Smart people who've worked hard all of their lives to achieve financial success often make dumb estate planning mistakes. Those mistakes can result in their families losing over half of their assets when they pass between generations. They can destroy much of a lifetime's work. And they can inflict a great deal of pain and heartache to the people they love.
The irony is that most of the mistakes are easily avoided. With a little forethought, people of average intellect can construct estate plans which perpetuate their estates for generations. To do that, you and they have to avoid these traps:
- Procrastination
- Trying to Take it with Them
- The "I love you" Will
- Lack of Liquidity
- Unbalanced Property Ownership
- Equal Distribution to Heirs
- Property Transfers Based on Non-Will Provisions
- Saddling Children with Debt
- Improperly-Owned Life Insurance
- "It's all been taken care of . . ."
1. Procrastination
Everybody has an estate plan. If you don't create one, on purpose, through carefully drafted wills, trusts and other documents, then your state legislature will step in with a plan of its own. This plan, called the laws of intestacy, dictates who will get your assets, how they will get them and guarantees that your estate will pay the highest possible estate taxes in the process.
If you're happy with your state legislature deciding who will receive your assets after you're gone . . . and especially if you want to pay the federal government the maximum estate taxes, then no additional work on your part is required. But if you're not, then you have to develop estate plans of your own and they have to be developed now.
2. The "I love you" will
Most people have very simple wills. They say that when one spouse dies, all of his/her property goes to the surviving spouse and, when they're both gone, all of the property goes to their children. Very straight forward. And, for people with modest estates, these wills work fine.
For people with estates which exceed $2,000,000, however, these wills create thousands of dollars of unnecessary taxes. These simple wills waste an opportunity to keep up to $1,000,000 of assets free of estate taxes. On a modest $2,000,000 estate, this single error can cost $480,000.
The solution is to have provisions in your wills or living trust agreements which create a bypass trust (also known as a credit-shelter trust) at the death of the first spouse.
3. Unbalanced property ownership
If each spouse owns substantially equal property, then bypass trusts can function neatly to avoid estate taxes on up to $600,000 of assets. However, if one spouse owns millions and the other spouse has only a small estate, the bypass trust's effect will be largely wasted if the less affluent spouse dies first. To avoid that, spouses should consider the benefits of balancing their property ownerships.
4. Property transfers based on non-will provisions
Most people think that their wills control who will get what when they die. Surprisingly, many assets are transferred based on provisions which can contradict but supersede those of a will.
Bank accounts, certificates of deposit, retirement plans, IRAs, annuities, life insurance policies, real estate and countless other assets are often not controlled by wills. In the case of jointly-owned assets - bank accounts, stock accounts and real estate are often owned this way - the surviving joint owner often becomes the sole owner of the assets. And retirement plans, IRAs, annuities and life insurance proceeds transfer to named beneficiaries, not necessarily to the people named in a will.
Property ownership forms and beneficiary designations need to be coordinated with your will planning. If they aren't, your carefully drawn will can become meaningless and the estate tax savings which it tried to create will be defeated.
