Common Estate Planning Mistakes (And How to Avoid Them

Estate planning is complex. There are a lot of financial, legal and family dynamics issues that interlock, and everything affects everything else. Furthermore, the estate tax is still out there, waiting to take a 40 percent chunk out of anything anyone leaves behind over $5.34 million – the current estate tax threshold and percentage for 2014. Estate planning mistakes tend to be big – and it’s worth considerable investment of time and expertise to make sure you get it right. Here are some of the most common mistakes people make with their personal estate planning, and how to avoid them.

  • Waiting too long. It’s not just that sometimes people die suddenly and unexpectedly – although that’s true, too. It’s also that your health can change over time as well. Life insurance is among the most crucial estate planning tools, for example. But getting type II diabetes, or putting on a bit of weight, or a bad blood test or elevated blood pressure reading can quickly make life insurance a much more expensive and less efficient tool. It’s important to start getting the building blocks of an estate plan into place as early as possible, when your health is at its best. Procrastination can make things much, much more difficult for yourself and your heirs.
  • Forgetting to update key documents. Life goes on. Your key planning documents should reflect that. Ensure that your last will and testament, living will, health care directives, life insurance, retirement plan documents, trusts and other key documents name the correct heirs and beneficiaries. You should also make sure any life insurance death benefits are appropriate and sufficient to cover your heirs’ liquidity needs after your death, and/or the death of your spouse.
  • Underestimating liquidity needs of your estate. Closing out an estate is expensive – and relatives often need cash now, to take care of travel costs, hotel costs, and to compensate them for time away from work while they put a home up for sale, liquidate or sell a family business, etc. And that’s before paying any kind of estate tax. Unless the ready cash is there to pay the federal tax, your heirs may be forced to sell valuable assets for much, much less than they are truly worth.
  • Going it alone. Estate planning is a lot more complex than anything you can get from a mass marketed consumer book. Leave the “For Dummies” books for the dummies. Get professional and experienced tax and legal advice, and get it early and often. Estate planning mistakes are often impossible to undo – and wind up costing your family many, many times more than these professionals make in fees.
  • Failing to provide for pets. Nobody wants a beloved pet to wind up in a kill shelter after they die or become disabled and are no longer able to care for them. Arrange for your pet’s new home… and use life insurance, a will provision or other arrangements to ensure resources are there to feed your pet and provide needed veterinary care and a forever home after you’re gone.
  • Hanging on to wealth too long. If you don’t need the money, and your kids are responsible with money, a strategic gifting program can provide immediate, tangible and important benefits to your children and grandchildren, while getting money out of your taxable estate. Gift laws are generally liberal.
  • Accidentally disinheriting stepchildren. Thousands of children live in non-adoptive or informal family arrangements where they were absolutely part of the family, but where there was never any finalized, formal adoption procedure making it legal. The problem is that state intestate laws generally make no provision for these arrangements, even well into the children’s’ adulthood. If you raised and loved children who were not legally your own, for whatever reason, it is crucial to make a will, and to look carefully at named beneficiaries on retirement plan and other documents. If you fail to do this, your state’s intestate laws will send your legacy to your estranged second cousin in prison before it will send a dime to a beloved stepchild or informally adopted child.
  • Overusing jointly-held property. While these can be convenient arrangements in the short run, improperly titling illiquid assets like real estate can cause big headaches when one of the parties on the title passes away. What happens to the ownership interest of the deceased individual? Does it pass to the surviving owner or owners? Or to the deceased individuals’ heirs? If it goes to the heirs, will they have any use for the property? Or would they rather have cash? If the latter, have you looked at some mechanism to provide a life insurance benefit to the co-owner so he or she can purchase your heirs’ interest in the property? This is a common business planning technique, it can apply to property ownership, too.
  • Exposing property to double taxation. Another negative side effect of jointly-held property is this: Unless attorneys are careful with titling, the entire property can show up in the taxable estate of the first owner to die – even if that owner only held a fractional interest. So the estate tax would accrue. And then it would accrue again, when the second owner dies. The same property gets hit twice with an estate tax. A good planner or advisor can help you avoid this issue with the use of trusts. Since a trust doesn’t die, it never incurs an estate tax. And you can control and update trust documents to ensure that you always have appropriate named beneficiaries and change them as you need to.
  • Leaving life insurance to one’s own estate. Once you do that, creditors get first crack at the assets. Probate courts will pay themselves, their attorneys, and your creditors out of anything that goes to your estate first, before your heirs see the first. If you name individual beneficiaries on life insurance, that money goes to them in a matter of days, not months – and it bypasses the IRS and any and all creditors and goes straight to your loved ones.

If you would like to discuss Estate Planning with a professional, call ACBI at 203-259-7580 or visit our website.

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