Here are 5 common, serious mistakes we see in estate planning – mistakes that can be solved fairly easily with help from your attorney or financial planner.
Misuse of Jointly Held Property – jointly held property may become a nightmare in terms of unexpected tax and nontax problems
First, there is the potential for federal and state gift tax upon the passing of one joint tenant if the property is jointly held with a non-spouse or a non-citizen spouse;
Second, once jointly owned property with a right of survivorship passes to the survivor, any provisions in the person who has passed away’s will pertaining to the property are ineffective – this is true even when the property is jointly held with a spouse.
Third, titling assets in joint names can result in such property by-passing provisions of estate planning documents, potentially creating a host of other problems, like double taxation.
Arranging Life Insurance Improperly – Life insurance is a great idea and can absolutely help your loved ones, but it there are things that must be considered, such as who should receive it, and when, and how?
Proceeds from a life insurance policy are often paid to the wrong person at the wrong time, i.e. before that person is legally or emotionally capable of managing it. Proceeds can also be paid in the perhaps not the best way. For example, do you really think an 18 year old should receive a million dollars as a lump sum? Perhaps it would be better if the funds were held in a trust and paid out over a period of time?
Inadequate insurance can also be problematic. How much is enough will vary depending on who is being insured and the situation of that person’s family and level of dependency on the person being insured.
Failure to designate a back-up beneficiary is common mistake. When in doubt, always have two back-up beneficiaries listed.
The insured is the owner of the policy, resulting in the proceeds being included in the insured’s estate at the time of his death. The easiest way to avoid this is to have a trusted, financially competent adult other than the insured (or a trust) purchase the policy and be named as the beneficiary.
The policy names the estate as the beneficiary. This mistake results in the proceeds being part of the estate and needlessly subject to the claims of the insured’s creditors.
Failing to update beneficiary designations to reflect changes to the estate planning documents.
Dying without a valid will is once of the biggest mistakes we see, and one of the easiest to avoid. Without a valid will, the result is “intestacy” – which means the state will decide who gets what.
The second most common mistake involving wills is failing to update them. Review your will a minimum of every three years, and after any major life change (marriage, birth of child, divorce, move to a new state, etc.).
Sufficient Liquidity – most people fail to consider how much it will cost to settle their estate, including paying the associated taxes and other expenses. Failing to adequately plan for these costs can result in the forced sale of precious assets. Expenses your executor may have to pay (depending on the size of your estate) are: federal estate and income taxes, state death and income taxes, probate and administration costs, payment of debts, payment of cash bequests, generation-skipping transfer taxes, and funds to continue operation of a family business.
Failure to Maintain Adequate and Easily Accessible Records – More than one executor has been driven crazy trying to locate necessary financial documents. And the search for and/or inability to find the same can end up costing an estate thousands of dollars. Instead of hiding your important financial documents under your mattress or in various random places, take out a safe deposit box. Make sure your executor knows where it is and how to access it.
Bottom Line: If in reading the above, you grew concerned that you might be making any of these common mistakes – fear not! Knowing and recognizing a potential problem is more than half the battle to developing a successful estate plan. The second step is to contact an estate-planning attorney to help you.