Everyone should have a plan for disbursing the results of their life’s efforts. It’s important to guard against some common mistakes, which could rob an estate of substantial sums of money. Since the top estate tax exceeds 50%, you should keep in mind these potential mistakes in reviewing your estate plan:
Underestimating the value of your estate.
Many people assume that because they’re “cash poor”, their net worth does not meet the threshold of a taxable estate. Taxable estates include hidden assets, such as home equity, retirement funds, death benefit of life insurance, personal assets and anticipated inheritances.
Missing the Portability Opportunity.
Portability allows the first spouse to die to transfer his or her unused estate tax applicable exclusion amount to the surviving spouse, who can then use it for his or her gift or estate tax purposes. If this election is not made timely at the first death, it is lost.
Not Considering the Qualified Disclaimer.
By disclaiming property left to you, you refuse to take the assets under a Will. Your estate plan can consider possible disclaimers and provide contingency plans. Qualified disclaimers can be used to rectify faulty estate plans.
Not Planning to Reduce the Tax Owed on Life Insurance Proceeds.
If insurance policies are owned by the insured, beneficiaries can be named, or the proceeds will be payable to the estate and death benefits will be included in the insured’s taxable estate. One way to avoid inclusion is by establishing a life insurance trust, which owns the policies. There are specific guidelines that must be met in order to gain a favorable tax benefit.
Failing to Appoint Qualified People to Oversee Your Estate.
Many personal representatives are not qualified to liquidate the estate, pay taxes and make short-term distributions on behalf of your estate. A trustee is needed who can handle long-term management as well as short-term needs, so you should choose one you can trust to carry out your intentions.
Not Realizing All Wills Go Through Probate.
Living Trusts serve many functions including controlling assets, avoiding probate, and letting your financial affairs be managed if you become disabled. You should also consider the need for a durable power of attorney. Estate tax savings techniques can be incorporated in such trusts to take effect upon the grantor’s death.
Ignoring Tax-Free “Step-Up” as a Way to Pass Money to Heirs.
When a person dies, his or her heirs typically pay no taxes on the gains in the investments they inherit, as the tax basis “steps-up” to the current fair-market value. This is not true for gifts.
Not Using the Annual Gift Tax Exclusion.
Individuals with substantial assets can make a significant dent in their taxable estate by making gifts, which are shielded, from gift tax, by the use of the annual gift tax exclusion.
Forgetting to Update and Communicate Changes in Your Plan.
Estate Planning is a process, not an event. As laws are revised and your situation changes, plans can be modified. And even the best plans can fail if your heirs are not apprised of your goals and desires.
*The purpose of this webpage is to provide general information, not legal advice. A qualified attorney should be consulted before implementing any plan.