Estate Planning is almost universally acknowledged as beneficial, yet it is often practiced poorly. In basic terms, an estate plan is your plan for how your assets should be managed during your lifetime if you are unable to make those decisions, how they should be managed when you’re gone and how those assets should be transferred to your heirs. A well developed estate plan requires an ongoing review and evaluation of personal, family and business circumstances, making periodic adjustments as necessary.
We thought it might be helpful to discuss briefly some of the most common estate planning mistakes people make in developing their estate plan. The list is by no means exhaustive, but it does provide valuable insight into some of the issues that need to be addressed properly.
Common Estate Planning Mistakes
1. Failing to take regular inventory and update the value of your assets
If you don’t know exactly what you have, you can’t protect it, and you may have trouble transferring it to your heirs. Many people don’t even consider intangible assets like pension payments, which can be passed on to survivors. Other assets, like a home or a stock portfolio, change value regularly and need to be updated regularly.
2. Omitting foreign-owned assets from the estate
Foreign-owned assets are part of a taxable estate. Omitting such assets can understate tax liability and force the unplanned liquidation of other valuable assets.
3. Failing to reflect life changes
We all experience life changing circumstances, like births, deaths, marriages and home purchases. These events usually require changes to a variety of planning documents, including wills, benefit plans, insurance policies and trusts. Failing to coordinate those documents can lead to unintended consequences. Any major life event should prompt a review – even a quick one – of your estate plan.
4. Failing to take advantage of a bypass trust
A bypass trust allows wealthy individuals to use a tax credit to shield millions of dollars of otherwise estate taxable assets. If you don’t incorporate this into your estate plan, the surviving spouse and/or the kids could be exposed to unnecessary taxation. Preserving this credit is most effectively done through a “bypass” or “credit shelter” trust.
5. Failing to maximize gifts in your estate plan
Estate values can be reduced, along with potential estate taxes, through the use of gifts or transfers of property. Individuals can gift up to $18,000 (2024) per person every year. This means that one parent can give $18,000 to one child. Both parents can therefore give $36,000 to that child. But it also means that both parents could give $72,000 to that child if they want to include the child’s spouse in the gift.
This can be as simple as making the check payable to both of them. There are also some sophisticated techniques for making gifts without actually losing your hard-earned cash and/or for making gifts at less than their market value.
6. Making gifts to pay for educational or medical expenses
Payments made directly to educational or medical providers which are eligible for charitable deduction are not subject to gift tax. So, instead of giving $10,000 to a child to help pay for his or her child’s private school tuition, you can pay the school tuition directly, and it won’t count as a “gift” for estate tax purposes. This further increases the amount you can effectively give to your kids. You can make actual gifts and pay some of these qualifying costs directly.
7. Poorly structured life insurance
Life insurance policies are more complicated than most people realize and careful consideration needs to be given to ownership, beneficiary arrangements, and dividend and settlement options. Seemingly inconsequential details can lead to disastrous results. Life insurance policies can be valuable financial tools, but like all tools, if improperly used they can do serious damage.
8. Inadequate amounts of life insurance
Studies consistently indicate that most Americans are underinsured. In result, survivors suffer a diminished standard of living and/or inability to achieve objectives like attainment of educational goals.
Many people also lose coverage or have it reduced due to policy expirations, automatic reductions at later ages and/or group coverage cancellations. This doesn’t mean that you have to increase your budget for premium payments. Many times, more coverage can be purchased for the same premium level if the structure is changed a bit. Deciding to change your life insurance policy may provide some much added support.
9. Failing to keep adequate records
Good record keeping helps keep track of assets, changes in value and ownership of property, all of which are critical for tax and family planning needs. If the IRS challenges any of the actions that you’ve taken, it is up to you or your heirs to support the action you took with proper documentation. Make no mistake about this; the burden of proof is on you, not the IRS.
Avoid These Mistakes
Avoiding these most common estate planning mistakes is crucial to your family’s financial success. Most of them are simple enough to fix, but they do require proactive steps on your part. If you haven’t looked at your retirement plan in the last year or two, you should make an appointment with your financial advisor or attorney as soon as you can.
If you don’t yet work with a financial advisor, we would urge you to do so. The expertise of a fiduciary financial advisor can go a long way into helping you achieve your financial goals. If you’re unsure where to start, we’ve complied an extensive list of questions to ask a financial advisor to help get the ball rolling. Or, you can use the link below to schedule a no-cost, complimentary meeting with one of our fiduciary advisors.
