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The Ten Most Common Estate Planning Mistakes (and How to Avoid Them)
© 2008 by Eric Holk

 

The Ten Most Common Estate Planning Mistakes

(and How to Avoid Them)

Eric N. Holk, Attorney at Law

26346 Carmel Rancho Lane, Suite 200, Carmel, CA 93923 • (831) 622-8808

MISTAKE #1: WILL DRAFTING ERRORS (OR NOT HAVING A WILL!)

A. The dangers of holographic wills

-- Incomplete or incorrect disposition of assets

-- Problems if spouse and/or children are not provided for

-- Ambiguities

-- Typically, no contingent beneficiaries or "residue" clause

-- Failure to name executor or waive bond requirement

-- Failure to comply with legal requirements for holographic wills

-- Failure to take advantage of available estate tax credits (spouses)

-- Will may attempt to dispose of jointly held assets

B. Problems with out-of-date wills

-- Omitted spouse or children (failure to change will after remarriage)

-- Unintended heirs

-- Named executor is deceased or incapacitated or no longer a good choice

-- Specific gifts of property that is no longer owned

-- Failure to nominate guardians for minor children, or nomination of

   guardians who are no longer the best choice

-- Failure to respond to tax law changes

C. Avoid these mistakes!

-- Make a will and review your will periodically

-- Update your will any time there are changes in your family (births, deaths,

   marriages, divorces, serious health or substance abuse problems), changes

   in your finances, or major changes in tax laws that affect your estate plan

-- Don't "do-it-yourself" unless you really know what you're doing (even

   then, consider having an attorney review it)

 

MISTAKE #2: NAMING THE WRONG EXECUTOR

A. What's an executor?

B. Factors to consider in selecting and naming an executor:

-- Personal characteristics: honestly, integrity, patience, interpersonal skills

-- Financial management and record-keeping capabilities

-- Time availability

-- Geographical proximity (how far away does the executor live?)

-- Willingness to serve

-- Relationship with intended beneficiaries

-- Executor's age and health

-- Conflict of interests (beneficiary or business associate)

    Help your executor: tell them the location of will, safe deposit box, important papers

-- Don't name someone as executor without asking them first; review this

   periodically to make sure your chosen executor is still the best choice.

 

MISTAKE #3: INCURRING UNNECESSARY ESTATE TAXES

A. Leaving everything to the surviving spouse outright

-- Failure to properly utilize each spouse's exemption amount can result in

   unnecessary estate taxes.

-- Proper use of living or testamentary trusts can minimize estate taxes

B. No estate reduction through lifetime gifting

-- Missed opportunities to make annual $12,000 tax-exempt gifts

-- Missed opportunities to make tax-deductible gifts to charity

 

MISTAKE #4: IMPROPER BENEFICIARY DESIGNATIONS

A. Naming "my estate" as beneficiary

-- Subjects a non-probate asset to probate

-- Even a bigger problem if no will or will is not current

B. Designated beneficiary is deceased & no contingent beneficiary is named

C. Designated beneficiary is a minor child or children

-- Court-appointed guardian may be required

-- Assets pass to the child outright at age of majority (18)

D. A person on SSI is named as a direct beneficiary

-- This will cause the disabled beneficiary to lose the SSI benefits

E. Improper coordination of beneficiary designations and bequests to charity

-- Large IRAs may be subject to both income taxes and estate taxes, both of

   which can be eliminated if a charity is named as remainder beneficiary

   * Review your beneficiary designations -- make sure they will work the way you

    want! If you need assistance, consult with a qualified estate planner.

 

MISTAKE #5: IMPROPERLY FUNDED LIVING TRUSTS

A. If you have a Revocable Living Trust, make sure it's properly funded!

-- Assets should be held in your name as trustee of your trust -- anything not in the trust (except joint assets having designated

   beneficiaries) may end up going through probate and causing added delays and unnecessary expense.
 

MISTAKE #6: GIVING THE WRONG ASSET TO THE WRONG PERSON IN THE

WRONG MANNER OR AT THE WRONG TIME

A. When might an inheritance be a problem for the beneficiary?

-- When the beneficiary is still a minor child (or multiple minor children)

-- When the beneficiary is financially irresponsible

-- When the beneficiary is receiving SSI or other government assistance

-- When the beneficiary is abusing drugs or alcohol

-- When the beneficiary is facing the possibility of divorce

-- When the beneficiary has a gambling problem

B. What can you do to minimize or avoid such inheritance problems?

-- Establish trusts for minors with principal distributions at later ages, and

   allow some trustee discretion so that different needs can be handled

   accordingly; or utilize CUTMA accounts

-- Create a spendthrift trust with an independent trustee

-- Create a special needs trust to provide for someone whose resources must

   remain limited in order to qualify for SSI or other government assistance

-- Establish a trust that limits distributions until the beneficiary can prove

   himself/herself clean and sober for a number of years

-- Provide the beneficiary with his/her own trust which will remain his/her

   separate property in the event of divorce

-- Establish a trust with an independent trustee who can make discretionary

   distributions

MISTAKE #7: IMPROPER USE OF JOINT TENANCY

A. Spouses using Joint Tenancy titling instead of Community Property*

-- Loss of full step-up in cost basis at first spouse's death

*Note: Effective 7/1/01, California now will allow spouses to hold title as

"Community Property with Right of Survivorship"

B. Adding an adult child or other person as Joint Tenant for ease of transfer

-- Possible gift tax implications if asset value is more than $12,000

-- Exposure to the other person's liabilities

-- Still fully included in your estate for estate tax purposes

-- Risk of having the other person abscond with your property

C. Joint tenancy property cannot be willed – the surviving joint tenant gets it all.

NOTE: The death of a joint tenant on title to real property requires the filing of an "Affidavit of Death of Joint Tenant" form with the county recorder in the county where the property is located, along with certain other required forms.

MISTAKE #8: LACK OF LIQUIDITY FOR THE ESTATE

A. Insufficient or nonexistent liquid assets can create a cash flow crunch

-- Medical/funeral expenses & ongoing bills must be paid

-- Income taxes and/or property taxes may be owed

-- Estate taxes (if any) are due and payable in cash 9 months after death

B. Life insurance may be inadequate or nonexistent

-- Is death benefit enough to pay the estate taxes, debts, and other expenses?

-- Will it provide an adequate income for surviving spouse and children?

-- If you have a family business, will it be adequate to keep the business going?

-- Review your life insurance needs and coverage with a qualified advisor

C. Illiquid assets may have to be sold quickly, often for less than full value

-- Real estate, cars, boats, motor homes, trailers, art, collectibles, etc.

MISTAKE #9: THE UNDERVALUED ESTATE

A. Failure to do appropriate tax planning for estate tax minimization

-- If your estate is worth more than you think, there may be unexpected taxes

B. Lack of liquidity (see Mistake #8) -- if you have a tax liability, how to pay it?

C. Forgotten assets

-- Life insurance proceeds are included as part of the taxable estate

-- Joint tenancy assets are included to the extent of your ownership interest,

   and may be fully included if the other joint tenant is not your spouse

-- Property owned in other states is included in your taxable estate

MISTAKE #10: BUSINESS OWNER MISTAKES

A. No plan for business continuation

-- No written buy-sell agreement -- who takes over when you're gone?

-- No "key person" life insurance to fund a buyout

B. Deducting life insurance premiums without knowing the implications

-- Deducting the premium cost makes the death benefit fully taxable as

   ordinary income at the death of the insured

C. Missed opportunities for lifetime gifting at discounted values

-- Lack of marketability and minority interest discounts can be advantageous.

Do you have expired legal documents?

-- Durable Powers of Attorney for Health Care Decisions executed before 1992

   expired 7 years after the date of signing. (Effective 7/1/00, the new "Advance

   Health Care Directive" has essentially replaced the Durable Power of Attorney

   for Health Care Decisions, even though DPAHCs are still valid if the have no

   expiration date.)

-- Directives to Physicians executed before 1992 expired 5 years after the date of

   signing.

Be sure to maintain good records. Keep your will or trust, deeds, life insurance policies, investment statements, and other important papers where they can be found readily in the event of your death. Don't make it hard on your loved ones!

 

REMEMBER: THE BIGGEST MISTAKE OF ALL IS TO DO NOTHING!


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