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Ten Common Estate Planning Mistakes

  1. Titling property jointly with your children as a substitute for a will

With a will or Revocable Living Trust, you make contingencies in case your initial beneficiaries listed are either disabled or deceased. Having a second or third contingent beneficiary is crucial because it helps to avoid probate court. Additionally, titling your personal residence jointly can result in partial loss of the capital gain exclusion if it is sold before your death or result in a gift tax at a 50 percent tax rate.

  1. Failing to plan for the possibility of children getting divorced or having problems with creditors

A major estate planning mistake lies in divorce. Parents often regret having made outright gifts to their children when the child subsequently divorces and the ex-son or daughter-in-law is awarded an interest in the gifted property by a court, or when property is taken pursuant to a legal creditor judgment against the child. These problems can be reduced through Trusts because they have a spendthrift provision, which prevents the inherited money being subject to a divorce or creditor of the surviving beneficiary.

  1. Underestimating family conflicts caused by an inheritance

Any person setting up a Will or Trust should strongly consider the family dynamics when deciding who should be a Trustee and who should inherit their estate. For example, Ann dies and has a surviving spouse from a second marriage. Ann also has two children from her first marriage. Without a Living Trust, this family will likely have a serious problem. If the estate is not properly structured, the second husband and Ann’s children from the first marriage will likely dispute who is entitled to plan the funeral, inherit from the estate, and whether the second husband should continue living in the residence that Ann and the surviving spouse once lived in together.

  1. Failing to plan for the possibility of a guardian for your children if they are under age 18

Many families fail to plan who they will choose to be the guardian over their minor children. A few factors should be considered.

  • Who is your first, second, and third choice for guardian over your minor children if you and your spouse are deceased?
  • Should one or two guardians manage the finances and parental responsibilities?
  • What happens if your choice of guardian is divorced or unmarried?
  • What school district and lifestyle will your children have if you choose certain people as guardians?
  1. Failing to plan for children that you do not consider to be your children or grandchildren

Families, especially those with a high net worth, often ask an estate planning attorneys to eliminate language in their Wills or Trusts that state they want to provide for any unborn or adopted children not listed in the Will or Trust. Many professionals are concerned about illegitimate children or grandchildren claiming a right to a family inheritance that the family was unaware of.

  1. Underestimating the true value of your estate for Federal Estate Tax Purposes

Many estate planning mistakes happen out due to lack of information. Many people are unaware that life insurance proceeds are includable in their taxable estates upon death. The estate tax unified credit is currently $2 million and if properly structured, an estate tax can be eliminated or greatly reduced with some simple planning techniques.

  1. Selling real estate without considering the benefits of “step up” in tax basis upon death

For example, Ann owns two real estate properties and is 85 years of age. She is considering selling the property upon her death. If Ann sells the real estate properties upon her death, she may pay a substantial capital gain’s tax because of having a low tax basis in her real estate properties. If Ann does not sell the real estate properties and she dies, her family gets a “step up” in tax basis in the real estate property which eliminates the capital gain’s tax on the real estate properties.

  1. Protecting loved ones from a substantial inheritance

One benefit of a Trust is that the creator of the Trust can put restrictions on use of a beneficiary’s use of Trust’s assets to protect a beneficiary from their inability to manage money, protect a beneficiary from immaturity, and guaranteeing that a beneficiary will not spend all their inheritance by selecting a Trustor that is good with managing money. For instance, one always should strongly consider how to protect their children and their children’s lifestyle such as choice of educational institutions if the guardian is irresponsible with money.

  1. Failing to plan for incapacity or disability

Families should have appropriate powers of attorney for property and healthcare to appoint a guardian or conservator to act on their behalf if they become disabled or unable to make healthcare or financial decisions for themselves. For instance, if you became disabled today, would you be able to pay your bills or continue running your business? If you have business partners, would your business be able to withstand your absence for a substantial amount of time without draining company resources? Do you have an adequate buy/sell written partnership agreement and the proper funding vehicles to fund the buy/sell agreement in case of a disability or incapacity?

  1. Failing to review and update your estate plan every couple of years

Law changes along with personal, family and business changes make it necessary to update your Will or Trust. For a lot of families, a Trust is more appropriate than a Will. Seeking out an estate planning expert can prevent your family from conflicts and substantial legal fees associated with probate court. A second opinion is always a good idea because few attorneys are experienced in estate planning and fail to understand the complicated family conflicts and ever-changing estate tax laws. This is often where estate planning mistakes happen. For example, have you had a baby, moved to a different state, accumulated additional assets, or been married or recently divorced? If you have had a substantial changes in your family or personal life, you should strongly consider scheduling an appointment with an estate planning attorney.

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