Ten Common Estate Planning Mistakes
An estate plan allows one to transfer their assets smoothly and quickly to beneficiaries after they pass away. Thus, while it may be uncomfortable or depressing to discuss your own end-of-life care or what will happen to your assets after you pass away, planning ahead can save your family time, money, and allow them to properly mourn your passing.
Estate planning and end-of-life planning are about taking control of your specific situation and putting plans in place to help your family manage risk after you pass away. Estate planning can be difficult as you have to face your own death, however, planning for end-of-life care is just as challenging as you do not know what end-of-life care you will need or even if it will be necessary at all. Below are the ten most common estate planning mistakes people make and how to avoid these usual pitfalls.
Not Having a Real Plan in Place
Many people may have an existing estate plan. However, just because you have a lawyer prepare certain estate planning documents for you does not mean that this plan is properly designed for your specific situation. If you do not have a last will and testament or trust documents, you are said to die intestate. Dying intestate means that a judge will distribute your assets according to your state’s specific succession laws and probate process. Dying intestate and going through probate costs your family money and, in most cases, it can take a year or longer before your heirs will receive any of your assets. Further, even if you do have a will, if it is not up to date or does not follow your state-specific laws, your assets will still have to go through probate.
Not Updating Plans Over Time
As your life changes so should your estate plan. Major life-changing events that require you to review, change, or update your estate plan include:
- When a child or grandchild needs educational funding.
- Marriage, separation, or divorce.
- Death or change in circumstances of the guardian named in your will for minor children.
- Birth or adoption of a child or grandchild.
- Death of an heir.
- If you or your spouse receive a large inheritance or gift.
- Death or change in circumstances of your personal representative, executor, or trustee.
- Career changes — a new job, promotion, or if you start or close a business.
- Significant changes to your or your spouse’s financial condition.
- Changes in the number of dependents, such as adding the caring of an adult.
- A move to another state.
- When a child or grandchild becomes an adult.
- Significant changes to your or your spouse’s health.
- Borrowing a large amount of money or taking on liability for any reason.
- You start taking distributions from an IRA, 401(k), or another qualified plan.
Any of the events can have a significant impact on your family’s financial situation. Thus, reviewing your estate plan ensures that your assets pass on to the correct beneficiaries quickly and easily.
Not Planning for Disability and Long-Term Care
Almost 70 percent of those aged 65 or older will require some type of long-term care before they pass away. Depending on the part of country one wants to live, a private room in a well-rated nursing home can cost upwards of $100,000 per year. Additionally, if someone simply wants a home healthcare aide, these services can cost more than $50,000 per year.
With nursing homes and personal care aides costing so much money, long-term care is estimated to be the most underfunded retirement cost. Taking into account these facts, accounting for long-term care in your estate plan is vital. While you are still of working age, planning for long-term care would be to take out disability insurance in the event you were involved in a serious accident. As you move towards retirement age, planning for long-term care shifts to saving for care and stating exactly what your long-term care will look like.
Not Planning for Estate Tax Liability
In 2020, the gift and estate tax exemption is $11.58 million for an individual and $23.16 million for married couples. The 2017 Tax Cuts and Jobs Act doubled the lifetime gift tax exemption from previous levels. These exemption levels are set to automatically expire at the end of 2025. When this occurs, the estate and gift tax exemption will lower back down to $5 million for an individual.
With the government in need of revenue, raising estate taxes on wealthy families is one of the most likely actions the Biden administration will make.
Improper Ownership of Assets
Planning for your estate can quickly expose issues with asset ownership. The first issue that our estate planning attorneys commonly see is spouses not owning property jointly. Certain people may want to own property separately from their spouses. However, when couples do own their property jointly, it creates creditor protections when looking to transfer property after the first spouse’s death.
Improper ownership of asset issues commonly occurs when a business owner incorrectly titles business property in their own name. Additional issues come up when retirement accounts are put into a trust when these accounts should be kept out of trust.
Other issues commonly occur when people think they can outsmart the estate tax system by deeding real estate to their children or selling the property for a single dollar. However, the government treats these transactions as gifts, potentially creating a gift tax liability or at least a requirement to file a gift tax return form to the IRS.
While it is important to have asset liquidity during your lifetime, it is also important to have liquidity after you pass away. For example, if you would like your estate to be split between your children, surviving spouse, and favorite charity, you must have a fair amount of liquidity. One of the most common ways to gain liquidity is to take out a life insurance policy to help pay off existing debts while also being able to pass on wealth to your family.
If you own a business, it is extra important to ensure that your estate has liquidity so that your beneficiaries can keep running your business after you pass away. Additionally, if you have a buy-sell agreement liquidity becomes even more important as, without enough liquidity, the buy-sell agreement could cease to exist.
Not Considering the Impact of Income Taxes on you and your Beneficiaries
Depending on the types of assets you leave your beneficiaries, they may have to deal with unintended taxes. Most people are aware that their IRAs and 401(k)s are subject to required minimum distributions (RMDs) after age 70.5. However, you might not know that inherited accounts can also be subject to RMDs. Further, if you are passing on 401(k)s or IRAs to an adult child, these accounts are subject to RMDs and could also impact your child’s tax situation. In these cases, the money will be taken out of the inherited accounts each year and both IRAs and 401(k)s will be taxed on their entire distribution. For the individual, the RMD is combined with their current income and is taxed as such. Thus, if your child inherits these accounts during their highest-earning years, the distribution will be taxed at an extremely high rate.
Not Planning for Minor Children and Beneficiaries
Parents often focus on the values, morals, and judgments of someone when evaluating whether they should select them as a guardian for their minor children. However, parents commonly neglect the financial impact a child will have on a guardian. Thus, though the right morals, values, and judgments are necessary to be a successful guardian, there are a few other important characteristics to consider when choosing a potential caregiver for your minor children including:
- Can the guardian manage your children’s assets
- Is the guardian you chose financially strong
- Does the guardian have a home that can accommodate your children
- Will the guardian be able to determine your children’s living costs
Not Incorporating Charitable Gifting and Bequests
Alma maters, nonprofits, or churches are all common entities included in people’s estate plans. However, the Tax Cuts and Jobs Act of 2017 prevents Americans from itemizing many deductions and receiving the subsequent tax benefits for their charitable contributions. While tax benefits are not the only reason why people give to charity, these benefits are a nice bonus.
Not Reviewing Impact of Beneficiary Decisions on Retirement Accounts
Most retirement accounts are subject to required minimum distribution (RMD) restrictions after the owner of the account turns 70.5. The reason why those over 70.5 must begin taking distributions from their accounts is that the goal of qualified retirement accounts is to provide tax, investment, and creditor protection benefits to encourage and support retirement savings. However, retirement accounts are usually one of the largest assets a person owns. Thus, it will represent a large portion of a person’s estate. Thus, it is vital to consider how these assets will be transferred to your beneficiaries after you pass away.
Once an IRA or 401(k) account owner passes away, the creditor protections on these accounts are mostly removed and the beneficiaries of these accounts are required to spend the money within these accounts. What makes this situation more difficult is that wills and trusts do not have control over these accounts.
In some cases, it is better to gift these accounts to a surviving spouse instead of multiple children. However, given current taxes, it is typically better to give whatever assets you are leaving directly to the intended beneficiaries.
Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia create a variety of trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.
Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help you decide what is the best type of trust for you and your family and maximize the cost savings you receive from setting up a trust in DC, Maryland, and Virginia.
Contact Our DC Law Office for More Information
Finally, for more on ten common estate planning mistakes, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding estate planning, check out our blog.