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Potholes are just part of life on the road. Some potholes, however, can be life threatening. Fortunately, even these deadly potholes can be avoided once you know where they are. So it is with estate planning mistakes. In this article we will warn you about 10 fatal estate planning mistakes before it is too late. [Note: The danger posed by any given mistake will vary depending on your unique circumstances...and this list is by no means all-inclusive.]
No
Plan
Probably the most fatal mistake is the failure to plan. Period.
Statistically, 70 percent of Americans have no plan at all. Why? Good,
old-fashioned procrastination. Consider it human nature. Who relishes
facing the possibility of their future incapacity and the certainty of
their own death? Nevertheless, as a matter of personal
responsibility, only you can
make your estate plan a top priority. Otherwise you expose yourself,
your loved ones and your hard-earned assets to unnecessary probate and
avoidable death taxes. Take time to carefully think through, implement
and then update your estate palm. You and your loved ones will be glad
you did.
No
Incapacity Planning
Too many people regard estate planning as merely an after-death
distribution program for their assets. While this is an important
component of proper planning, a comprehensive plan begins with planning
for your own incapacity. The law requires every adult American to make
their own personal, health care and financial decisions. However, if you
have not legally appointed the agent/decision-maker of your own
selection in advance of your incapacity, then a probate judge, who may
not know you or your wishes, will appoint one for you. This process may
invade your privacy by making your personal and financial circumstances
a matter of public record.
No
Back-Up Parents
Silver and gold aside, most parents consider
their children to be their most
valuable assets. These
parents often devote considerable time and treasure to providing
educations, social/athletic activities and religious training for their
children. Incredibly, however, these same parents typically fail to
legally appoint guardians (i.e. back-up parents) for their minor
children in the event both parents die. Who would you appoint as
guardians to take your place and rear your minor children to adulthood?
What special instructions would you give the guardians regarding their
upbringing? By the way, listing the guardians on a cocktail napkin in
the airport lounge will not work. You must legally appoint the guardians
in your Last Will and Testament in advance of tragedy.
No
Inheritance Protection
No one values a dollar like the person who earned it. If you do not
incorporate inheritance protection
into your estate planning, your hard-earned assets could be squandered
by your surviving spouse’s new spouse, your children/grandchildren, or
lost to their divorces, lawsuits or bankruptcies. Enough said.
No
Basic Estate Tax Planning
A married couple may lawfully protect up to $3 million* of their assets
from federal estate taxes through proper estate planning. However, if
your plan includes the joint ownership of assets between spouses, with
reciprocal beneficiary designations and simple, Sweetheart
Wills, then you are likely
shortchanging your loved ones and unnecessarily enriching the IRS. In
fact, on an estate of $3 million, the taxes could exceed well over
$600,000.
*
Note: The future of this tax exemption amount is uncertain under current
federal tax law and many states are imposing their own estate taxes,
independent of any federal estate taxes. Accordingly, careful monitoring
of the economic, political and legal climate is required.
No
Estate Tax Planning For Life Insurance
Life insurance is a
fundamental financial tool for most Americans. Whether intended to help
support a surviving spouse and minor children, provide cash liquidity to
satisfy federal and/or state estate taxes, or for myriad other important
uses, most Americans do not own enough life insurance and/or do not own
their life insurance properly. One of the greatest tax myths is that
life insurance death benefits are tax-free.
While a lump sum payment of the death benefit may be income tax-free
when received by the beneficiary, the entire value of the death benefit
is part of the policy owner’s estate for estate tax purposes. This is
true if the policy owner held any incidents of ownership (e.g.
access to any cash value or even the authority to change beneficiaries)
at the time of their death or transferred ownership of the policy within
three years of their death. You may structure your life insurance to
avoid estate taxes and still fulfill your objectives through a properly
structured and coordinated estate plan. Otherwise, you unintentionally
may have made the IRS beneficiary of nearly half of your life insurance.
No
Probate Avoidance Planning For Multi-State Real Estate
Real estate is subject to probate in the state in which it
is located. Accordingly, if you own real estate outside your home state,
then such real estate may go through probate in that state before being
transferred to your loved ones. Probate, whether in your home state
and/or in another state may be avoided if you make appropriate legal
plans in advance. Note: Probate is more burdensome in some states than
in others.
No
Income Or Estate Tax Planning For Retirement Plans
Due to the unprecedented performance of the stock market over the past
several decades, coupled with the government’s encouragement of
employer-sponsored retirement plans, much of the private, individual
wealth in America is in qualified retirement plans. Without careful
coordination between one’s financial plan and one’s estate plan,
over 50% of a married couple’s retirement monies may go to the IRS
instead of their loved ones. With proper coordination between the two,
the impact of taxes on these unique assets can be substantially
minimized and perhaps even replaced (through special life insurance
arrangements).
No
Business Succession Planning
Statistically, only 30% of family businesses survive from the founding
generation to the next. The success rate thereafter is even more dismal.
Just like individuals, business owners fail to make plans, have the
wrong plan or even an outdated plan for the eventual transfer of their
business. A comprehensive estate plan should incorporate planning for
the business succession, especially when it is the major family asset.
For example, if some children are active
in the business and others are not, how do you treat everyone equally
(or at least fairly) when you are gone? Or, if the business is to
be sold to other shareholders, key employees or a third-party purchaser,
how do you structure the sale to protect your loved ones when you are
gone? Will there be sufficient cash liquidity in your estate to pay any
death taxes due or will illiquid assets be sold to raise the cash
needed?
No
Tax-Savvy Lifetime Giving Program
One overlooked and therefore underutilized opportunity under the tax
code is the annual gift exclusion.
This allows you to give up to $11,000 each year to as many individuals
as you desire without incurring gift taxes on the transfers. For estates
already subject to potential federal estate taxes at rates over 40% this
technique not only removes the gifted asset’s value from the donor’s
estate valuation, but also any future appreciation on the asset. Note:
Competent professional advice should be sought before making a gift of appreciated
property because of special capital gains treatment such assets
receive upon the death of the owner. In addition, it may be prudent to
consider using all or part of your $1 million lifetime gift exemption,
sooner rather than later.
Conclusion
We have reviewed 10 fatal estate-planning potholes
that can destroy your plans for yourself, your loved ones and your
hard-earned assets. To safely navigate them make sure you seek competent
legal counsel.
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