7 Major Errors in Estate Planning
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| 7 Major Errors in Estate Planning - everinsta.com |
It never fails to amaze me that so many otherwise savvy
individuals, many of whom have their financial lives otherwise buttoned-up, use
poor judgment (or no judgment) when it comes to their estate planning.
The list of major estate omissions and poor choices is almost infinite.
Here are some of the mistakes that are frequently made.
1. Not having a plan
In
a sense, everyone does have an estate plan; state law makes this point a
certainty. It simply may not be the plan that you had in mind, or that your
family would have preferred. Not having a will means that at your death
the distribution of your assets will be dictated by the inheritance laws of the
state where you were domiciled when you died.
These “intestacy laws” vary
from state to state but, typically, leave percentages of your assets to various
family members. There is always a remote chance that these laws will
accomplish what you would have intended – but not likely. It is highly
improbable that, by chance, your dispositive intentions as to who gets what,
when and in what form will be fulfilled.
This is true even if your estate
is below the tax threshold. Your will applies to the disposition of your
“probate assets” – those assets NOT otherwise following a beneficiary designation
or the titling of the asset. Non-probate assets will pass by operation of law
or contract.
For example, whoever the beneficiary designation may have been
when you originally began your 401(k) or IRA at the start of your work life
will override either your will or the laws of intestacy. Even a simple
plan that is well thought out and results from the identification of your
personal objectives will be much more successful than nothing at all.
2. Online or DIY rather than professionals
There
has been a noticeable uptick in the number of people who will look to the
Internet to prepare their own wills and trusts. There are dozens upon dozens of
websites that will profess to offer you just the right discounted estate
planning documents. Even wealthy clients who stand to benefit the most
from expert planning advice have been impacted. Unfortunately, relying on
web-based, do it yourself solutions is a recipe for disaster.
Estate
planning documents should represent the culmination of a well thought out
financial and estate plan. An amalgam of stand-alone documents does not a plan
make. Furthermore, those pesky nuanced requirements (i.e. the
“formalities”) for a validly written and executed document will vary from state
to state. Internet sites can provide you with documents but no actual
advice that fits you in the context of your specific financial and personal
life.
What happens when the laws change? Does the document create an
unnecessary tax if the state and federal tax laws diverge
substantially? Also, use an experienced estate attorney. All
wills are perfect documents while they are in your desk drawer. Only when
examined post-mortem are the inadequacies revealed.
3. Failure to Review Beneficiary
Designations and Titling of Assets
One
of the most basic and most overlooked items on every estate-planning checklist
is the review of beneficiary designations and the proper titling of accounts.
Unwittingly, many people will often let beneficiary designations and asset
titling determine their estate plans for them, contrary to their intentions.
Why? Regardless of what your well developed wills and trusts say, your
beneficiary designations and the title of your assets will control the ultimate
distribution of those assets. Most investment accounts allow for the
designation of a beneficiary (IRAs, 401(k)s, company plans, etc.). More recently,
many states have enacted legislation to convert even otherwise ordinary
brokerage accounts into accounts with beneficiary designations via
Payable/Transfer Upon Death Registrations.
All of these beneficiary
designations absolutely control who gets the asset at your death. The
titling of assets is a property law concept with estate implications. An
account that is held jointly with right of survivorship will pass automatically
to the survivor of the joint owners. Why does this matter? Assets
can flow to the wrong people due to old, wrong and/or out-of-date designations,
often with unintended estate and income tax implications.
Life
insurance proceeds are included in the estate when owned by the insured at
death. However, the insured may choose to transfer all incidence of ownership
during his/her lifetime thereby avoiding any potential estate tax inclusion.
Notwithstanding this accessible planning fix (usually via trust), relinquishing
ownership and control is not necessarily an automatic decision.
In some
instances, large sums of available, tax-advantaged and asset-protected cash has
accumulated in permanent life insurance policies (i.e. whole life).
Accordingly, the decision as to how an insurance policy should be owned and, as
importantly, controlled, can be complex and is highly individualized.
In the
right fact patterns, especially when tax is not the only important
consideration, credible arguments can be made for both trust ownership and
direct ownership. As in most estate planning, it is very much dependent on
individual circumstances: family dynamics, net worth, financial / liquidity
position, personal preferences and, even, your philosophy on the transfer of assets
to future generations.
5. Maximizing annual gifts
Gifting
is, probably, the oldest and best way to minimize future estate taxes. The
entire universe of exemptions and deductions available for the reduction of
estate taxes consist of: the lifetime exemption ($5.12 million in 2012),
the marital deduction (for gifts to citizen spouses during life or at death),
the gift and estate tax charitable deduction, annual exclusion gifts ($13,000
in 2012) and direct transfers (not to be treated as gifts) for education
(tuition) and medical care (both theoretically unlimited).
For the wealthy,
maximizing all of these is smart planning. Making annual exclusion gifts every
year to as many family members (this includes anyone close to you) as is
financially prudent (given your financial situation) is good planning. Over the
long run, you can transfer significant sums of money out of your estate along
with any appreciation, thereby reducing the tax.
Even better planning would be
to use your annual exclusion gifts, strategically, so that each annual
gift can be leveraged into larger sums being transferred out of your estate. Strategies such
as sales/ gifts to defective grantor trusts, the use of LLCs/FLPs in the case
of hard to value assets and life insurance are just a few ways to leverage the
annual exclusion gifts. In the case of gifting, leverage is a very good thing
and strategies that allow you to leverage this scarce resource – tax-free gifts
– are crucial to successful estate planning.
6. Failure to Take Advantage of
the Estate Tax Exemption in 2012
As
every estate and financial planning practitioner will tell you (and probably
already has told you), making lifetime gifts is a simple and effective estate
tax minimization strategy. Simply giving away assets at no gift tax cost
will allow both the corpus and its appreciation to escape the Federal estate
tax on the passing of the donor. Using the
exemption equivalent amount during your life is better than leaving it for use
at death.
The urgency is to act now to take advantage of the current
estate tax regime that it is set to expire at the end of 2012. Above and
beyond the annual exclusion gift limit of $13,000, the federal applicable
exemption amount for transfers during life (gifts) and death (estates) has
increased (by indexing) to $5,120,000 per person for 2012 -- by far the highest
it has ever been since the establishment of the estate tax. Wealthy individuals
who have both the means and desire to do so, should plan on making these gifts
during 2012.
7. Leaving assets outright to
Adult Children
In
recent years, there has been a growing opinion among advisors for wealthy
families that assets should remain in trust, even for adult children, for as
long as possible for the asset protection and other benefits that a trust can
offer. For a wealthy couple with adult children, the question may no longer be
a one of legal capacity or maturity (although those issues may still remain).
The bigger questions may, more accurately, become: who should really benefit
from the fruits of my labor and how do I protect those assets from creditors,
potential creditors and ex-spouses. Depending on your perspective,
dictating from the grave may or may not be a pejorative expression. For as long
as trusts have been in existence (800+ years), the idea of controlling assets
for as long as allowed with a set of instructions has been considered
acceptable and often sought after planning.
In fact, centuries ago,
keeping assets in trust forever was, more likely than not, the goal; hence
the genesis of the “rule against perpetuities.” This rule was law in all
50 states to prevent perpetual or “dynasty” trusts. Over the last several
years, many states have been modifying this rule to allow for longer trusts or
have outright abolished the rule. Whether or not to leave assets in trust for
adult children depends on many factors; not the least of which is personal
preference. However, in our litigious society of high divorce rates, leaving
some assets in trust with fairly liberal access is certainly worth
consideration.
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