A Fine Estate of Affairs: 7 Common Estate Planning Mistakes That Can Wreck Your Best Laid Plans

By Teresa Kuhn, JD, RFC, CSA

The first thing you need to know about estate planning is this:

Everyone has an estate plan, whether they create their own via attorney-directed wills and trusts, or whether they allow the state to enact a default plan on their behalf.

This default plan, put together through what are known as the laws of intestacy, allows the state to decide who gets what when you die and also lets them take the maximum amount of tax possible from your estate.

In my opinion this is the very worst thing that could happen to the legacy you’ve worked so hard to leave to your loved ones.  Yet, there are thousands of people who die each year without even a simple estate plan; leaving their families to deal with taxes and other consequences.

So, the first mistake in estate planning is simply to not have a plan in place when you die.  What, then, are other common mistakes people make when preparing for the final stage of life?

Estate attorneys have identified some of the most common estate planning mistakes; mistakes that, each year, result in a myriad of problems for the ones left behind.

Here are just 7 of the most common estate-planning errors:

1. Forgetting the IRS is NOT on your side.

The government wants you to die wealthy because it results in more cash for them.  Therefore, they have a vested interest in you not taking advantage of laws and strategies which can result in your estate paying ZERO taxes.

You may realize that there are only 3 real ways to reduce estate taxes: give money away while you are still alive, spend the money now, or use a specially-designed trust called a bypass trust that lets you give it away while you are alive while retaining use of the money for yourself.

The IRS is banking on you being the kind of thrifty, careful person who has a hard time letting go of the money you so painstakingly accumulate, because they’ll have more money to TAX!

2. Failing to Ensure Benficiaries Are Correctly Designated on Retirement Accounts

Often times, the beneficiaries of retirement accounts will change, particularly if the primary beneficiary dies before the account owner.

In most cases, the account owner is required to complete a new beneficiary designation form, indicating the new beneficiary. Failure to do so might result in the beneficiary being determined under the default terms of the retirement account agreement.

Payout options under most retirement plans often depend on whether the beneficiary is a spouse of the account owner.. There can be unintended and adverse tax repercussions for those who are not careful in this matter.

3. Inadequate life insurance

Because of the specially designed Bank on Yourself ™ whole life policies used in the financial plans designed by Living Wealthy Financial Group, inadequate life insurance is not a problem for our clients.

However, for most people it is a BIG issue.

According to a recent Metropolitan Life Insurance survey, more than half of the widows and widowers who collected life insurance proceeds in the United States received less than one year’s income.

If you are concerned about not having enough life insurance, please give our office a call to arrange a personal consultation. We can go over your insurance to ensure that you have the right amounts for your goals.

4, Wrong guardian listed for your children

If you don’t have a will, the state decides who will care for your minor children. However, if you do have a will, be sure to review it regularly . Check to see if your original guardian is still valid and still willing to take on the responsibility.  Things could have radically changed for your guardian such as their job situation or they could have new financial challenges.

5. No medical power of attorney and living will or those documents are not valid

Even if you have a medical power of attorney or living will in place, it is always best to assume that these documents weren’t correctly executed or notarized and are not valid. Assuming this will force you to review those medical papers with an attorney to be sure they are valid in your state and that you’ve addressed every important issue.

If you do not have these documents on file, you are creating a potentially devastating situation for your loved ones should you become incapacitated due to a medical problem. Without a proper durable power of attorney, no one can access funds to pay for your medical care or other bills.  They will also be unable to legally sell your property such as a car or real property.

6. Trying to be “fair” with your children

If you have more than one child, the temptation is great to want to divide your estate evenly with all of them.  After all, you reason, you love all your kids the same so it is only fair that each one of them gets the same share of your estate.

Unfortunately this can be a great mistake, especially in the case of a family owned business.  If you have children who participate actively in the business and others who do not, giving the non-participating child a share equal to the children who actually work the business can cause a lot of resentment and lead to family disputes.

Consider giving shares of the business to your kids who actually work in it and then give non-business-related assets to your other children.

If you feel that this creates an intolerable imbalance, talk to my office about how to correct such an  imbalance by purchasing additional life insurance or other methods.

7.  Take my debt, please…

Sometimes the law of unintended consequences means that what is supposed to be a loving gift from a parent to their offspring can turn into a stressful financial nightmare.

For example: when an estate comprised of heavy illiquid assets is given to beneficiaries, Uncle Sam wants his cut right away. As a result, those beneficiaries are often forced to borrow great amounts of money to pay estate taxes because the assets which created the tax situation simply don’t generate enough income to pay it. It is common for those loans to come from banks or other financial institutions, sometimes at unfavorable interest rates.

Again, life insurance is a great solution, providing liquid assets which can be used to pay off  taxes and other costs associated with settling an estate. Many of my clients fund Bank on Yourself policies  with the express purpose of providing extra cash to their beneficiaries to help them meet their tax obligations.

In Conclusion…

It never ceases to amaze me that most people spend more time planning their social calendars than they spend on planning their financial futures.

Yet, few things will have as much impact on your happiness and sense of well-being than knowing you have a current, complete estate plan in place.

If you haven’t talked with an estate planner lately (or at all) call our office today at  (800) 382-0830.

We can arrange a free consultation with one of our hand-picked estate attorneys who have partnered with us to provide competent, ethical, and thorough estate planning services to all our valued clients.

 

Why I Encourage All My Clients to Get a Will!!

When someone dies without a will, the distribution of property can get very tricky and in many cases may cause resentment and hurt amongst family members. Many people don’t understand how complicated this process can be and the how important the difference between ‘separate’, ‘community’, ‘real’ and ‘personal’ property. Here is a quick run-down:

Community v. Separate property- Was the deceased married? If so, everything acquired during the marriage is community property, while everything owned prior to the marriage is separate property.

 Real v. Personal property- Real property includes real estate (including mineral interests) while personal property is anything that is not real property (ex. Cash, bank accounts, cars, jewelry, furniture, etc.)

Now that you know the difference, the following rules must be applied when someone dies without a will:

 

Community Property (Texas Probate Code §45)

Married, no children All to surviving spouse
Married, with children who are also the children of the Decedent’s spouse All to surviving spouse
Married, with children, but at least one child is not a child of the Decedent’s surviving spouse. All of Decendent’s half interest in any community property passes to kids, spouse retains his/her half.

Separate Property (Texas Probate Code §38)

Unmarried, no kids All to children
Unmarried, no descendants, parents surviving All to father and mother, equally
Unmarried, no descendants, one parent deceased, at least one sibling Half of all separate property to surviving parent and the other half to surviving sibling(s) or their descendants
Unmarried, no descendants, one parent deceased, no siblings All to surviving parent
Unmarried, no descendants, no parents, at least one sibling All to surviving sibling(s)
Unmarried, no descendants, no parents, no siblings Half to paternal grandparents (or their descendants) and half to maternal grandparents (or their descendants)
Married with kids One-third of separate personal property to spouse, two-thirds to kids. All separate real property to kids, subject to spouse’s life estate in an undivided one-third of it
Married, no descendants, no parents, no siblings or their descendants All to spouse
Married, no descendants, a parent or sibling or niece or nephew One-half to spouse, other half to parents or siblings as if decedent was unmarried.

 

For parents, making a will is the single most important thing you can do to make sure your child is cared for by the people you choose and manage the money left for them if anything were to happen to you. Without a will, your children’s money would be controlled by a state-appointed administrator (who charges fess, of course), meaning not even your surviving spouse could use the funds to access the money to raise your children without going through a complicated legal process. Also, think of the implications of an 18-year old inheriting a large sum of cash- without a trust in place to help them manage their new found wealth their lives could be potentially ruined.

If you and your spouse were to die without a will, the courts get to decide who will care for your children. Even more than protecting property, designating the guardian for your minor children is the most important part of a will, as courts have no idea of your values or wishes for your children. Remember, this person will be making decisions about your child’s health, education, and morality.

As you can see, things can get very complicated very quickly, and none of us want the courts determining what happens after we die. I encourage you to avoid ever having to put your loved ones through dealing with these rules by calling us today at (800) 382-0830 so we can arrange a free consultation with one of our hand-picked estate attorneys.

The materials on this website are provided for informational purposes only and do not constitute legal, financial or tax advice. These materials are intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. The newsletters and articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute legal, financial or tax advice or legal, financial or tax opinions,. You should not act or rely on any information contained in this website without first seeking the advice of an attorney, CPA or financial advisor.