The estate planning process can be difficult to navigate on your own. The process involves the coordination of the various assets of an individual into a cohesive, comprehensive plan to provide for family members. It requires you to analyze all assets whether held individually, jointly, and those that pass by beneficiary designations to come up with an effective overall and integrated strategy to deal with these assets. Often, assets are incorrectly titled and need to be retitled and beneficiary designations for life insurance and retirement plans need to be changed to obtain better results. An estate planning attorney should be addressing all of these issues with each client.
The following are some of the common mistakes in estate planning:
1. FAILURE TO DRAFT A WILL
The failure to draft a will results in the following problems:
- State determines who gets your property. The rules of intestate succession of the state of residence of the decedent will determine who receives your property.
- State determines the Personal Representative of your estate (executor/executrix). Without a will, you have given up the right to name the person you want to administer your estate.
- State will determine who will be the guardian of your minor children. A will allows you to name a guardian for your minor children.
- Increased risk of estate litigation. 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.
It is never a good idea to delay getting a will in place because you are waiting for “the right time.” Wills can be easily changed, so it’s better to get one in place right away and modify it when you need to.
2. OWNING JOINT ASSETS OR HOLDING TOO MANY ASSETS JOINTLY
While holding assets in joint tenancy (with rights of survivorship) can be an effective estate planning tool, there are some serious drawbacks to this approach:
- Holding property jointly does not completely avoid probate for married couples. It only delays it until the second spouse dies.
- In a second marriage, since the property transfers to the spouse as sole owner, your second spouse may not provide for your children from your first marriage.
- Owning too many assets jointly will not allow the married couple to utilize each of their unified credits for estate taxes.
3. LEAVING ALL YOUR ASSETS TO YOUR SPOUSE
The federal estate tax laws are constantly changing. Although it may seem like a good idea to leave everything to your spouse, that may not be wise from a tax perspective. For 2020 there is a federal exemption of $11.58 million for any decedent, but in Minnesota, there is a Minnesota Estate Tax exemption of $3,000,000, so any estate over that amount may be subject to the Minnesota Estate Tax.
For example: Husband has an estate of $3 million in his name alone and wife owns $1 million in her name alone. Husband dies in 2020 with a will that gives everything to his spouse. He pays no federal or state estate taxes because his bequest to his wife is at or below both the Minnesota and federal exemption rules. If the wife dies later in 2020, with an estate now worth $4 million when the exemption in Minnesota is $3 million, the wife’s estate has a Minnesota estate tax issue: The excess $1 million is taxable. Her Minnesota estate tax rate may be anywhere between 13-16%, which could trigger an estate tax debt of $130,000 to $160,000. This tax debt is due to the state within 9 months of death regardless of whether the estate has yet been settled. This means it may be an out of pocket expense for the heirs until the estate can be settled and the heirs can be reimbursed. That can be an immense financial burden on her heirs. Had the couple utilized a qualified trust plan in their estate plan, they could have avoided or minimized their tax exposure. Minimally, they could have planned for this tax and provided certain assets to be immediately available to the heirs upon the wife’s death in order to pay this tax. Lastly, a simple life insurance policy with a death benefit at or above the estate tax amount that is due can be an easy way of providing your heirs with the money they will need to pay the estate tax debt. That brings me to my next common mistake.
4. FAILURE TO OWN LIFE INSURANCE PROPERLY
Improperly named beneficiaries on a life insurance policy is a common mistake. Where a second marriage is involved and the new spouse is named beneficiary, these proceeds may never end up benefiting your children from your first marriage. When a husband and wife die simultaneously and small children are named as contingent beneficiaries of the life insurance proceeds, a court will have to appoint someone to administer the policy proceeds, triggering a costly and lengthy conservatorship. The person the court appoints may not be the person you and your spouse would have chosen. Even if you have a trust in place in to protect your children and intend to use the life insurance proceeds to fund the trust, unless the beneficiary designations are completed properly, these proceeds will never go into the trust as you had intended.
From an estate tax perspective, people are surprised that life insurance owned by an individual is included in their taxable estate at death. This may result in estate taxes being paid on insurance proceeds at death. To avoid estate taxes, often times an irrevocable life insurance trust is utilized to own such policies to remove them from the taxable estate.
5. FAILURE TO FUND YOUR TRUST
All good planning can be undone by poor execution. If you have created a trust to protect your family, you must move the proper assets into the trust and/or update your beneficiary designations on your IRA’s and life insurance, etc. to make sure that the assets will transfer to the trust as intended. Otherwise, your assets will be transferred as if you had no plan at all. The trust is merely an empty bucket until you put something in it. If the assets are not going in the trust until after you die, then the beneficiary settings on those assets are critical in order for your trust to work properly.
Without proper planning, there are numerous other mistakes that can happen with your estate plan. Your estate plan must be tailored to your family’s needs. Sound estate planning brings together a person’s diverse assets to fit into an integrated and comprehensive estate plan that may include wills, trusts and other documents. Do not hesitate to call me to help you develop your estate plan.