Thinking about death is not a very pleasant experience. Perhaps that is why only about 45% of adults in the United States have estate planning documents. Unfortunately, we have seen many people pass away, only to see their estate plan fail to do what they had intended. Here are some of the more common errors we have seen in those plans:
X
Not Having a Written Plan – For those unwilling to make the effort to put their plans in writing in a last will and testament, you will subject yourself to the state’s plan. If you die intestate, your assets will be distributed based on the inheritance tax laws of the state where you are domiciled. These laws vary throughout the country, but typically leave percentages of your assets to various family members based on their relationship. While these laws might accomplish what you had intended, it is highly unlikely. Your will only applies to assets subject to the probate process. Assets with beneficiary designations such as 401(k) plans and Individual Retirement Accounts will supersede any intention you may have noted for these assets in your will.
X
Maximizing Annual Gifts – Gifting is the most utilized method to minimize estate taxes. There are several different exemptions and deductions available for the reduction of estate taxes; including:
X
- The lifetime exemption – $5,490,000 in 2017
- The marital deduction – unlimited gift to spouse during life or at death
- The annual exclusion gift – $14,000 in 2017
- Direct transfers for tuition/education – unlimited
- Direct transfers for medical care – unlimited
- Estate charitable deduction
X
More complicated strategies such as sales/gifts to defective grantor trusts and life insurance trusts can be implemented in larger estates to effectively minimize the value of one’s estate. There are ample tools available to minimize the estate tax. Failing to utilize a full complement of these tools could result in an excessive estate tax.
X
Titling of Assets – The titling of assets is a property law concept with estate implications. An account that is held jointly with right of survivorship will pass automatically to the survivor of the joint owners. It will not be subject to any intentions you had for the property in your will. Why does this matter? Assets can flow to the wrong people due to old, wrong and/or out-of-date designations, often with unintended estate and income tax implications.
X
Failure to Review Beneficiary Designations – As previously noted, certain assets and accounts allow for a beneficiary designation. These designations remain in place until they are updated or changed. So a 401(k) plan account that was set up many years ago at a previous employer might still have an ex-spouse or another beneficiary that may no longer be a preferred person in your life. Make sure you take a look at these designations periodically and update accordingly.
X
Failing to Update the Plan – Just because you have set up a reasonable plan, do not think that your work is done. Life circumstances are constantly changing. Laws are constantly changing. The estate tax exclusion has bounced between $2 million, to unlimited, to currently about $5.5 million. The current President has proposed additional changes to the estate tax laws. As these changes occur, updates to one’s estate plan need to be made accordingly.
X
Leaving Assets Outright to Children – Trusts have been in existence for hundreds of years. It has often been said that trusts allows one to control their assets from the grave. Whether or not continued control of assets is your goal, there are other compelling benefits to consider. Proper use of trusts can also protect assets from certain legal disputes, creditors, ex-spouses etc. Like it or not, our society has high levels of litigation and divorce, and this should be taken into consideration when leaving assets into a trust.
X
If you have any questions regarding this article, please contact Jamie Downey at 800-849-6022 or at jmdowney@downeycocopa.com.
