|
Tips to Avoid
Common Estate Planning Mistakes
By Michael Curtis
1. Complete Your Foundational Estate Plan
The failure to complete a
foundational estate plan (revocable trusts, Wills, financial powers of
attorney, health care directives and asset transfer documents) is the single
biggest mistake people make. Planning
is required to deal with sudden unanticipated tragedies. We are not invincible. Don’t delay in completing your estate plan.
The consequences of the failure to plan often
include:
·
State intestacy laws controlling the process (e.g., court
supervised probate) and the distribution scheme (e.g., outright distributions
when trusts would be preferable, court supervised guardianships for children
until age 18, outright distribution to children over age 18);
·
Court supervised conservatorship proceedings in the case of a
disability during lifetime; and
·
The inability to take advantage of transfer tax (gift, estate and
generation-skipping) planning opportunities.
2. Don’t Make Mistakes After You Have Signed Your Foundational
Estate Planning Documents
Once foundational estate
planning documents have been signed there is still work to be done to make
the plan and the planning documents fully functional.
The most common mistakes
people and their advisers make after documents are signed are:
·
Failing to title all appropriate assets properly in the names of
the trustees of the trust (often referred to as funding the trust);
·
Failing to coordinate retirement plans (e.g., IRAs, 401(k)) and
life insurance policy beneficiary designations with the dispositive
provisions of the estate plan;
·
Failing to fully understand the difference between separate
property and community property and to appropriately segregate one type from
the other to avoid commingling issues; and
·
Failing to review and keep the foundational estate planning
documents current. Thorough reviews
with an estate planning attorney should occur every 3 – 5 years.
3. Be Careful About How You Take Title to Assets
Too often, after a
foundational estate plan is in place, clients acquire assets or take actions
without discussion with their estate planning attorney that are inconsistent
with their estate plan or that have unintended consequences. For example:
·
Taking title in joint tenancy with a spouse may result in an
undesirable distribution and adverse income and estate tax consequences;
·
Taking title in joint tenancy with a child or any other person
may result in immediate but unintended estate, gift and real property tax
consequences;
·
Holding title “as trustees” without proper reference to the trust
may result in significant additional legal expense to clear title to
property;
·
After taking title out of the trust at the request of a lender
when refinancing real property, failing to have the property deeded back into
the trust; and
·
Making loans to children without charging IRS mandated minimum
interest rates or failing to document such loans so that they are later
characterized as a gift with potential adverse transfer tax consequences.
4. Don’t Make Any Gifts Without Obtaining Proper Legal and Tax
Advice
There are many tax and
non-tax factors that need to be considered before any type of gift should be
made. See our article entitled “Factors to Consider Before Making Gifts.” Income, gift, estate and real property tax
issues need to be evaluated before any gift is made. Frequently formal appraisals will be
required. With proper advice gifts can
be structured to minimize the various tax consequences and make certain all
required reporting and tax returns are prepared and filed in the most
appropriate manner. For married
couples, the character of the property (e.g., community property or separate
property) to be gifted and whether approvals will be required (e.g., lender
consent) must be taken into consideration.
5. Mistakes To Avoid After the Death of a Spouse
It is always a difficult,
emotional time for the survivor after the death of a spouse. It is helpful if family or friends are
involved to assist the survivor so that the following mistakes, which often
require significant time and expense to correct, are not made:
·
Failing to take the necessary post-death estate administration
steps (identification and valuation of assets and liabilities, payment of
debts, taxes and estate administration expenses, and division and
distribution of the assets and liabilities in accordance with the provisions
of the trust). This can result in
significant adverse estate tax consequence if not corrected during the
survivor’s lifetime.
·
If two or more trusts are created after the death of a spouse,
the failure of the survivor to keep the assets allocated to each such trust
segregated properly. As a result,
accountings and re-adjustments to title must be undertaken which may raise
tax issues that would not otherwise be an issue.
This publication is of general applicability and not specific to any
set of facts. Thus, it should not be
relied upon for any specific case or matter without further discussion. No attorney-client relationship is formed
as a result of your reading or replying to this publication, which is not
intended to provide legal advice on any specific matter, but rather to
provide insight into current developments and issues.
Internal Revenue Service Circular 230 Disclosure. Please note that any
discussion of or advice regarding United States tax matters contained herein
(including any attachments hereto) does not meet the requirements necessary
to be a "covered opinion" as defined in Internal Revenue Service
Circular 230, and therefore, is not intended or written to be relied upon or
used and cannot be relied upon or used for the purpose of avoiding federal
tax penalties that may be imposed or for the purpose of promoting, marketing,
or recommending any tax-related matters or advice to another party.
|