Whether your estate
plan is simple or complex, there are many details, which are often overlooked,
that can undermine your plan’s effectiveness. Are you aware of these common
estate planning mistakes?
Titling property jointly
with your children as a substitute for a will.
Unlike a will, a transfer of an
interest in your property is irrevocable, which may prevent you
from changing the disposition if circumstances change before your death.
Also, titling your personal residence jointly can result in partial loss
of the capital gain exclusion if the property is sold before your death.
Failing to plan for the possibility
of children getting divorced or having problems with creditors.
Parents may regret having made
outright gifts to their children if they subsequently divorce and an
ex-son- or daughter-in-law is awarded an interest in the gifted property
by a court. Or, in another situation, gifted property may be taken
pursuant to a legal judgment against the child. Such problems can be
minimized through the proper use of trusts or a business entity, such as a
limited liability company.
Failing to make sure that
all your assets pass in accordance with your wishes upon your death.
Many types of assets, including life
insurance, IRAs, and brokerage accounts, can pass to your heirs or others
based on beneficiary designations. The provisions of your will cannot
change a beneficiary designation. Remember to account for things you’ve
already designated. You should review your will, as well as all other
beneficiary designations when formulating your estate plan.
Underestimating the true
value of your estate for Federal estate tax purposes.
Many people are unaware that the
proceeds of their life insurance are includable in their taxable estates
if they own the policies. This could bring the total value of their
estates to more than the amount sheltered from estate tax by the
applicable exclusion amount. For people who pass away in 2022, the
exemption amount will be $12.06 million (it’s $11.7 million
for 2021). For a married couple, that comes to a combined exemption of
$24.12 million.
Failing to consider state
death taxes in light of recent changes in the law.
Many states have “decoupled” their
death taxes from the Federal estate tax, which means your estate could be
subject to death tax in a state even if no Federal estate tax is due. This
could result in an unpleasant surprise to your heirs upon your death, one
that might be avoidable with proper planning.
The laws of each state where you own property should be carefully
reviewed in order to determine the potential exposure to state death taxes
and how to minimize them.
Failing to maximize the
benefits of the income tax basis “step-up” at death.
Low-basis/high-value assets should
generally not be given away during your lifetime. The basis for capital
gain computation purposes will be increased to fair market value at death,
but the basis remains at the property’s original cost if the asset is
given away.
Some of these
common mistakes can be avoided with a few, simple actions. Early and thorough
planning can help you reach your financial goals and leave a lasting legacy.
