FIVE COMMON MISTAKES IN ESTATE PLANNING

The estate planning process can be difficult to navigate on your own. The process involves the coordination of the various assets of an individual into a cohesive, comprehensive plan to provide for family members. It requires you to analyze all assets whether held individually, jointly, and those that pass by beneficiary designations to come up with an effective overall and integrated strategy to deal with these assets. Often, assets are incorrectly titled and need to be retitled and beneficiary designations for life insurance and retirement plans need to be changed to obtain better results. An estate planning attorney should be addressing all of these issues with each client.

The following are some of the common mistakes in estate planning:

1. Failure To Draft A Will

The failure to draft a will results in the following problems:

  • State determines who gets your property. The rules of intestate succession of the state of residence of the decedent will determine who receives your property.
  • State determines the Personal Representative of your estate (executor/executrix). Without a will, you have given up the right to name the person you want to administer your estate.
  • State will determine who will be the guardian of your minor children. A will allows you to name a guardian for your minor children.
  • Increased risk of estate litigation. Having a well drafted will can help avoid costly, time consuming, and often bitter litigation between family members. This is especially the case in second marriages.

It is never a good idea to delay getting a will in place because you are waiting for “the right time.” Wills can be easily changed, so it’s better to get one in place right away and modify it when you need to.

2. Owning Joint Assets or Holding Too Many Assets Jointly

While holding assets in joint tenancy (with rights of survivorship) can be an effective estate planning tool, there are some serious drawbacks to this approach:

  • Holding property jointly does not completely avoid probate for married couples. It only delays it until the second spouse dies.
  • In a second marriage, since the property transfers to the spouse as sole owner, your second spouse may not provide for your children from your first marriage.
  • Owning too many assets jointly will not allow the married couple to utilize each of their unified credits for estate taxes.

3. Leaving All Your Assets To Your Spouse

The federal estate tax laws are constantly changing. Although it may seem like a good idea to leave everything to your spouse, that may not be wise from a tax perspective. For 2013, there is a $5,250,000 federal exemption for any decedent, but in Minnesota, there is a Minnesota Estate Tax that has an exemption of $1,000,000, so any estate over that amount may be subject to the Minnesota Estate Tax.

For example:  Husband has an estate of $1 million in his name alone and wife owns $1 million in her name alone. Husband dies in 2013 with a will that gives everything to his spouse. He pays no federal or state estate taxes because his bequest to his wife is at or below both the Minnesota and federal exemption rules. She dies later in 2013, with an estate now worth $2 million when the exemption is still $1 million in Minnesota. The excess $1 million is taxable. Her Minnesota estate taxes could be as high as $99,600. This amount is due to the state within 9 months of death regardless of whether the estate has been settled yet. That can be an immense burden on her beneficiaries to cover that expense while waiting to get reimbursed after the estate is settled. Had the couple utilized a qualified trust plan in their estate plan, they could have avoided or minimized their tax exposure.

Also, if you know you’re going to have an estate tax debt, a simple life insurance policy that has a death benefit at or above the estate tax amount that is due can be a simple way of providing your beneficiaries with the money to pay your tax debt. That brings me to my next common mistake.

4. Failure To Own Life Insurance Properly

Improperly named beneficiaries on a life insurance policy is a common mistake. Where a second marriage is involved and the new spouse is named beneficiary, these proceeds may never end up benefiting your children from your first marriage. When a husband and wife die simultaneously and small children are named as contingent beneficiaries of the life insurance proceeds, a court will have to appoint someone to administer the policy proceeds. That person may not be the person you and your spouse would have chosen. Even if you have a trust in place in to protect your children and intend to use the life insurance proceeds to fund the trust, unless the beneficiary designations are completed properly, these proceeds will never go into the trust as you had intended.

From an estate tax perspective, people are surprised that life insurance owned by an individual is included in their taxable estate at death. This may result in estate taxes being paid on insurance proceeds at death. To avoid estate taxes, often times an irrevocable life insurance trust is utilized to own such policies to remove them from the taxable estate.

5. Failure To Fund Your Trust

All good planning can be undone by poor execution. If you have created a trust to protect your family, you must move the proper assets into the trust and/or update your beneficiary designations on your IRA’s and life insurance to make sure that the assets will transfer properly when they need to. Otherwise, your assets will be transferred as if you had no plan at all.

Without proper planning, there are numerous other mistakes that can happen with your estate plan. Your estate plan must be tailored to your family’s needs. Sound estate planning brings together a person’s diverse assets to fit into an integrated and comprehensive estate plan that may include wills, trusts and other documents. Do not hesitate to call me to help you develop your estate plan.