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7 Biggest Estate Planning Mistakes

7 Biggest Estate Planning Mistakes

Estate planning is generally about as fun as taxes. You don't want to think about a time when you won't be here. But like taxes, death is certain, so you plan. But there's planning and then there's proper planning.

There are more than a few ways to mess up the best of intentions. Here's how to avoid critical estate planning mistakes.

Forget DIY

There's a lot to consider when creating an estate plan and you are going to need the help of professionals like an experienced estate attorney to draft a will and trust. You may need to consult your health care provider to discuss medical documents dealing with incapacity. Your financial advisor can help with estate taxes and protection. “If you're not an expert in these fields, don't pretend to be one. Estate planning is too big to do yourself, and too important to mess up,” says Tom Hegna, author of Paychecks and Playchecks: Retirement Solutions For Life.

Trying to avoid legal fees by using a form or non-attorney service from the Internet could create problems for heirs and administrators. Don't go cheap. The cost of “fixing” the problems, if they can be fixed, will often be far more expensive than the attorney fees for preparing a will or trust. “One of my favorite lines is from the old Fram Oil Filter commercial, 'you can pay me now, or pay me later,'” says Scott Haislet, an attorney and CPA.

Be clear about joint tenancy

The principal advantage of the joint tenant approach is that it's cheap, fast and easy. But Haislet, describes how it can be tricky.

Say mom owns real estate called Blackacre. She wants to leave it to her only child, Charlie. She could adopt a living trust to provide that Charlie gets Blackacre at her death. Instead, she transfer Blackacre to herself and Charlie, as joint tenants with right of survivorship, intending that she will die first and the property will automatically go to Charlie when she does (which it will if death occurs in that order).

However there are problems with joint tenancy. Does Charlie get a 100% “step up” in federal income tax basis? “It's not entirely clear,” says Haislet. What if Charlie is in a car accident with a big claim against him? The victim could seize Blackacre. What if Charlie dies first? Blackacre is in mom's estate and subject to probate. What if Charlie becomes incapacitated? If mom needs to sell or finance Blackacre, she won't be able to do it absent getting a court order, Haislet explains.

What's the solution? “Avoid those joint tenancy problems by establishing a living trust,” says Haislet.

Update documents

Julie Malekhedayat, a tax partner with Perisho Tombor Ramirez Filler & Brown says she had a client who had changed the title of two real properties in order to refinance. The client changed from revocable trust (living trust) to personal names. Then the husband died and the properties were no longer in the trust for administration and not available for funding the bypass trust. This issue is still open, but if the surviving spouse wants to use these properties for the bypass trust, she will need to go to probate court to try to return the properties to the trust, says Malekhedayat. Alternatively, the properties will need to go through a probate proceeding to pass the properties to the heirs. “The moral of the story – remember to re-title real estate to a living trust after refinancing.”

Furthermore, if the estate plan is outdated, your legacy could be going to the wrong person. People who have had multiple marriages and divorces or children in multiple relationships, they need to have a heightened awareness that their estate could be headed for trouble if they don't take action, warns Hegna. “If only Marilyn Monroe was alive today we could ask her. 'Did you really intend for your estate to go to your acting coach's third wife?' I'm sure she would say otherwise,” says Hegna.

Get proper protection

Most people don't realize how this low interest rate environment causes people to be underinsured. In a 1% interest rate, you need $5 million to produce $50,000 of annual income. Even in a 5% interest rate environment, yo need $1 million to produce $50,000 of income. “Don't leave the ones you love in a dangerous financial situation,” says Hegna.

Creditors can tap your revocable trust

Sometimes people think a revocable trust will protect their assets from creditors. This is generally not true says Haislet. The reason for adopting a revocable trust should be to avoid probate and avoid asset management in case of incapacity. Estate taxes can also be avoided or reduced in some cases, says Haislet.

Coordination counts

Some people don't coordinate the estate plan with beneficiary designations. They expect the family trust agreement to cover all of their planning, but assets that have a beneficiary designation (retirement plans, annuities and life insurance), for example, or are held in joint tenancy (bank accounts, cars), are not subject to the trust agreement, points out Mary Kay Foss, a CPA with Sweeney Kovar.

She had a client who named his wife as beneficiary of his trust. The trust agreement provided that his wife would get the residence outright and that his share of other assets would fund a bypass trust. With the IRA and the residence going directly to the spouse, there was only a small amount of assets that would go to the bypass trust. The solution was to have the widow disclaim an interest in the residence so there were more assets to fund a trust. The the residence was allocated to her as her share of the family trust.

Just do it

Procrastination could come back to haunt you and your heirs. No one knows when they are going to die. Right up there with not forming a plan, is pushing it off to a future date. You never know when “too late” is going to be. “Don't delay planning,” says Hegna.

If you fail to plan, the government will settle your affairs. Most likely, your remaining assets are not going to be distributed in the manner you desire. Even a simple will is better than nothing at all.

Says Hegna, “Failing to plan is the worst case scenario.”

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scottj   |     |   Comment #1
And with no deal on expirng tax cuts being reached we will see estate taxes go to $1m exempt and rest taxed at 55%. Grammy and Gramps should be locking their bedroom door for the next week
pearlbrown   |     |   Comment #2
Too funny Scott J.  If Grammy and Gramps stay home they should keep the curtains drawn to discourage visitors and also use some of that money to hire a personal taster just in case.   A nice long spur-of-the-moment cruise that ends after 1/1/13 might be better - as long as they don't share the details with any friends/family members. 

Paoli2   |     |   Comment #3
You two must not know normal granny and grampaws.  With so many of their adult children and grandkids out of work, WHO has the big bucks to hide from anyone?  The only big buck I know has antlers and is looking for food in some cold forrest!  Maybe granny can catch it and store it in the freezer for food for all the bad times coming.  On that note:  Happy Whatever you can still Celebrate Days to All!
Anonymous   |     |   Comment #4
Our tax system is soo messed up and unfair that you can no longer apply the old trusts or will solutions.
Do what I did, simple and very effective, buy high value life insurance and name the beneficiaries, that’s it.
I’m going to leave all of that without any complications or tax liabilities, since life insurance is received tax free to the beneficiary. When you reach 85 just convert the life policies into annuities, the same principle apply, your beneficiaries receive the proceeds tax free.
Those are the secrets that your tax attorney or tax advisor will never tell you about, because you are putting them out of business and they have no incentive to even mentioning them to you.
It works, whether you have $10K or $10Millions in assets is irrelevant. If you have properties all paid for, get mortgage(s) and fund life insurance policies, problem solved.
Anonymous   |     |   Comment #5
So Tom Hegna writes a book that just says to hire a pro? No wonder the book can't be bought in hardcover from Amazon itself (and anyone can publish an e-book). Using a few unusual example cases to justify that everyone hire a pro isn't helpful. Younger folks are likely to need to restate their trust later in life (eg, 20-30 years) to account for births & deaths, and that can be done with or without a pro. Once a trust is in place the will merely needs to state that any remaining assets be placed in the trust.
Anonymous   |     |   Comment #6
Joint tenancy works well
Anonymous   |     |   Comment #7


Dear Ms Nance-Nash,

>> Procrastination could come back to haunt you and your heirs.
>> No one knows when they are going to die.

Err ... Really?  ... I thought it was the other way around.

Is it not that after you die, you get to haunt others, rather than anthing else coming to haunt you.  ;-)

Yours Truly,

Paoli2   |     |   Comment #8
Yours Very:  You only get to "haunt" others if you are a bad ghost.  If you are a good ghost you get to visit your friends and tell them where to find all the great paying CDs!   So be sure to stay friendly with everyone and only bring back "good" ghosts!
Anonymous   |     |   Comment #9
Remember life insurance is only as good as the company issuing it. Think of AIG. The insurance segment of the company was doing well but without a major bailout the entire company would have folded. If you think annuities are safe, they are only "insured" (if you want to call it that) up to a certain point by the individual state where it is sold. Often the cap is 100K. Just a word to the wise.   Ken
Anonymous   |     |   Comment #10
1. donate all your property to your favorite University

--immediate charitable tax deduction

--tax bennefited income for your life

--you become a "hero on campus"--(free football tickets)

2. put your heirs on all your CDs, Bank/Credit Union and Brokerage Accounts (Joint with rights of survivorship)

--if you cant trust them to not take the assets away before you die-then, they shouldnt be your heirs

--no probate, no wills, no estate tax

3. die broke

there you are--and may I suggest the winner of the BCS bowl--alabama or notre dame as the University

Paoli2   |     |   Comment #12
#10  Why would anyone want an heir they couldn't trust?  Give to the Animal Society first and save some animals!  BTW why not just put heirs on CDs as PODs and one can make sure no one is touching the funds until we have gone off forever. 
Anonymous   |     |   Comment #11
Anonymous #9:  As a FYI on state coverage on annuities. 

I recently called my state's dept of insurance that's in "charge" of the so called coverage on annuities.  I asked them a few basic question.  They said they were in process of changing the rules and would not tell me either the CURRENT law or the proposed law.  They wouldn't even give me a time frame when the so-called new law would take affect.  So in my opinion, with the states' bad budget, I would count on them covering anything for the annuitites.  Pick your insurance company carefully!
playc   |     |   Comment #14
TO: Anonymous - #4, Monday, December 24, 2012 - 11:00 AM

1) Thanks for your post and I want to learn more from you.  Would you please provide more detail and specific for the steps/list on your strategy?

2) I am in Texas and was told the Annuity is insured up to 1M.  Anonymous - #9 post says the cap is 100K.  Can someone clarify?
Anonymous   |     |   Comment #17
Considering that it isn't uncommon at all for people to live into their late 80's & beyond these days ,I sometimes wonder what the average age around here must be with all this serious conversation about kicking the bucket.
Anonymous   |     |   Comment #18
To lou - #16,

You do not have to qualify your life for $2Mill contingent on your health, you show proof of assets of $2Mill and if they refuse to qualify you, just hire an attorney, the life insurance company will send you an apology with reduced rates.

I have done it, so are many of my friends too.

Remember, you are not buying longevity life policy, you are buying life insurance policy based on your life style (assets).
lou   |     |   Comment #19
#18, I am confused. I would have thought any insurance company would ask for your medical records prior to selling you a $2 million policy. A life insurance policy is a bet on your longevity, not necessarily based on your assets. What am I missing? Is this whole life, where you would fund it with a large upfront payment?
Anonymous   |     |   Comment #20
He is probably talking about universal life
Paoli2   |     |   Comment #22
I thought the type of Million Dollar policy was a special one to cover you against law suits.  If it is then there is no reason for them to need to know about your health.  The regular polices on your life would be interested in health problems. 
Anonymous   |     |   Comment #23
I'm a life agent and have issued many similar policies, just do the following:

You get either, Endowment insurance (is paid out whether the insured lives or dies, after a specific period) or Universal Variable life ( is the type of insurance which gives you more control of cash value account policy features than any other insurance type) and include a rider with No Medical Exam Life Insurance.
The value of the policy can be in relation to your present assets. Any reputable insurance company will be happy to issue you such policy.
scottj   |     |   Comment #26
I see our resident idiot is back, feel bad for you that this all you have to do with your life
scottj   |     |   Comment #27
On and very nice to see $5million exempt on estates is now permenant