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29 Most Common Estate Planning Mistakes

18 April 2012 No Comment

29 Most Common Estate Planning Mistakes

Estate planning focuses on the disposition of your assets after your death, but it can also involve planning for the use of your assets for your care if you become unable to manage your own affairs during your lifetime. Your estate planning objectives may include the desire to:

  • Protect your assets in the event you become disabled.
  • Make sure that assets are transferred to your intended beneficiaries;
  • Avoid probate
  • Reduce estate administration costs, such as attorneys’ fees, executors’ fees, and court costs;
  • Reduce or eliminate federal gift, estate, and generation-skipping taxes;
  • Protect beneficiaries from mismanagement and from the claims of creditors and ex-spouses;
  • Discourage certain types of conduct (e.g., lack of fiscal responsibility, substance abuse);
  • Give incentives to beneficiaries to be productive members of society;
  • Provide for the succession of a family business; and/or
  • Facilitate charitable giving

When planning your estate, it is easy to make mistakes that sabotage your goals and cause chaos for your family. Below are some of the most common estate planning mistakes and oversights that later can cause chaos for your family. These can be avoided by seeking the guidance of an attorney who specializes in the field of estate planning.

1. Avoiding the issue. Planning for your death is not pleasant, but it is an uncertain world and you need to think ahead. You are never too young for estate planning. Unexpected death or disability can occur at anytime. Because my practice also involves probate services, I am able to see first hand the serious consequences from the failure to adopt at least a minimal estate plan. Putting off planning until it is too late can leave your estate riddled with problems and even debts after your death.

Everyone can benefit from a will or some other form of estate planning. Some benefits of having a will are the following:

  • Avoiding or reducing estate taxes
  • Saving estate administrative costs
  • Specifying who will receive your estate
  • Protecting your family

Despite some financial costs associated with implementing an estate plan, the benefits from a will or some other estate planning technique far outweigh the initial costs. Further, since some attorneys, myself included, do not charge prospective clients for their initial consultation, there is no reason not to meet with a qualified estate-planning attorney and determine for yourself whether you and your family would benefit from a will or some other form of estate planning.

2. Thinking you do not have enough wealth for estate planning. Estate planning does not depend on how much you have. It is about how you handle what you do have. Your net worth may influence the type of estate plan that is appropriate for you. But rarely is an estate too small to warrant some type of planning.

3. Not seeking professional help. This may sound like self serving advice coming from an estate planning attorney, but estate planning simply is not a do it yourself project. With the advent of the internet, I have seen a rise in the use of will forms. In most states, including New York, if you fail to follow strict legal formalities the will is invalid. A seemingly insignificant error can tie up your estate in the courts and cost your heirs thousands in legal fees. You might ask yourself why the do-it-yourself sites and books disclaim any liability and, in fact, advise you to check with an attorney.

Remember, if you get your estate plan wrong, the errors probably will not be discovered until after you have died. At that point, there are no do-overs.

Even if a self-prepared will or trust is legally enforceable, estate planning is a complex legal process requiring knowledge in several legal disciplines, including estate law, tax law and property law. A proper estate plan involves evaluating a persons estate to determine the correct type of document (will, trust, etc.), drafting the document to accomplish your objectives and then coordinating the titling of assets and the beneficiary designation of life insurance, IRA’s, annuities, etc. to be consistent with the estate plan. Former U.S. Supreme Court Justice Warren Burger thought he could write his own will, but even he made mistakes and it cost his family more than $400,000 in taxes he might otherwise have avoided.

4. Hiring a Generalist. When hiring a doctor, attorney, mechanic or any type of service profession, I strongly recommend hiring a specialist. I would be remiss if I did not comment on the number of times that I have been called in to “correct” estate plans created by generalists after someone has died. Almost without exception, the specialist will have more experience and skill in their area of specialty than will a generalist. This usually translates into higher quality services provided in the most cost effective manner possible. For more information click Selecting an Attorney.

5. Failing to review and update your estate plan. It is essential that you periodically review your estate plan to make sure it reflects your current wishes. Failing to address changes in the law or in your personal financial and family circumstances can result in additional taxes, family conflicts, and unintended people receiving a significant part of your estate. If any of the following events occur, you should make certain to review your estate plan:

  • Relocation to another state;
  • Changes in the estate tax laws, federal or state;
  • Birth of a child or grandchild;
  • Receipt of an inheritance;
  • Marriage;
  • Divorce;
  • Death of an intended beneficiary; and
  • Acquisition of real estate.

In order to keep your plan current, you should review it every three to five years.

6. Failure to recognize the significance of the New York estate tax law. New York has “decoupled” its estate tax from the Federal estate tax, which means that your estate could be subject to NY estate tax even if no Federal estate tax is due. Since the Federal estate tax exemption currently is currently $5.12 million (for 2012 only) and the NY threshold is $1 million, without proper planning, this variance could result in an unpleasant surprise for your heirs upon your death. It’s a good idea to review your current financial situation to determine the potential exposure to NY estate tax and how to minimize it.

7. Misunderstanding the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (signed into law on December 17, 2010).

Many sighed in relief when President Obama signed the bill. They believed that estate taxes for all but the very well-to-do effectively were eliminated.

The Act provides for an estate tax exemption of $5 million in 2011-2012 (indexed to 5.12 million in 2012 for inflation). The Act also provides for “portability” between spouses of the estate tax exemption for estates of decedents dying in 2011 and 2012. Unfortunately, this new regime is itself temporary and will sunset on December 31, 2012 and the prior estate tax regime, with a 55% maximum estate tax rate and a $1 million exemption, is reinstated at that time.

Moreover, although the federal tax law now has been temporarily revised, New York continues to have an estate tax exemption of only $1,000,000, with no “portability” of unused estate tax exemption between spouses. Thus, tax planning continues to be needed in order to minimize or avoid New York estate taxes.

With the current federal estate tax law set to expire at the end of 2012, and the exemption amount scheduled to revert to $1 million as of January 1, 2013, all planning today should reflect the possibility that things may revert to pre-2001 law.

8. Leaving everything to your spouse. Many couples own the bulk of their property jointly and have reciprocal Wills in which the wife leaves everything to the husband and the husband leaves everything to the wife. Generally, this is an imperfect arrangement for couples whose combined estates may exceed the $1million New York State exemption because it wastes the available exemption of the first spouse to die, thus leaving only the $1 million exemption of the survivor to avoid estate tax. Although in leaving everything to the surviving spouse there will be no estate tax when the first spouse dies because of the unlimited marital deduction, the surviving spouse’s estate will be subject to estate tax if the property owned by the surviving spouse (including the property inherited from the first spouse) exceeds the $1 million exemption.

The loss of an estate tax exemption may be avoided if provisions in the will or living trust agreements create a “credit shelter” or “bypass” trust at the death of the first spouse. In a typical credit shelter trust, the surviving spouse is entitled to receive all of the income from the trust for his or her lifetime, and has the right to withdraw principal for his or her health, education, support and maintenance in his or her accustomed manner of living. When the surviving spouse dies, the $1 million in the credit shelter trust (including any appreciation as well) goes to the children free of estate tax.

The amount which funds a typical credit shelter trust varies according to a particular client’s financial and family circumstances. For New York estate tax purposes, the credit shelter trust should be funded with up to $1 million. The credit shelter trust may be funded with an additional amount up to the federal estate tax exemption ($5.12 million for 2012), depending on the client’s federal estate tax exposure.

9. Leaving your estate outright to young children. In the unfortunate event that you die while your children are still young and perhaps not responsible enough to handle a large sum of money, it might not be in their best interest to leave them their share outright. Without proper planning you could end up leaving thousands of dollars that young children may spend as they see fit. Think back to when you were 18 years old. If you came into a significant amount of wealth to spend at your disposal, the money may possibly have been spent before your 19th birthday. To adequately address this scenario, your estate planning documents may provide that if any of your estate passes to someone who is under 30 or 35, it should be held in trust for them and paid out at predetermined ages. For example, one-third may be paid at age 25, one-half at age 30 and the balance at 35. If you want to teach your children financial responsibility but also want to make sure they are properly cared for, you could have language in your documents stating that during the term of the trust, income and principal should be paid to your children for health, education, support, to marry, start a business, make a down payment on a home, and other legitimate purposes.

10. Failure to plan for the possibility of a child getting divorced or having creditor issues. If your child is going through a divorce or has substantial creditor issues, you need to create an estate plan that will not bring unintended results. For instance, would you want your ex-son or daughter-in-law to be awarded an interest in your estate by a court? Alternatively, if your child has significant creditor issues, would you want their inheritance to be subject to a legal judgment against him or her? Such problems can be minimized through proper use of trusts or a business entity, such as a family limited partnership or limited liability corporation.

11. Leaving money to children with disabilities. If you have a disabled child who is receiving government benefits, such as Medicaid, and your current plan leaves him or her money outright, or in a trust without the required language protecting the benefits, you may disqualify him or her, either temporarily or permanently, from receiving future benefits. To avoid the loss of benefits, your child’s potential inheritance should be placed in a Supplemental Need Trust (SNT). An SNT will guarantee that your child will still receive government benefits, while providing for his or her additional needs through distributions from the SNT.

12. Failure to review beneficiary designations and asset ownership. Certain types of assets, such as life insurance policies and IRAs, pass directly to the recipients you specify on your beneficiary designations. Other assets pass by right of survivorship, such as bank accounts or real property held as joint tenants with right of survivorship. Assets such as these pass according to the beneficiary designation or to the surviving joint tenant, regardless of the provisions of your will. For example, if you intend to leave a joint bank account to all of your children but you only designated one child as a joint owner of the account, that child is only under a moral responsibility, not a legal one, to give his or her siblings an equal share of the account.

It is absolutely essential to coordinate the way you title your assets with the type of estate plan you have. For example, just because you set up a revocable trust does not mean you will automatically avoid probate unless all of your assets are titled correctly to work through your trust. Also, people often misuse “probate shortcuts,” such as joint and survivorship, payable on death, beneficiary designations and similar titling methods. ometimes these are good, but used incorrectly, they can completely ruin an estate plan.

13. Titling property jointly with your children. Do-it-yourself estate planners often add children or others to bank accounts, investment accounts, real estate deeds and other property in an attempt at a cheap method to avoid probate and/or plan for disability. I strongly advise against this type of planning except upon the direct advice of a competent estate planning attorney.

Adding others to titles and accounts can have serious unintended consequences. For one, the added person’s creditors may be able to access the property to satisfy their debts. Moreover, a child’s spouse in a divorce may claim a portion of the property. Also, gift taxes may be triggered as well as the loss of significant tax benefit such as a stepped up income tax basis upon your death. Further, by adding the person you have given up significant control of that property. If, for example, you added your child to the deed of you home, it may be impossible to transfer the property should the child withhold their consent.

Quite frequently in the case of elderly, widowed clients, a client may have put property in his or her name and a child’s name as joint tenants with rights of survivorship to make it easy for the child to get access to the assets should the parent have needs but be unable to access the assets because of a disability the parent has experienced. Unfortunately, I often see situations where, at the death of the parent, the child (who perhaps was the care giver to the parent and feels somewhat entitled to “compensation”) then “conveniently” forgets that the decedent’s Last Will and Testament directs that all assets be divided among all of the living children, and this inevitably leads to lawsuits over whether the parent really wanted the care giver to have extra funds or not.

A revocable living trust can avoid probate and plan for disability without exposing you to the pitfalls of adding children or others to the title of your assets.

14. Naming minor children as contingent beneficiaries. Individuals often implement a well thought out estate plan only to have it undermined by an incorrect beneficiary designation. The most common, but certainly not the only mistake, is naming minor children as contingent beneficiaries of their life insurance or retirement accounts.

For example, many parents have wills that specify that, in the event of both of their deaths, their estate be placed into a trust for their children’s benefit until the children reach age 30. This is done to avoid the children receiving a large sum of money at age 18 as the parents recognize the negative effect that a large inheritance could have on a child.

Unfortunately, many parents name their children as contingent beneficiaries of life insurance or retirement proceeds. This means that the children will receive the proceeds at age 18. In addition, the courts will require that a court supervised and costly conservatorship be created to control the money while the child is a minor, which will have the effect of depleting the insurance or retirement proceeds.

An alternative is to name your estate or a trust directly as the contingent beneficiary. However, the exact beneficiary designation that is appropriate will depend upon the type of will or estate plan that you have in place, as well as other factors. Beneficiary designations are more difficult than they appear and you should consult you’re your estate planner attorney for specific advice concerning this matter.

15. Failure to address life insurance ownership. Life insurance often is a significant part of an individual’s estate plan. A common misconception that people have about life insurance is that the policy is tax-free. It is important to understand that life insurance death benefits are not subject to income tax. However, they are subject to estate taxes if the policies are owned by the insured at death. By transferring the ownership of your existing policies or purchasing a new policy through an irrevocable life insurance trust, you can avoid paying unnecessary estate taxes.

16. Creating a living trust (a.k.a. a revocable trust) but failing to transfer your assets into it. A revocable trust can offer many benefits, such as probate avoidance, but it remains just a piece of paper until it is “funded.” Funding means that the trust actually owns your assets. A competent estate planning attorney will advise you what assets belong in your revocable trust and how to go about retitling them to the name of the revocable trust.

17. Failure to create a business succession plan. If you currently own a business that you want to pass down to your children and/or grandchildren, you need to address business succession as part of your estate plan. Family owned businesses have only a 40% chance of surviving when passed from the first to the second generation, and that survival rate drops drastically as it passes to future generations. In order to plan for succession of your business to future generations, tax and non-tax considerations should be considered as part of your planning. A properly drafted plan will assure that your business continues for future generations.

18. Failure to plan for a physical or mental disability. A power of attorney guarantees that your finances will be handled properly by someone you trust. A health care proxy will provide you with the comfort that your health care decisions will be made according to your wishes, thereby reducing that emotional burden on family or friends. If you do not have a health care proxy and power of attorney, costly and time-consuming court proceedings may be required in order to appoint a guardian to act on your behalf if you become physically or mentally disabled. These two documents are quite effective and relatively easy to implement.

19. Failing to provide for estate liquidity. Many times people find that the majority of their wealth is tied into real estate or a family business. This can be problematic because these assets are not very liquid and make it difficult to pay taxes on the total value of the estate, forcing the heirs to quickly sell the property or enter into a large amount of debt. This situation can be avoided easily with proper estate planning.

20. Planning to dispose of specific assets. Many times, people try to dictate exactly what is to happen with each specific asset they own. One problem is that often they may have different assets when they pass away. Another is that the value of the assets today may be far different years from now than it is today. The better way is to plan based on the “value” of your estate rather than specific assets.

21. Giving away the wrong assets. It is important in estate planning to know when to make a gift and when to wait. When a person dies, the property in their estate gets a stepped up basis equal to fair market value at death. By contrast, gifted property retains the same basis. The effect can be significant if you gift a highly appreciated asset. For example, imagine that you have 1,000 share of Apple stock which you paid $50 a share and the stock is now valued at $300 per share. If you gifted the shares to your children, the shares would retain their $50 basis so that, if your children then sold the shares for $300 a share, their taxable gain would be $250,000 (300-50 x 1000). If your children inherited the shares, their basis would be $300 and therefore there would be no taxable gain on the sale by your children at $300 a share. The general rule is to gift appreciating assets but not appreciated assets.

22. Ignoring income tax consequences. Income taxes often are an important consideration in estate planning. Individual retirement accounts, 401k’s and other retirement plans often are subject to both estate and income taxes on your death. The tax bite can be huge without good planning. Likewise, making gifts during your lifetime can be good planning, but first you have to consider potential income tax disadvantages (see paragraph 21, above).

23. Assuming that Medicare will pick up the tab for a nursing home if you ever need long-term care. Contrary to common belief, Medicare does not pay for long-term care, but only for skilled nursing care on a limited basis. Given greater longevity, more and more of us will require long-term care at some point in our lives, and the astronomical expense can wipe out the average family in no time. Thus, planning for this eventuality should a cornerstone of most people’s estate plans. Long-term care insurance can be a good investment. However, if you cannot afford it or if you cannot qualify for health reasons, assets may often be preserved with strategies that incorporate Medicaid planning into your estate plan.

24. Thinking that your will allows your estate to avoid probate. When you die, any assets passing under your will must go through the probate court. The probate court will then direct the distribution of your assets to the beneficiaries named in your will, ensure creditors are paid, etc. If one of your estate planning goals is to keep your estate out of probate, a will is not the way to go. Instead, consider a revocable trust (a.k.a. a living trust).

25. Thinking that if your estate is not taxable, it avoids probate. It is a common misconception that only taxable estates must go through probate. The reality is that the need for probate and an estate’s tax status are unrelated. A modest estate not subject to estate tax may go through probate if the decedent relied on a will to transfer assets. A large, taxable estate may not be probated if the decedent utilized effective probate-avoidance strategies such as a living trust (a.k.a. a revocable trust). Regardless of the size of your estate, a will is not the estate planning vehicle of choice for anyone intent on making sure his family avoids dealing with the probate court.

26. Failing to have estate tax payment provisions in your documents. In the estates of wealthy people, estate taxes often must be paid at the death of the second spouse. Clients rarely address the source of those payments, which can cause problems of large magnitude. Two simple examples will illustrate the types of problems this may create.

Husband creates a trust for his wife at his death. At his wife’s death, the trust terminates and pays assets to the husband’s children, who are not children of his wife. No taxes are paid at the death of the husband but, at his wife’s death, a large amount of taxes are due. Are those taxes due from the trust which the husband created for his wife, or are they due from the wife’s separate assets which she leaves by Last Will and Testament to her children?

Client creates a trust into which she places $1,000,000 for management purposes. The trust provides that, at her death, the trust balance goes to two children. The client provides, in her Last Will and Testament, that the balance of her assets ave divided among five grandchildren, all of whom are the offspring of only one of the two children. Is the tax attributable to the $1,000,000 trust paid from the trust or from the assets in the estate which would otherwise go to the grandchildren?

27. Thinking you can make a minor revision to your Will simply by marking the changes and initialing them. Without observing the necessary execution formalities, making changes to your Will by handwriting (or typing) and then initialing is invalid. Furthermore, doing so may invalidate that portion of your Will which you intended to change. Making changes to your Will on your own can only lead to trouble and/or potential litigation. If you wish to make changes to your Will, you should have an attorney assist you in making revisions.

28. Thinking you have no estate tax exposure. There are two potential estate taxes that are applicable to a New York resident, Federal estate tax and New York estate tax. The Federal estate tax exemption currently is currently $5.12 million (for 2012), but scheduled to be reduced to $1 million in 2013 absent Congressional Action.

By contrast, the New York estate tax exemption is only $1 million. It will remain at this level regardless of what happens to the Federal estate tax. For example, if someone dies in 2012 with a taxable estate of $2,000,000, there would be no Federal estate tax, but there would be New York estate tax of $99,600.

29. Thinking you don’t need an estate plan because everything goes to your spouse if you die. If you die with out a will or trust, you are deemed to have died intestate and your estate will be distributed according to the intestacy laws of the state where you died. Under New York law, this means that only half of your estate passes to your surviving spouse, while the other half passes to your children. Do you really want your young children to receive as much money as your wife or husband? In addition, under New York law your children receive their inheritance outright if they have attained the age of 18. Most parents would not want their children to inherit at so young an age. Moreover, if your children are under the age of 18, a court-supervised guardianship is required for the children’s benefit. The court strictly monitors the guardianship and its consent in necessary to use funds for the benefit of your children. Finally, New York law generally requires that your minor child’s property be secured by a bond, which serves as a type of insurance that your child’s inheritance is not mismanaged.

There is an abundance of misinformation and misunderstanding about estate planning. The mistakes listed above are just a sampling of poor planning. It is important to understand the potential issues and conflicts that may arise from an improperly planned estate. Knowing your estate planning options provides you with the ability to create a plan that maximizes your wealth and minimize your taxes.


Lawrence J. Peck, Esq.
Founder of the Estate Planning New York Group
Manhattan, New York City

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