Top 8 Things People Overlook with Estate Planning
1. The Entire Estate Plan
What do Jimi Hendrix, Steve McNair, Michael Jackson, and Bob Marley all have in common? They all died without a proper estate plan or even a will
and their heirs paid the price in legal fees, court costs, and endless delays. Many people die “intestate,” (without a will). Even though the states have continued to improve their intestate laws, your assets and your family’s lives could be stuck in probate court for 12 months or more if things aren’t completed correctly. That’s if your relatives don’t start fighting over your belongings. Or, how about this scenario? You die the day after your son turns 18. He inherits assets worth $800,000 and your life insurance pays him $1,000,000. An 18 year old with $1.8 million is a scary thought.
2. Failure to Review Beneficiary Designations and Directing of Assets
As you age or as you have aged, you acquire many different asset growing instruments. You have several different retirement accounts
, life insurance accounts, investment accounts, and real property
. All of these accounts may list beneficiaries. A lot of people forget about these accounts and they list people who you may no longer wish the assets to go to. Also, there may be specific ways to leave these assets in order to maximize the avoidance of taxes, avoid probate, and protect them from the nursing home spend-down.
3. Failure to Take Advantage of the Estate Tax Exemption in 2013
If you have a lot of assets, chances are you are going to be subject to federal estate tax
. This year’s exemption is $5.25M, but nobody knows what it will be 5-10 years from now, so it is prudent to take advantage of the exemptions while you can. With the United States debt growing to $17 Trillion, the likelihood of these exemptions lasting forever is slim. There are exemptions amounts and there are gifting exemptions. If you don’t take advantage of these exemptions while living, your estate will pay them when you are gone. A will doesn’t do it and all versions of revocable trusts don’t either.
4. Leaving assets outright to adult children
How about this scenario? We already discussed the $1.8 million teenager, but how about this one: You pass away, and all of your estate goes straight to your son… no wait, your son’s debtors. That’s right, your child could be in debt and all of your hard earned savings goes to pay off the dumb decisions your child made. Even worse, your son gets a divorce 6 months after he inherits your 50 years of assets; blood, sweat, and tears. His ex-wife now snatches $900,000 just because they were married for 4 years.
5. Leaving assets outright to minor children
Whether because you died intestate or whether your will specified that the assets go to the children, assets to minor children will normally be managed by whomever you decided should be guardian of your children. Your sister Meg may be great at teaching and fostering great children, but not so good at investing or banking. By the time your children are 18 there could be nothing left for them.
6. Don’t overlook states’ inheritance taxes
You may not think that you have enough assets to trigger inheritance taxes because the federal exemption is $5.25M in 2013, but it has changed 30 times in the last 40 years and with the current federal deficit nearing $20 Trillion, do you really think that it will be at $5.25M in 5-10 years? Plus, did you forget about state inheritance taxes
? Usually state taxes are at a smaller rate, but they also usually have a much smaller exemption. That means that your assets plus your $500,000 will put your heirs into a taxable situation. For example, Minnesota’s exemption is only $1M and the tax is 16%. Check out your state estate taxes
7. Use no-contest clauses properly
Lawyers love to talk about the no-contest clause when you are in their office. The no-contest clause
basically states that anyone who contests the will, collects nothing. Sounds bulletproof, right? I mean who would challenge that will? Well, if the will is not legal, then neither is the no-contest clause. Additionally, even if the will is effective, what stops a person who is collecting nothing from contesting the will. Nothing does, because they have nothing to lose. So, maybe you want to leave that person some money so if they challenge the will they lose it. Even better, you don’t want to use a will at all.
8. Picking the right trust for the right purpose
There are basically two types of trusts: revocable and irrevocable
. If you want to avoid probate, but not protect your assets and/or plan for Medicaid, the revocable trust
is for you. With this type of trust, you can take your assets out whenever you want, but Medicaid and your creditors can also. An irrevocable trust can hold your assets with all the benefits of an irrevocable trust, but if written correctly, it can protect assets from creditors. The difference here is that once the trust is set up and you put asset into it, you no longer own them, but you can still get the benefit from them - similar to leasing a car; it is in your driveway to drive whenever you like, but you don’t own it.
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Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB - Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an "AA" asset protection, Trust, and estate planning expert.