual may have moved to a new state and their existing estate plan does not comply with the various rules of the new state! This is extremely important, especially if they move to a community property state (see Mistake 7 below).
Also, the new tax laws often warrant changing the estate plan. For example, the new estate planning laws that allow you to have up to $1 million in your estate without paying any estate taxes will also increase over time. It is possible that the clients may have had a taxable estate in the past and now do not have any taxable estate. It may be a good idea to actually eliminate the provision of the exemption trust or make it only as an option.
It is recommended to have an agreement with an estate planning attorney who will at least review the estate plan at no charge.
Mistake 5 - Having the wrong beneficiary named on retirement accounts.
It is estimated that over one-third of retirement accounts either have an incorrect beneficiary or do not even show who the beneficiary of the account is! It is critical to make sure that you retain all copies of the beneficiary forms and make sure that they are, in fact, correct and that the beneficiary is not deceased or the beneficiary is simply the estate. Remember - in the event that no beneficiary is found, the default is usually going to be the estate! This is very unfavorable because the retirement account will not have a designated beneficiary which can create significant income tax problems for the beneficiaries in the future.
Mistake 6 - Not having a current durable power of attorney for health care / directive to physicians.
This is also an area that is often overlooked. It is common to find that the client does not have one or cannot locate one or the current one they have is expired! For example, most of these documents are governed state by state and many states changed the wording of these documents a few years ago. In many cases, there is an expiration date on some of the older powers of attorney. It is very possible that the existing durable power of attorney is no longer in force!
We also recommend that you give your financial advisor a copy of this document for your file. In fact, we think a copy of the entire estate plan should be kept on file in your financial advisor's office! In the event of an emergency, your financial advisor can send a copy to the hospital or your doctor for you.
Mistake 7 - Not having a community property agreement.
This usually applies to people living in community property states. However, this usually also applies in the event that the couple purchased an asset in a community property state while they were married and then moved to a non-community property state and passed away in the non-community property state.
In the event that a couple acquired an asset in a community property state, there is a full step-up in basis on the entire asset equal to the fair market value as of the date of death. This often saves a significant amount of income taxes upon the sale of the asset after the first spouse passes away. This is a considerable tax advantage over holding title as joint tenants or assets that are purchased in a non-community property state, in which case the step-up in basis is only on one-half of the assets.
In order to achieve the tax-favored step-up in basis, there are a few requirements:
The couple must reside in a community property state or the asset must have been purchased by the couple in the community property state in the past.
The couple must be legally married as of the date of death.
The title must be held in community property or there must be a community property agreement. It is important to note that just because a couple lives in a community property state does not mean that that asset is considered to be community property for purpose of the step-up in basis rules. Individuals often mistakenly believe that if they have a living trust, for example, that this will satisfy the community property rules.
We usually recommend having a community property agreement rather than holding title as community property in order to avoid probate on the asset that is held as community property.
Mistake 8 - Not funding your living trust properly.
In many cases, people establish a living trust properly, but fail to transfer their assets into the trust. Therefore, it is important to actually look at each of the documents such as account statements, property tax bills, etc. in order to review the actual title of the property. If you have a living trust and it is not funded, the provisions of the trust will not be taken into consideration. It is estimated that only about one-third of these trusts are funded properly.
Mistake 9 - Not putting your life insurance in an irrevocable life insurance trust (ILIT).
In many cases, clients do not know their true net worth, and often they are exposed to unnecessary estate taxes, especially because of the life insurance death benefits. If their estate is close to or exceeds the exemption amount, it is usually best to put the life insurance policies inside this ILIT. Life insurance proceeds will avoid probate in most cases and is also income tax free, although the proceeds are not necessarily estate tax free.
These are but a few of the various mistakes that are very common. Again, please make sure that you consult a competent estate planning attorney to make sure everything is in order. Remember - if you do not have a license to practice law, don't!
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