 Provided
by the Law Offices of RICHARD MAYBERRY
MAYBERRY LAW FIRM
2010 Corporate Ridge
McLean, VA 22102
(703)714-1554
Committed to providing the highest quality estate planning legal services for
individuals, families and businesses |
Mistakes, like potholes in a road, are just part of life.
Period. Most mistakes and potholes, however, are avoidable once you know where they are.
So it is with common estate planning mistakes. Here are 10 common estate planning
"potholes" to avoid. (Note: These are intentionally unnumbered. The significance
of any given "mistake" will vary given individual circumstances.) No Plan
Probably the most common mistake is the failure to plan. Statistically, 70 percent of
Americans have no plan at all. Why? Good, old-fashioned procrastination. Consider it human
nature. Who relishes facing the possibility of their future incapacity and the certainty
of their own death? Nevertheless, as matter of "personal responsibility" only
you can make your Life & Estate Plan a top priority. Otherwise you expose yourself,
your loved ones and your hard-earned assets to unnecessary probate and death taxes. Take
time to carefully think through, implement and then update your Life & Estate Plan.
You and your loved ones will be glad you did.
No Incapacity Planning
Too many people regard Life & Estate Planning as merely an after-death distribution
program for their assets. While this is an important component of proper planning, a
comprehensive plan begins with planning for the possibility of your own incapacity. The
law requires every adult American to make their own personal, health care and financial
decisions. However, if you have not legally appointed the agent/decision-maker of your own
selection in advance of your incapacity, then one may be selected for you by a probate
judge who likely does not know you or your wishes. This process may invade your privacy by
making your personal and financial circumstances a matter of public record.
No "Back-Up Parents"
Silver and gold aside, most Americans consider their children to be their most important
assets. Parents may devote considerable time and treasure to providing educations,
social/athletic activities and religious training for their "two-legged
investments." Incredibly, these same parents typically fail to legally appoint the
guardians (i.e. "back-up parents") for their minor children in the event both
parents die. Who would you name as guardians to take your place and take care of your
"most important assets"? What instructions would you give the guardians to carry
out your goals and dreams for your children? You must legally appoint the guardians in
advance of tragedy. By the way, listing the guardians on a cocktail napkin in the airport
lounge will not work.
No Inheritance Protection
No one values a dollar like the person who earned it. If you do not incorporate
inheritance protection into your Life & Estate Planning, your hard-earned assets could
be squandered by your surviving spouse's new spouse, your children/grandchildren, or lost
to their divorces, lawsuits or bankruptcies.
No Estate Tax Planning
A married couple, assuming both parties are U.S. Citizens, may lawfully protect up to
$1.35 million* of their assets from federal estate taxes through proper Life & Estate
Planning. However, if your "plan" includes the joint ownership of assets between
spouses, with reciprocal beneficiary designations and simple, "sweetheart"
wills, then you are likely shortchanging your loved ones and unnecessarily enriching the
IRS. In fact, on an estate of $1.35 million, the taxes could exceed well over $200,000.
* Note: This figure is scheduled to increase incrementally to $2 million in the year 2006.
No Estate Tax Planning For Life
Insurance
Life insurance is a fundamental financial tool for most Americans. Whether it is intended
to help provide support for a surviving spouse and minor children, cash liquidity to
satisfy federal estate taxes, or myriad other valuable uses, most Americans do not own
enough life insurance and do not own their life insurance properly. One of the greatest
tax myths is that life insurance death benefits are "tax-free." While a lump sum
payment of the death benefit may be "income tax-free" when received by the
beneficiary, the entire value of the death benefit is part of the policy owner's estate
for federal estate tax purposes. This is true if the policy owner held any "incidents
of ownership" (e.g. access to any cash value or even the authority to
change
beneficiaries) at the time of their death or transferred ownership of the policy within
three years of their death. You may structure your life insurance to avoid federal estate
taxes and still fulfill your objectives through a properly structured and coordinated Life
& Estate Plan. Otherwise, you unintentionally may have made the IRS beneficiary of
over half of your life insurance.
No Probate Avoidance Planning For
Multi-State Real Estate
Absent planning otherwise, real estate is subject to probate in the state in which it is
located. Accordingly, if you own real estate outside your home state, then such real
estate may go through probate in that state before it may be transferred to your loved
ones. Probate, whether in your home state and/or in another state can be avoided if you
desire. In some states probate is less burdensome than in other states. However, if you
choose to avoid probate you must make appropriate legal plans.
No Tax Planning For Retirement Plans
Due to the unprecedented performance of the stock market over the past several decades,
coupled with the government's encouragement of employer-sponsored retirement plans, much
of the private, individual wealth in America is in qualified retirement plans. Without
careful coordination between one's financial plan and one's Life & Estate Plan, over
75% of a married couple's retirement monies may go to the IRS instead of their loved ones.
With proper coordination between the two, the impact of taxes on these unique assets can
be substantially minimized and perhaps even replaced (through special life insurance
arrangements).
No Business Succession Planning
Statistically, only 30% of family businesses survive from the founding generation the
next. The success rate thereafter is even more dismal. Just like individuals, business
owners fail to make plans, have the wrong plan or even an outdated plan for the eventual
transfer of their business. A comprehensive Life & Estate Plan should incorporate
planning for the business succession, especially when it is the major family asset. For
example, if some children are "active" in the business and others are not, how
do you treat everyone equally as well as fairly when you are gone? Or, if the business is
to be sold to other shareholders, key employees or a third-party purchaser, how do you
structure the sale to protect your loved ones when you are gone? Will there be sufficient
cash liquidity in your estate to pay any death taxes due or will illiquid assets be sold
to raise the cash needed?
No Lifetime Giving Program
One overlooked and therefore underutilized opportunity under the tax code is the
"annual gift exclusion." This allows you to give up to $10,000 tax-free to as
many individuals as you desire. No tax is assessed on the transfer to the donor or the
donee. For estates already subject to potential federal estate taxes at rates ranging from
37% to 55%, this technique not only removes the gifted asset's value from the donor's
estate valuation, but also any future appreciation on the asset. Note: Competent
professional advice should be sought before making a gift of "appreciated
property" because of special capital gains treatment such assets receive upon the
death of the owner.
Conclusion
Like potholes, common estate planning mistakes can be avoided. We have looked at 10 common
"potholes" that can disrupt your plans for yourself, your loved ones and your
hard-earned assets. To safely navigate them make sure you seek competent legal counsel. |
