It never fails to amaze me that so many otherwise savvy
individuals, many of whom have their financial lives otherwise buttoned-up, use
poor judgment (or no judgment) when it comes to their estate planning.
The list of major estate omissions and poor choices is almost infinite.
Here are some of the mistakes that are frequently made.
1. Not having a
plan
Not having a will means that at your death the distribution
of your assets will be dictated by the inheritance laws of the state where you
were domiciled when you died. These “intestacy laws” vary from state to
state but, typically, leave percentages of your assets to various family
members. There is always a remote chance that these laws will accomplish
what you would have intended – but not likely. Even a simple plan that is well
thought out and results from the identification of your personal objectives
will be much more successful than nothing at all.
2. Online or DIY
rather than professionals
There has been a noticeable uptick in the number of people
who will look to the Internet to prepare their own wills and trusts. There are
dozens upon dozens of websites that will profess to offer you just the right
discounted estate planning documents. Even wealthy clients who stand to
benefit the most from expert planning advice have been impacted. Unfortunately,
relying on web-based, do it yourself solutions is a recipe for disaster. Estate
planning documents should represent the culmination of a well thought out
financial and estate plan. An amalgam of stand-alone documents does not a plan
make. Internet sites can provide you with documents but no actual advice
that fits you in the context of your specific financial and personal life.
3. Failure to
Review Beneficiary Designations and Titling of Assets
One of the most basic and most overlooked items on every
estate-planning checklist is the review of beneficiary designations and the
proper titling of accounts. Unwittingly, many people will often let beneficiary
designations and asset titling determine their estate plans for them, contrary
to their intentions. Why? Regardless of what your well-developed wills and
trusts say, your beneficiary designations and the title of your assets will
control the ultimate distribution of those assets. More recently, many states
have enacted legislation to convert even otherwise ordinary brokerage accounts
into accounts with beneficiary designations via Payable/Transfer upon Death
Registrations. All of these beneficiary designations absolutely control who
gets the asset at your death. The titling of assets is a property law
concept with estate implications.
4. Failure to
Consider the Estate and Gift Tax Consequences of Life Insurance
Life insurance proceeds are included in the estate when
owned by the insured at death. However, the insured may choose to transfer all
incidence of ownership during his/her lifetime thereby avoiding any potential
estate tax inclusion. Notwithstanding this accessible planning fix (usually via
trust), relinquishing ownership and control is not necessarily an automatic
decision. In some instances, large sums of available, tax-advantaged and
asset-protected cash has accumulated in permanent life insurance policies (i.e.
whole life). Accordingly, the decision as to how an insurance policy
should be owned and, as importantly, controlled, can be complex and is highly
individualized. In the right fact patterns, especially when tax is not the only
important consideration, credible arguments can be made for both trust
ownership and direct ownership.
5. Maximizing
annual gifts
Gifting is, probably, the oldest and best way to minimize
future estate taxes. The entire universe of exemptions and deductions available
for the reduction of estate taxes consist of: the lifetime exemption
($5.12 million in 2012), the marital deduction (for gifts to citizen spouses
during life or at death), the gift and estate tax charitable deduction, annual
exclusion gifts ($13,000 in 2012) and direct transfers (not to be treated as
gifts) for education (tuition) and medical care (both theoretically unlimited).
For the wealthy, maximizing all of these is smart planning. Making annual
exclusion gifts every year to as many family members (this includes anyone
close to you) as is financially prudent (given your financial situation) is
good planning. Over the long run, you can transfer significant sums of money
out of your estate along with any appreciation, thereby reducing the tax.
6. Failure to
Take Advantage of the Estate Tax Exemption in 2012
As every estate and financial planning practitioner will
tell you (and probably already has told you), making lifetime gifts is a simple
and effective estate tax minimization strategy. Simply giving away assets
at no gift tax cost will allow both the corpus and its appreciation to escape
the Federal estate tax on the passing of the donor. Using the exemption
equivalent amount during your life is better than leaving it for use at death.
The urgency is to act now to take advantage of the current estate tax
regime that it is set to expire at the end of 2012. Above and beyond the annual
exclusion gift limit of $13,000, the federal applicable exemption amount for
transfers during life (gifts) and death (estates) has increased (by indexing)
to $5,120,000 per person for 2012 — by far the highest it has ever been since
the establishment of the estate tax. Wealthy individuals who have both the
means and desire to do so, should plan on making these gifts during 2012.
7. Leaving
assets outright to Adult Children
In recent years, there has been a growing opinion among
advisors for wealthy families that assets should remain in trust, even for
adult children, for as long as possible for the asset protection and other
benefits that a trust can offer. For a wealthy couple with adult children, the
question may no longer be a one of legal capacity or maturity (although those
issues may still remain). The bigger questions may, more accurately, become:
who should really benefit from the fruits of my labor and how do I protect
those assets from creditors, potential creditors and ex-spouses. Over the
last several years, many states have been modifying this rule to allow for
longer trusts or have outright abolished the rule. Whether or not to leave
assets in trust for adult children depends on many factors; not the least of
which is personal preference. However, in our litigious society of high divorce
rates, leaving some assets in trust with fairly liberal access is certainly
worth consideration.
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