Estate planning can often seem like navigating a minefield. The process, while necessary, is filled with legal complexities, intricate decisions, and the potential for costly errors. It is about making strategic choices today to secure the future of your loved ones and safeguard your hard-earned assets. Without careful consideration and appropriate expertise, individuals can easily stumble into common pitfalls that may lead to unfavorable tax consequences or discord among heirs.

The intention of estate planning is to put you in the driver’s seat of decision-making, even in your absence. It is about ensuring your assets are disposed of according to your wishes and your loved ones are provided for adequately. It is a proactive approach to wealth management that can spare your family the stress of legal proceedings and prevent the erosion of your estate’s value.

Yet, even with the best intentions, estate planning mistakes are common. They can range from misuse of jointly held properties to inadequate liquidity, choosing the wrong executor and much more. Many people, often unknowingly, make these mistakes that can complicate the process, devalue the estate, or even lead to familial disputes.

10 Common Estate Planning Mistakes

  1. Misuse of Jointly Held Property

One of the biggest pitfalls in estate planning is the misuse of jointly held properties. While often acquired with the best intentions of shared ownership and responsibility, these properties can quickly become a tangled web of tax and legal complexities. The crux of the problem lies in the potential for double taxation, particularly when the property is jointly owned by individuals who are not married to each other.

Here’s how it works: when one owner of the jointly held property passes away, the entire value of the property is subject to taxation, regardless of the proportion of ownership. The tax code stipulates the property’s full value is included in the deceased’s estate unless the surviving owner can demonstrate their contribution to the acquisition of the property. This means the survivor must provide evidence of their financial contribution to purchasing the property to avoid having the total value included in the taxable estate of the first to die.

However, the tax implications do not stop there. When the surviving owner eventually passes away, any property received but not consumed or given away during their lifetime will be taxed again. This is because the remaining property is included in the gross estate of the surviving owner, leading to a second round of taxation on the same property.

This situation can create a financial burden for the surviving owner, who may be forced to sell the property to cover the taxes. Even if the survivor can pay the taxes without selling the property, the double taxation reduces the value of the property and diminishes the wealth passed on to the next generation.

To prevent this, estate planning should consider the consequences of joint ownership. Strategies such as owning property as tenants in common or using a trust may be more advantageous in certain circumstances. It is important to note, that any form of joint ownership supersedes a will or trust document. The best estate plan only works if property ownership coincides with the plan the decedent put in place.

In all cases, professional advice should be sought to navigate the complexities of property ownership in estate planning.

  1. Poorly Arranged Life Insurance

When used correctly, life insurance can be a powerful tool in estate planning. It can be a financial lifesaver, ensuring the surviving family members have the necessary funds to cover their living costs. It can also inject liquidity into an estate or even magnify the impact of a charitable bequest. However, if a life insurance policy is arranged haphazardly, it can trigger a host of financial difficulties.

Poorly arranged life insurance often manifests in inappropriate coverage amounts or unsuitable policy types. For instance, having insufficient coverage can leave dependents in a financially precarious situation after the policyholder’s death. Conversely, excessively large policies might lead to unnecessary costs or even estate tax issues.

Another common mistake is choosing the wrong type of life insurance policy. Term life, whole life, and universal life insurance policies each have their unique benefits and drawbacks. The best choice depends on the policyholder’s personal circumstances, financial goals, and the needs of their beneficiaries. A poorly suited policy can result in higher premiums, wasted resources or coverage that ends when it is still needed.

While life insurance can play a crucial role in estate planning, it must be arranged correctly. Regular reviews and updates, appropriate coverage, suitable policy types and proper alignment with the overall estate plan are all essential aspects of effective life insurance planning.

  1. Will Errors

Dying without a valid will is one of the most significant estate planning mistakes. Without a valid will, your property will be distributed according to state laws, which may not align with your wishes.

Having a will gives you the authority to manage how your assets will be passed on after your death. This allows you to guarantee that your wealth goes to the people and causes that matter to you. If you do not have a will, your choices are not considered, and state law will take over.

Keeping a will current is equally vital. Once prepared, it is not a static document but needs to evolve with the changes in your life and financial circumstances. For example, family additions like the birth or adoption of a child or changes in marital status, such as a marriage or divorce, warrant a review of your will.

Changes in tax laws may affect your estate and require a revision of your will. Adjustments may also be necessary if there are significant changes in income or beneficiaries to ensure fair distribution. It is wise to review and revise your will if the needs, circumstances or objectives of you or your beneficiaries change significantly.

  1. Insufficient Liquidity

Often underestimated, liquidity – or the lack of it – plays a vital role in estate planning. Many individuals are unaware of the extensive costs associated with settling their estates. From taxes to legal fees and administrative costs, the financial demands can mount rapidly, often requiring immediate payment.

Demands for liquidity within an estate or for maintaining family members’ standard of living have seen a considerable rise due to inflation. Consequently, ensuring adequate cash flow to cover these expenses is vital to estate planning. This involves a periodic analysis of the family’s and estate’s cash-flow requirements to ascertain whether the available funds are sufficient to cover the necessary costs.

The expenses related to an estate can be numerous and substantial. Primary among these are federal estate taxes and state death taxes. There are also income taxes at both federal and state levels to consider. Moreover, property taxes, usually worth two years given the average duration of an estate administration, add to this total.

Further costs may emerge in the form of probate and administrative expenses, which encompass probate, attorney and/or CPA fees. The payment of maturing debts also contributes to the estate’s financial burden. Additionally, funds are often required to ensure the family’s welfare and to continue a family business if one exists.

Large estates are frequently subjected to all these costs and taxes. Therefore, a lack of liquidity can create financial strain and might force the sale of assets, often at a disadvantageous time or price. This potential challenge underscores the need for comprehensive estate planning that considers liquidity needs, ensuring a smoother transition and minimizing financial strain during a challenging time.

  1. Wrong Executor Choice

Being an executor in estate planning is more than just a ceremonial role – it comes with significant responsibilities and complexity. It is important to dispel the misconception that it is simply an honor. The executor will be tasked with various challenging responsibilities that require time, effort, knowledge, and integrity.

The executor’s role can be broadly categorized into a three-step process: collection of all assets, payment of all obligations and distribution of remaining assets to beneficiaries. While this may appear straightforward, in reality these tasks are highly complex, time-consuming, and technically demanding.

Before finalizing an estate plan, it is advisable to discuss the chosen executor and overall plan with family members. This open conversation sets expectations, facilitates understanding and could lessen the likelihood of disagreements or legal challenges in the future. Many times, the best executor choice is not a family member, or at least not a beneficiary of the estate.

  1. Leaving Everything to Your Spouse

While leaving your entire estate to your spouse may seem like the simplest choice, it can lead to significant tax implications. An excellent alternative solution is establishing a credit equivalent bypass trust, which can provide financial security to the surviving spouse and minimize taxes. This strategy allows for the decedent spouse’s applicable exclusion amount to be fully utilized, preventing the estate from being excessively taxed upon the death of the surviving spouse.

A bypass trust is a type of trust that involves putting assets equal to the applicable exclusion amount into a taxable trust. The trust generates income for the surviving spouse, which ensures their financial stability. It is crucial to review the dispositive provisions of the bypass trust, especially since the applicable exclusion amount has increased over time. This helps to ensure that the surviving spouse’s financial needs are sufficiently covered.

  1. Incorrect Disposition of Assets

Improper disposition of assets in estate planning can have far-reaching consequences. This happens when the wrong asset is bequeathed to the wrong individual, or it is transferred in an inappropriate manner or at an unsuitable time. For instance, leaving a large or complex estate outright to a spouse who is unprepared or unwilling to manage it could lead to mismanagement and potential financial loss. A similar risk arises when a substantial estate is left outright to a minor or a teenager, as they may lack the maturity or financial literacy to handle such responsibility.

Another common mistake is failing to retitle assets into a previously created trust. Revocable trusts are often established during an individual’s lifetime with several goals in mind, including avoiding probate. However, these objectives cannot be achieved if the assets are not correctly transferred into the trust’s name. When a trust document is created, the attorneys typically only transfer real estate into the trust as there is a legal document which he or she will file with the county. It is the responsibility of the trustee to retitle all other assets such as stock certificates of closely held businesses, bank accounts, brokerage accounts, retirement accounts and life insurance policies according to the plan parameters. Often these transfers are overlooked and accounts are either remain titled in individual’s name (which subjects the assets to probate) or have improperly selected transfer on death or payable on death beneficiaries (which overrides the trust document). Therefore, regularly ensuring that trusts are properly funded is a critical part of successful estate planning.

  1. Failure to Stabilize & Maximize Value

Failure to stabilize and maximize the value of a business in light of potential threats, such as the disability or death of key personnel, is a significant oversight in estate planning. The loss of key individuals could not only interrupt daily operations, but also devalue the business due to a drop in productivity or loss of critical knowledge and connections. Therefore, addressing specific questions well in advance is vital to protect the business. For example, what mechanisms have been established to safeguard the business’s financial health in case a key employee, who is instrumental in income generation, is suddenly no longer available? Are there arrangements to cover the business’s fixed expenses during such a crisis?

A buy-sell agreement stipulates the terms of a business ownership transfer and is an indispensable tool to ensure the business’s continuity and stability upon the death of an owner or a key employee. It lays down a predefined method to determine the company’s value and provides a clear mechanism to fund the purchase of the deceased or incapacitated person’s share in the business. The agreement also helps avoid potential disputes among heirs and surviving owners.

Despite the significance of buy-sell agreements, many businesses do not have one in place. Without a properly drafted and funded buy-sell agreement, a company may face the risk of dissolution or disputes among heirs and surviving owners regarding the value of the business.

  1. Inadequate Record Keeping

The lack of organized records can lead to significant challenges for the executor, leading to time-consuming searches and potentially substantial expenses. A safe deposit box is a valuable tool for storing important estate and financial documents. It is essential the executor not only knows the location of the box but also has the access needed to retrieve documents.

In addition to securing documents, maintaining an updated list of advisors’ names and contact information is recommended. This information should be readily accessible to surviving family members, guiding them on who to contact in the event of the individual’s death.

  1. Lack of a Master Strategy

A thorough estate plan is crucial to ensure an individual’s assets are distributed as they wish after they pass away. It can also help in reducing tax liabilities and providing protection to beneficiaries. However, creating such a plan is a complex task that requires careful thought and expertise in different areas.

Assembling the right team of professionals is the first step toward building a robust estate plan. This team often includes CPAs, attorneys, life insurance agents, trust officers and other financial service professionals. Each member brings unique expertise and perspectives to the table.

Questions?

Estate planning is vital for safeguarding your wealth and ensuring the seamless transfer of assets to your beneficiaries. However, it can be challenging, and mistakes can result in financial and emotional distress. To avoid such mishaps, individuals should embrace the complexity of estate planning, make strategic decisions, maintain organized records, and regularly review their plans to reflect changes in circumstances or laws. Seeking the assistance of a skilled team of financial professionals can make estate planning a powerful tool in securing the future of your loved ones. Contact an Adams Brown Advisor today to learn more about trust and estate planning.