Estate planning can be complicated and taxing, to say the least, and those who go about it alone may find that a single mistake can have big effects. Minor problems might only result in some unnecessary expense or delayed inheritance for the heirs. Other mistakes, however, will waste unnecessary millions in estate taxes or even cause the estate to be passed to unintended heirs! Below is a list of some common problems encountered.
- Lack of Protection—Trusts are designed to protect assets for heirs. A properly designed trust protects funds in the event an heir is sued, divorced or befallen by other misfortune. The trust should also ensure that inheritances pass in intended form, whether bloodlines or otherwise. Improper protection can lead to unanticipated heirs.
- Replacing / Selecting Trustees–Deciding who will be a trustee requires no small consideration. One can decide between an adult, child, other trusted individuals or a professional trust company. Often one forgets that trustees do not last forever. Selection of successor trustees should thus be carefully considered and periodically reexamined. Just as important may be the mechanism by which the new trustee will assume his or her responsibilities should you be unable to fulfill your duties. The cycling of trustees can be cumbersome and difficult and may even involve court intervention. However, important procedures can be included in a trust to assure that the transition from one trustee to the next will occur seamlessly and without dispute when necessary.
- Funding–Funding is the process of transferring assets to a trust, which may involve the preparation of deeds, assignments, beneficiary designation forms, new account forms and other documentation. An important function of a revocable trust is to avoid probate proceedings upon your death. But, this avoidance won’t happen if you continue to own assets in your own name without assuring that all are transferred to the trust. A life insurance trust is intended to avoid estate tax on insurance proceeds, which won’t happen unless the policy has actually been transferred to the trust. You must have that aspect of your estate plan reviewed periodically.
- Poor tax planning–The current exemption from federal estate tax is only $5.43 million. Beyond that threshold, 45% of the estate will be lost to tax without some advanced planning initiatives. Luckily, a number of techniques, performed at a relatively low cost, can reduce or eliminate the estate tax. In other cases the necessary procedures may be more complex. The point is that there is much that can be done to control estate taxes. As an old adage says, estate tax is partially voluntary – you can ignore the problem and volunteer to pay the tax, or take some planning steps to reduce or even avoid the tax altogether.
- Misguided IRA planning—Individual Retirement Accounts and other qualified retirement plans can be powerful accumulators of wealth because the account grows for many years at pre-tax yields. At death, most of the IRA (or other retirement plan) can be lost because it is subject to both income and estate tax. Without careful planning, the combined taxes can result in a 75% or greater dissipation. The complex and tedious tax rules relating to IRAs and other qualified plans must be carefully applied in each estate where there is a significant IRA or other qualified plan. A probate attorney well versed in tax planning will limit this liability for you.
Periodic Review– The biggest mistake of them all, however, is not having your estate plan reviewed every few years, or even annually in the case of a complex plan. These periodic reviews uncover potential problems and allow the implementation of new techniques and strategies to control estate taxes, better assuring that your heirs will receive their inheritance in the most efficient and protected manner .