Ten Common Estate Planning Mistakes And Solutions

By Robert W. Kessler, Esq.

A primary purpose of estate planning is to preserve and distribute assets to beneficiaries in accordance with a client’s wishes in a timely manner while minimizing taxes.  Most of my clients are intimidated at the onset, but I assure them that if they can tell me what they want to accomplish in their own words, we can work together to achieve it.  Discussing care of spouse, children and loved ones first, then the values and organizations they care about, form the basis of a good plan.  With refinements, a plan emerges bringing my clients satisfaction and peace of mind.

Here are some of the most common estate planning mistakes that people make and their solutions:

 

1.  Failure to review estate plan in light of new tax laws and to maximize $2,000,000 federal exemption and $1,000,000 New York exemption.

A properly planned estate with a trust for surviving spouse and family can maximize both spouses’ exemptions and shelter at least $4,000,000 from federal estate tax, for savings of approximately $1,000,000 compared to simple Wills.  The mistake occurs if the first spouse leaves the entire estate to the surviving spouse, wasting the deceased spouse’s $2,000,000 federal exemption and $1,000,000 New York exemption.  Many clients underestimate the size of their estate not realizing that their life insurance, retirement plans, inheritances, and jointly held real property and stocks are all included in their taxable estate.  However, if the combined assets are less than $2,000,000, putting more than $1,000,000 in a by-pass trust can create an unnecessary New York tax.  Old tax planning Wills done when the exemptions were considerably smaller can create unintended adverse taxes.  Sending your attorney an updated list of assets will trigger recommendations to maximize the best use of your federal and New York exemptions.  In these changing estate tax times, a disclaimer Will can provide the most flexible plan and give the surviving spouse the option to set up the best tax savings trust.

 

2.  Failing to understand the impact of the increasing federal exemption from $2,000,000 to $3,500,000 in 2009 and potentially more in the future on your current estate plan with by-pass trusts.

As the exemption increases, the amount of assets passing to the by-pass  trust increases which will significantly decrease the amount passing to the spouse.  The traditional by-pass trust required funding with the current federal exemption amount, with the balance passing outright to the spouse.  Making the spouse a beneficiary of the tax-savings trust protects the spouse from being short-changed.  In multiple marriage situations, leaving the exemption amount to children and not to a spouse will clearly result in the spouse’s share significantly decreasing under the new tax law.

 

3.  Incorrect ownership of property to maximize exemption.

Not only do wealthier clients need to have a tax-savings trust set up in their estate plans, but each spouse also needs to have at least $2,000,000 of assets in his or her name alone to fund their trust.  This requires reviewing the assets and often transferring assets like a house or cottage or joint stocks into the other spouse’s name.

Unlimited gifting between spouses is permitted without any gift tax returns needing to be filed.  The key is to balance estate assets to allow each spouse’s trust to be funded with non-retirement assets, irrespective of which spouse dies first, and joint ownership should be avoided.

 

4.  Incorrect beneficiary designations.

The largest assets in many clients’ estates are retirement plans, rolled over IRAs or life insurance.  All these assets pass by beneficiary designation and need to be coordinated with the estate plan; otherwise, all assets could be designated to a spouse, and there would not be sufficient other assets to fund the tax-savings trust.  In many cases, the proper primary beneficiary should be the spouse with “The Trustee named in my Last Will and Testament admitted to probate” as the secondary or contingent beneficiary.  This will allow the surviving spouse to either take the assets or “disclaim” them into a tax-savings trust, if necessary.  This is the most flexible designation in light of the changing estate tax laws.

 

5.  Improper life insurance ownership.

In estates over $2,000,000, the client should not be the owner of his or her life insurance.  This can result in estate taxes of 50%, with 50% pass to the family.  Having old policies or new policies owned by an Irrevocable Life Insurance Trust will allow the proceeds to be available to surviving spouses and pass to the children without being taxed in the survivor’s estate – a savings of 50% of the face value of the policy.

 

6.  Failing to consider lifetime gifts to maximize the $12,000 annual exclusion and $1,000,000 gift tax exemptions.

The gift tax annual exclusion now allows $12,000 to be gifted to any number of individuals each year.  Each $12,000 gifted saves $6,000 in estate taxes.  Larger gifts can be made resulting in a reduction of the $1,000,000 exemption with no gift tax having to be paid.  Gifting property with the potential for appreciation will remove the appreciation from your estate.  Clients are now looking at leveraging their gifts through the use of personal residence trusts, grantor-retained annuity trusts, family limited partnerships, and family limited liability companies.  Since discounts are recognized for these techniques, more can be gifted free of any tax.

 

7.  Not using the current $2,000,000 generation-skipping tax exemption to reduce estate taxes in children’s estates.

Leaving property outright to children who are wealthy will cause those assets to be taxed in the child’s estate before passing to grandchildren.  A grandparent now has a $2,000,000 exemption and can provide income and principal to children and grandchildren as needed, and the trust will pass estate tax free to the grandchildren on the child’s death.  Any amount in excess of $2,000,000 can be left outright to children.

 

8.  Failure to consider charitable gifts in an estate plan, especially from IRAs.

IRAs passing to children are potentially subject to estate taxes of 50% and income taxes of 30%, leaving only about 20% available to the children.  Designating a portion of an IRA to charity will result in no estate or income tax.  Other assets not subject to income taxes can be left to children, or a life insurance policy can be purchased to replace the assets passing to the charity.

Charitable remainder trusts during lifetime are still a favored technique to save both estate and income taxes and to diversify a highly appreciated asset with no immediate capital gain taxes while retaining an income stream of 5% or more.  A client would receive an income tax deduction for the value of the interest passing to the charity.

With wealthy families consisting of a few children and grandchildren, more clients are looking for tax efficient ways to give something back to their colleges or communities that gave them their foundation for success.

 

9.  Failing to plan for disability or terminal illness and protecting assets from nursing home spend-down.

Every client needs to have a durable Power of Attorney that designates a spouse and/or close family member to manage his or her affairs in the event either is traveling or becomes disabled.  Otherwise, a court would have to appoint a guardian to act on their behalf.  As clients get older, we recommend more than one person be designated on a Power of Attorney.  It is important that the power to make gifts be included, so any gifting plan started could be continued during a disability.  Medical decisions are controlled by a Living Will and Health Care Proxy that every client should have, and a copy should be given to their physician.

Planning can be done through gifts, loans, Supplemental Needs Trusts, and Medicaid trusts to protect assets from nursing home costs.

 

10.  Procrastination

Estate plans should be reviewed and updated when the law changes, your assets change, or there is a change in circumstances regarding your intended beneficiaries.  Unexpected death or disability can occur, and you need to have a current plan to carry out your objectives.  Calling an estate planning attorney for a review or update would avoid the potential mistakes listed above.


Robert W. Kessler, Esq. is a frequent lecturer on estate planning and a Fellow of the American College of Trust & Estate Counsel.  He is also involved in with numerous charitable organizations and is the past Chairman of the Board of Directors of The Community Foundation.  Partner in Woods Oviatt Gilman LLP.