The Top Ten Estate Planning Mistakes and How To Avoid Them
1. BELIEVING YOU DON’T NEED A WILL:
Everyone can benefit from at least a will or some other form of estate planning. At a minimum, a will allows you to specifically choose who will inherit your assets and who will handle the paperwork and manage your assets until they are distributed. If you do not have a will, the assets in your probate estate will be distributed to the individuals entitled to inherit your estate under the probate laws of Pennsylvania. Specifying who will receive your assets and who will handle the paperwork and manage your assets until they are distributed, are just a few of the benefits a will can achieve.
For most of us, the benefits of a will or some other estate planning technique far outweigh the initial costs. Further, since some attorneys do not charge prospective clients for their initial consultation, there is no reason not to meet with a qualified estate planning attorney and determine for yourself whether you and your family would benefit from a will or some other form of estate planning.
2. PROCRASTINATING:
Once a person is aware that some sort of estate planning is necessary because it would be beneficial to them and their family, they often wait until it is too late. Unexpected death or disability can occur at anytime. As indicated above, without at least a will, your assets may not be distributed to the individuals you desire. Also, as will be discussed below, if you do not have the appropriate documents in place before an unexpected disability, you and your family will incur unnecessary expenses and endure embarrassing court procedures that could have been avoided with advance planning.
3. BELIEVING A WILL AVOIDS PROBATE:
When people hear or read that having a will is a good idea, many people assume that, if they have a will, no probate is required, and no further planning needs to be done. As mentioned above, having a will is better than no planning at all; however, a will DOES NOT avoid the probate process. The will simply gives directions to the probate court. The will must be probated in order to be effective. Methods of planning to totally eliminate the requirement of probate will be discussed below.
4. INCORRECTLY TITLING PROPERTY:
Often well-meaning people add children or others to real estate deeds, bank accounts, and other property in an attempt at an inexpensive method to avoid probate and/or plan for disability. However, there are many pitfalls in this method of “planning”. For example, ownership in joint tenancy subjects property to claims of creditors of a joint tenant, including a joint tenant’s spouse in a divorce action. Additionally, you lose control when you add a joint tenant because you need the joint tenant’s consent if you want to transfer or sell the property. Also, one of the most overlooked disadvantages of planning using joint tenancy is the loss of stepped-up basis upon your death, which will subject your heir/joint tenant to capital gains tax.
Furthermore, if the intention for eventual distribution of property is equal division between all children and to include grandchildren if a child does not survive, joint tenancy will not carry out this wish. Only surviving joint tenants inherit property, so if the asset continues to be held in joint tenancy, eventually the entire property will be inherited by the child who survives the longest.
If ownership in joint tenancy is contemplated solely to avoid probate and to plan for disability, these goals can be accomplished with a revocable living trust (discussed below) without creating potential tax, creditor, distribution, management, and other issues.
5. BELIEVING THAT A REVOCABLE LIVING TRUST IS ONLY FOR THOSE WITH LARGE ESTATES:
On estates of all sizes, probate avoidance, planning for disability, and planning to make certain that assets are protected and are eventually distributed to chosen beneficiaries is essential. Because a revocable living trust can accomplish all of the above goals, it is an estate planning tool that should be considered, regardless of whether or not you have a large estate (most people underestimate the value of their estate anyway). A revocable living trust is a legal document that, just like a will, indicates who you want your property to go to when you pass away. But it is different from a will in that it avoids probate and lets you keep control of your assets while you are living—even if you become incapacitated—and after you die. Following is a summary of the benefits of a revocable living trust:
Avoids probate at death, including multiple probates if you own property in other states
Prevents court control of assets at incapacity
Brings all your assets together under one plan
Provides maximum privacy
Quicker distribution of assets to beneficiaries
Assets can remain in trust until you want beneficiaries to inherit
Can reduce or eliminate estate taxes
Inexpensive, easy to set up and maintain
Can be changed or cancelled at any time
Difficult to contest
Prevents court control of minors' inheritances
Can protect dependents with special needs
Prevents unintentional disinheriting and other problems of joint ownership
Peace of mind
An evaluation of your specific situation with a qualified estate planning attorney is necessary to determine whether a revocable living trust is right for you.
6. FAILING TO UTILIZE THE FEDERAL EXEMPTION TWICE:
Every person is currently entitled to a $2,000,000 federal estate tax exemption. Therefore, if you are married, you and your spouse are each entitled to the $2,000,000 federal estate exemption thereby shielding $4,000,000 from estate tax. The mistake occurs when the first spouse dies and leaves his or her entire estate to the surviving spouse thereby in effect losing the deceased spouse’s individual $2,000,0000 exemption amount. To prevent this, it is often beneficial for the spouse to leave all or a portion of their estate to a simple trust called a credit shelter trust, which can be included in a revocable living trust, discussed above.
7. LEAVING ASSETS OUTRIGHT TO INDIVIDUALS WITH DISABILITIES:
Most people are unaware that if they leave property directly to a person who has a disability and is receiving government benefits (such as supplemental security income and medical assistance) the inheritance will probably cause the disabled person to lose their eligibility for these benefits until the inheritance is entirely spent. Upon hearing this, most people think that they must then disinherit the disabled person. However, this is not the case. If your estate is planned properly, you can include a special needs trust in your revocable living trust to be a receptacle for any inheritance you leave to a disabled person. This special needs trust allows the disabled person to continue receiving his or her government benefits, while also benefiting from the assets in the special needs trust.
8. NOT UNDERSTANDING HOW TO GIFT PROPERLY:
When properly applied, gifting can be a very effective way to reduce estate taxes. However, many individuals incorrectly assume that gifting is simple and fail to obtain competent advice. The following example demonstrates a common gifting mistake:
Example - An individual has a taxable estate and wishes to make gifts to her children in order to reduce her taxable estate. Unfortunately the wrong property is gifted. When a person dies the property in his or her estate gets a stepped-up basis; however, gifted property retains the same basis. The effect can be significant if you gift a highly appreciated asset.
Imagine you have 1,000 shares of stock which you paid $15 a share ($15 is your basis) and the stock is now valued at $60 per share. If you gifted the shares to you daughter the shares would retain their $15 basis so if she then sold the shares for $60 a share her taxable gain would be $45,000 (60-15 x 1000). If she inherited the shares her basis would be $60 and therefore there would be no taxable gain on their sale if sold at $60 a share.
The general rule is to gift appreciating assets but not appreciated assets.
Also, this is a changing area of law; therefore, legal advice should be sought whenever gifting is contemplated.
9. FAILING TO PLAN FOR DISABILITY:
Often overlooked are documents that are necessary if you are still living, but incapacitated, and unable to make financial or medical decisions for yourself.
What if you are involved in a car accident, and although you will survive and fully recover, you will spend a month in the hospital and during that time you are unable to manage your own financial affairs. What if you owned a business and an important business decision needed to be made? Or what if you had intended to sell some stock or other investment but now were unable to do so?
Or imagine that you or your spouse has a serious stroke and are now permanently disabled. If you do not have a disability plan in place, such as a durable power of attorney for financial management or a revocable living trust and a durable power of attorney for health care, it would be necessary to hire an attorney and endure a costly judicial proceeding to have a guardian appointed to handle your affairs.
10. DOING IT YOURSELF:
Estate planning is simply not a do-it-yourself project. With the advent of the internet, there has been a rise in use of estate planning forms.
Even if a self-prepared will or trust is legally enforceable, it may not accomplish what you desire.
Because estate planning is a complex legal process requiring knowledge in several legal disciplines, including estate law, tax law and property law, a self-drafted estate plan may not properly take into consideration all of the relevant issues. A proper estate plan involves evaluating a person’s estate to determine the correct type of document (will, trust, etc.), drafting the document to accomplish the objectives, and then coordinating the titling of assets and the beneficiary designations of life insurance, IRA's, annuities, etc. to be consistent with the estate plan. This is best accomplished by a professional—an estate planning attorney. This important planning for you and your family should not be left to chance.
