10 Costly Estate Planning Mistakes and How To Avoid Them

  1. I DON'T NEED A WILL:
    Everyone can benefit from a will or some other form of estate planning. Avoiding or reducing estate taxes, saving estate administrative costs, specifying who will receive your estate and protecting your family are just a few of the benefits a will can achieve.

    Despite some financial costs associated with implementing an estate plan, for the vast majority of us, the benefits from a will or some other estate planning technique far outweigh the initial costs. Further, since some attorneys, myself included, 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. PROCRASTINATION:
    Once a person recognizes the fact that they could benefit from some sort of estate planning, they often wait until it is too late. Unexpected death or disability can occur at anytime. Because my practice also involves probate services, I am able to see first hand the serious consequences from the failure to adopt at least a minimal estate plan.

  3. FAILURE TO UTILIZE THE FEDERAL $675,000 EXEMPTION TWICE:
    If you are married, with proper planning you and your spouse can shield double the state and federal exemption amount from estate tax. The mistake occurs when the first spouse dies and leaves their entire estate to the surviving spouse thereby in effect losing the deceased spouses individual exemption amount. Instead, it is often beneficial for the spouse to leave all or a portion of their estate to a simple trust called an exemption trust (also know as a credit shelter trust). For further discussion click Estate Tax Basics.

  4. INCORRECTLY TITLING PROPERTY:
    Do-it-yourself estate planners often add children or others to bank accounts, investment accounts, real estate deeds and other property in an attempt at a cheap method to avoid probate and/or plan for disability. I strongly advise against this type of planning except upon the direct advice of a competent estate planning attorney.

    Adding others to titles and accounts can have serious unintended consequences. For one, the added person's creditors may be able to access the property to satisfy their debts. You may even find a child's spouse in a divorce claiming a portion of the property. In addition, gift taxes may be triggered as well as the loss of significant tax benefit such as a stepped up basis upon your death. Further, by adding the person you have given up significant control of that property. If, for example, you added your child to the deed of you home, it may be impossible to transfer the property should the child withhold their consent.

    A revocable living trust can avoid probate and plan for disability without exposing you to the pitfalls of adding children or others to the title of your assets. If you wish to learn more click Revocable Living Trusts.

  5. LIFE INSURANCE:
    Most people do not realize that life insurance proceeds are normally included in the estate of the deceased. This can result in up to 55% of the insurance proceeds going to the IRS with the remaining 45% left for the intended beneficiaries. A relatively simple trust known as a Life Insurance Trust can avoid the taxation of life insurance proceeds and control the disposition of the proceeds upon your death. For further discussion click Estate Tax Basics-Remove life insurance from your estate.

  6. INCORRECT BENEFICIARY DESIGNATIONS:
    Individuals often implement a well thought out estate plan only to have it undermined by an incorrect beneficiary designation. The most common, but certainly not the only mistake, is naming minor children as contingent beneficiaries.

    For example, assume parents have wills that specify that in the event of both of their deaths that their estate be placed into a trust for their children's benefit until the children reach age 25. This is done to avoid the children receiving a large sum of money at age 18 as the parents recognize the negative effect that a large inheritance could have on a child.

    Unfortunately, with the children named as contingent beneficiaries of the life insurance they will receive the proceeds at age 18. In addition, the courts will normally require that a court supervised and costly conservatorship be created to control the money while the child is a minor, which will have the effect of depleting the insurance proceeds.

    An alternative is to name your estate or a trust directly as the contingent beneficiary. However, the exact beneficiary designation that is appropriate will depend upon the type of will or estate plan that you have in place, as well as other factors. Beneficiary designations are more difficult that they appear and you should consult you're your estate planner for specific advice concerning this matter.

  7. FAILING TO PLAN FOR DISABILITY:
    People are living longer and therefore the risk of being disabled sometime during your lifetime is increasing. A disability can be far more financially devastating than death. Nevertheless, disability planning is often ignored.

    Just imagine that 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. If you are married and your spouse has access to your finances and important assets then this may only be a minor inconvenience. However, if you are single or your spouse does not have complete access and control to an important asset this could be devastating. 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. Without a disability plan it is often necessary to hire an attorney and commence a formal and costly judicial proceeding to have a conservator and guardian appointed.

    Disability planning can be as inexpensive as a $50 power of attorney or involve multiple trusts and powers of attorney and cost in excess of $5,000. However, most people can achieve their appropriate level of disability planning by using a $1,250-$1,450 revocable living trust. For further discussion click Living Trusts.

  8. GIFTING WHEN YOU SHOULDN'T AND NOT GIFTING WHEN YOU SHOULD:
    When properly applied, gifting can be an extremely effective way to reduce estate taxes. However, many individuals incorrectly assume that gifting is simple and fail to obtain competent advice. The following examples demonstrate two gifting mistakes:

    Example 1 - 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 their 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 share of Intel 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.

    Example 2 - An individual has a taxable estate but incorrectly overestimates their spending requirements. If your estate is worth only $50,000 more than the federal exemption amount your estate could pay over $25,000 in estate taxes. Often individuals can gift appropriate assets to the persons who will receive their estate ultimately without any effect upon their financial security or change in lifestyle.

    For further discussion click Estate Tax Basics - Give your estate away.

  9. DOING IT YOURSELF:
    This may sound like self serving advice coming from an estate planning attorney, but estate planning is simply not a do it yourself project. With the advent of the internet, I have seen a rise in the use of will forms. In most states, including Oregon, if you fail to follow strict legal formalities the will is invalid.

    Even if a self-prepared will or trust is legally enforceable, estate planning is a complex legal process requiring knowledge in several legal disciplines, including estate law, tax law and property law. A proper estate plan involves evaluating a persons estate to determine the correct type of document (Will, Trust, ect.), drafting the document to accomplish the objectives and then coordinating the titling of assets and the beneficiary designation of life insurance, IRA's, annuities, ects. to be consistent with the estate plan.

    Protecting your loved ones and your estate is far too important to leave to chance. A basic will cost between $250 and $450, which is very little considering its importance and benefits to you and your family.

  10. HIRING A GENERALIST:
    When hiring a doctor, attorney, mechanic or any type of service profession, I strongly recommend hiring a specialist. Almost without exception, the specialist will have more experience and skill in their area of specialty than will a generalist. This usually translates into higher quality services provided in the most cost effective manner possible. For more information click Selecting an Attorney.