Working for a lifetime should reflect a lifetime of wealth. But that significant effort can be erased quickly with poor estate planning, resulting in the significant reduction of an estate's assets when it passes between generations. With a little advance planning, easy mistakes can be avoided and the estate can perpetuate wealth for generations. This article will list the traps and pitfalls you can and should avoid in order to maintain the maximum value of your estate.
Don't procrastinate - draft a will and make an estate plan. If you don't create your own will, trust, and other documents, then the legislature of the state where you reside may step in with a plan of its own. As such, the distribution of your estate then follows the laws of intestacy, which dictates who will get your assets and how they will be divided. Rest assured that this process practically guarantees that your estate will pay the highest possible estate taxes in the process. If you can afford one, using an experienced Estate Planning Attorney or specialist is highly advisable as the laws are complicated and change often.
1. Avoid "surviving spouse" wills unless appropriate.
Also known as "I love you wills", most people create wills which state that when one spouse dies, all of his or her property goes to the surviving spouse and, when they are both deceased, all their property goes to their children. This type of will is only appropriate with modest estates. However, when estates exceed the million dollar mark, more care is needed. Up to $600,000 in assets may be transferred free of estate taxes and up to $1,200,000 for a married couple. There are strategies in distributing assets to the ultimate beneficiaries, your children. One solution is to include provisions in your will or living trust agreement that create a bypass trust or "credit-shelter trust") at the death of the first spouse.
2. Avoid unbalanced property ownership
. If each spouse owns substantially equal property, the bypass or credit-shelter trusts can function to avoid estate taxes on up to $600,000 of assets. However, if one spouse owns millions and the other spouse has only a small estate, the trust's effect will be wasted if the less affluent spouse dies first. To avoid the loss of this benefit, spouses should consider balancing their property ownership.
3. Transfer life insurance policy ownership to a trust.
Most affluent estates include a significant amount of life insurance. The common belief is that life insurance benefits will provide immediate liquidity and the proceeds are tax-free. This is only half correct. While life insurance death benefits are generally not subject to income tax, they are subject to estate taxes if the policies are owned by the insured at the time of the policyholder's death. This can result int he loss of up to 60% of the policy's value. To avoid the estate taxes, the holder can transfer the ownership of certain life insurance policies to an irrevocable trust - the policies that are intended to pass onto a future generation such as children or grandchildren. The needs of the surviving spouse can be addressed with another policy or instrument and need not be tied into money intended for others.
4. Coordinate property forms and beneficiary designations
. A common fallacy is that wills control the distribution of an entire estate. Surprisingly, this is not always the case and property transfers can be based on non-will provisions that can not only contradict but also supersede those of a will. Countless other assets often not controlled by wills including:
With jointly owned assets (e.g. bank and stock accounts, real estate), the surviving joint owner often becomes the sole owner of the assets. In the case of retirement plans, IRAs, annuities, and life insurance proceeds transfer to named beneficiaries, not necessarily to the people named in a will. As you can see, it is extremelyy important to coordinate the form of ownership of your property and beneficiary designations with regard to your will.
- Bank accounts;
- Certificates of deposit;
- Life insurance policies; and
- Real estate.
- Retirement plans;
5. Distribute your money while you're healthy.
There are three ways to reduce estate taxes:
1. Spend your money;
2. Give away your money while you're still living; and
3. Create a bypass trust.
Many self-made affluent people are financial "pack rats" and have made it through life by saving, not spending. Being thrifty is admirable quality but being too restrained is only good for the IRS. This is a habit that is difficult to break but, for those of you who fit into this category, remember that if you aren't spending or distributing the money, the IRS will take a good portion. As such, you might as well enjoy it either through spending or giving.
6. Liquidity is important.
Typically the holdings of affluent people consists primarily of real estate and family businesses, an illiquid position. If an estate is subject to taxes of over 50%, scrambling for liquidity occurs. Assets are frequently sold at clearance prices to pay estate taxes which are usually due within nine months of death. This is why it is important to ensure that enough cash remains on hand to satisfy the estate's tax requirements at time of death.
7. Distribute equitably to beneficiaries.
There are different ways to carve up an estate, as you've seen above. At times it pays not to distribute each asset equally amongst your children. If you want an "equal distribution" then it may pay to think about dividing your assets equally in aggregate dollar value while providing for a different breakdown of individual property. This is easier understood in an example. Let's say that a clothing business is owned and run by the father with some of the children participating. It is a better practice to leave this business to the participating children while giving your nonparticipating children other unrelated assets. If you're still having problems with an unbalanced distribution, consider creating additional assets through life insurance.
8. Triggers burdening children with heavy debt.
As we've learned above, it's important for an estate to have liquidity at time of death to deal with potential estate taxes and avoiding a necessary sale of other estate assets at bargain prices. But it's not only the real estate taxes that will harm your children - significant debt may also created when children who participate in a family business are compelled to buyout the interests of nonparticipating siblings. This situation creates a great deal of acrimony in addition to a financial burden. Remember that life insurance can help alleviate this type of situation.
9. Estate planning is always a work in progress.
Life is dynamic and as circumstances change over time, your plans need to reflect an appropriate be kept current. It's probably a good idea to meet with your attorney annually to take into account what has changed over the course of the year. Considering how quickly the world moves these days, the benefits of a short visit once a year could be the difference in avoiding hundreds of thousands of dollars paid in estate taxes - perhaps even millions.
10. Don't think you can do this yourself.
This isn't an advertisement for estate planners, just some common sense! You can only be good at number of things in your life and, unless you've spent significant time researching estate planning strategies and law, can't know the benefits and pitfalls as well as a professional. The amount of money saved by not going to an estate planner is probably less than the money saved by the estate planner, given the complex nature of the topic and the constantly changing law.
While this list is not exhaustive, it should certainly give you plenty to think about and to discuss with your estate planner. Best of luck to you and your beneficiaries!
Estate Planning Avoid 10 Common Estate Planning Mistakes
By Michael Wechsler |
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