Top Ten Mistakes: Estate Planning

Estate planning mistakes are the most expensive, disruptive and divisive problems anyone could impose on a surviving spouse and children. Here is my top ten list of the major mistakes people make when completing their estate plans:

1.  Using a Bypass Trust for (many) under $11 Million Estates

Federal law permits anyone to give up to $11 million tax free (2018 amount), known as the Bypass amount. The Bypass Trust was an indispensable part of most estate plans not that long ago, since the Bypass amount has been far lower over the past 30+ years, and the Bypass Trust helped may couples avoid estate taxes altogether. Bypass Trust earnings are subject to income and capital gains tax, but at that time those taxes were far lower than the estate tax. Now, income and capital gains taxes are much higher than before, and estate taxes are gone for most people. The main advantage of a Bypass Trust, getting lower income and capital gains taxes to avoid higher estate taxes, is now a disadvantage for most people.

2.  Not making annual gifts

Up to $15,000 per person per year may be gifted tax free (2018 amount). For those who can afford to do so, and feel comfortable enough to make these gifts to the intended recipients, making these gifts is an excellent way to reduce the size of your estate and the accompanying estate tax. Gifting tangible assets within the annual limit (such as jewelry or family heirlooms) is also a great idea - it reduces your estate tax just as monetary gifts do, and it reduces the fighting about who gets what since the gifting has already been completed.

3.  Not paying a grandchild's tuition (§529 plans)

Income from a §529 Plan accrues and is paid out tax free when used for defined educational expenses. If you plan to leave your estate to your children and they would be paying for your grandchild's education, funding a 529 Plan not only provides tax free income, but also avoids estate taxes altogether. Even better, direct payment of a grandchild's tuition is not considered part of the $15,000 per year annual gift exclusion. If you have sufficient assets, this is a no-brainer.

4.  Failing to complete deeds, change of ownership
     and beneficiary statements

A living trust does not avoid probate if your assets are not transferred into the trust and change of ownership and beneficiary statements are not filed with the insurance company and retirement plan administrator. Proof of recordings and filings should also be obtained, since the IRS will not accept the excuse that your filing got lost in the mail.

5.  Substituting Joint Tenancy for Estate Planning

People may think that joint tenancy is an easy way to avoid probate. They are right - except they fail to consider the negative consequences of joint tenancy, and there are other ways to avoid probate. Transfers in joint tenancy expose those assets to the joint tenant's debts, creates a gift tax liability when granted to a non-spouse, and disinherits children of first marriage from that joint tenancy property when the joint tenancy is given to a second marriage spouse. Joint tenancy should be used sparingly and even then only under the close supervision of an estate planning expert.

6.  Micromanaging the estate plan

Certainly, you should plan for contingencies - that's what planning is all about. On the other hand, contingency planning can go too far. Micromanaging an estate can cause you to lose a bypass trust tax exemption, or cause major fights if the assets specified are no longer part of the estate. Sometimes, it is best to give your executor and trustee a certain level of discretion to decide where specific assets go.

7.  Choosing the wrong people to fulfill your estate plan

Being the oldest or the smartest child does not automatically make that child the best choice for executor, trustee, guardian, or health care agent. Each of these positions have very particular demands, and the person appointed must be able and willing to fulfill those demands. Care must also be given to choosing appropriate successors, because the named person may not be able or willing to fulfill those duties.

8.  Assuming a domestic partnership or gay marriage has
     the same tax benefits as a heterosexual marriage

Federal law currently allows you to give an unlimited amount to a spouse tax free. However, that law does not yet recognize domestic partnerships or gay marriages (where legal) as qualifying for the unlimited marital deduction. Similar barriers exist for homosexual unions in many other areas of estate planning. Special planning is necessary to maximize the estate planning benefits for gay and lesbian couples.

9.  Using online forms or a document service for estate planning

Drafting wills, trusts and other estate planning documents is the practice of law. Even if the documents being offered are "written by lawyers," laws on the administration of estates differ from state to state and can change year to year; generic forms cannot include any state specific references that could run afoul of another state's laws. Also, when you choose and complete your own forms, you have no attorney to ask (and answer) the right questions, decide the right estate planning approach, order and properly complete insurance and retirement plan forms, and confirm that all documents have been properly drafted, signed, witnessed and recorded. Finally, having an estate planning attorney provides you with a source of ongoing representation, informing you of changes in the law that may impact your estate and require changes to your plan.

10.  Not completing or updating your estate plan

Without an estate plan, your state decides who administers your estate and where your assets will go. Probate is frequently required of an intestate estate (no will or trust), costing the estate unnecessary lawyer and executor fees. Finally, an intestate estate has not taken any steps to reduce the impact of estate taxes, costing the estate (and heirs) far more than would have occurred with even simple planning. Also, changes in your family situation (marriages, births, deaths, divorces) can require changes in your estate plan, so you must inform your attorney of these events so required changes in the estate plan can be completed.