Five Common Estate Planning Mistakes

by | Aug 15, 2012 | Articles

Estate Planning is a process whereby you provide for you and your loved ones if you become disabled, and upon your death you give what you own, to whom you want, when you want, and how you want them to receive it.

(1)   Failure to Draft a Will

  • The rules of intestate succession of the state of residence of the decedent determine who will receive the estate assets. These state rules of intestate succession are a poor substitute for a person’s actual wishes. A will allows you to determine and control who gets what, how they get it and when they are allowed to receive assets of your estate. Often times a trust is drafted as part of a will or as a separate document to provide for management and preservation of assets for those in need of a trust due to youth, lack of financial skills or special needs.
  • Without a will, you have given up the right to name a person to administer your estate. Leaving this to state law or a judge is usually not a good idea.
  • Without a will some states require a bond for anyone who serves as administrator. If an out of state relative needs to be named or wants to serve as administrator, a posting of bond is almost always required.
  • A will allows the naming of a guardian for young children. Most people prefer to name the guardian of their children rather than allow a judge to decide this matter if at all possible.
  • 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.


(2)   Leaving All Your Assets to Your Spouse


Although it may seem like a good idea, leaving everything to your spouse may not be wise from an estate tax perspective. For 2012, there is a $5,120,000 exemption for any decedent. In 2013, the exemption will drop to $1,000,000. There is talk in Congress of increasing this amount but with the federal deficit and congressional gridlock it may end up this exemption remains at $1 million.


Where a decedent has a will that simply gives everything to the surviving spouse, they have failed to utilize their exemption. When the second spouse dies they include in their estate the assets received from the first spouse to die. If they have a taxable estate that exceeds the then applicable federal exemption, a federal estate tax will result. This excess will be taxed at 35 or 45 percent or more depending on what the law may be at their date of death.


(3)   Owning Assets Jointly or Holding Too Many Assets Jointly:


The problem here is the same as leaving  all your assets to your spouse. Owning too many assets jointly will not allow the married couple to utilize each of their unified credits, since property is transferred automatically to the surviving joint tenant.


In addition, holding property jointly does not completely avoid probate in a husband and wife scenario. Although there may be no probate when the first spouse dies, the survivor will eventually own all the previously owned joint property  that will then be probated and subject to estate administration on the second spouse’s death. So if avoiding probate and keeping one’s estate private is a goal joint tenancy ultimately will not work.


Joint tenancy arrangements can cause major problems where there is a second marriage. If assets pass to the surviving spouse on the first spouse’s death, such assets become the sole property of the survivor. That survivor is free to draft a will that does not provide for the children of the deceased spouse. This can create real problems and expensive, time consuming and contentious litigation.


Transferring of assets into joint tenancy with other family members (not a spouse) raise other problems. Gift tax, gift tax filing responsibilities and income tax issues are some of the problems raised by such scenarios.


(4)   Failure to Own Life Insurance Properly


Naming the beneficiary of a life insurance policy seems simple enough. However, where a second marriage is involved and the spouse is named beneficiary, these proceeds may never end up benefitting the deceased spouse’s children. Where a husband and wife suffer a simultaneous death and small children are named as contingent beneficiaries of the life insurance proceeds, without proper planning a court will have to appoint someone to administer the policy proceeds. The person the court appoints as trustee may not be the person the deceased parties would have chosen. This could be a very expensive and problematic situation which can be solved by drafting an appropriate trust document.


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


To pay premiums on such policy held in trust there can be gift tax implications. However, if the trust is drafted properly and certain documentation and notices are given each year, the insured can make annual gifts to the trusts that qualify for the annual exclusion to pay for the insurance premiums on such policies.


Finally, if a current policy is transferred to an irrevocable trust, care must be taken to account for the 3 year rule under federal law. This rule pulls back into the estate the insurance policy transferred to the irrevocable trust if the taxpayer dies within 3 years of the date of transfer.


(5)   Failure to Have a Gift Giving Plan:


Taxpayers sometime fail to recognize they can give $13,000 per year to as many donees as they desire. In addition, the spouse can join in such a gift for additional $13,000 annual donee exclusion. This will allow for gifts of $26,000 per year to as many donees as desired.

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