Estate planning can be a complex process with far-reaching consequences, or quite simple. In either case it is important to review your wishes and have the proper documents prepared to ensure they are followed at your death. Here are a few of the common and potentially costly mistakes, with suggestions for avoiding them that you might encounter once you start the process.
Failing to plan. This is the case where you just can’t get started. If you are like the majority of Americans you have no will, but like it or not you do have an estate plan. If you die without a will your estate will be divided according to the intestacy laws of your state and there is no guarantee this would be consistent with your wishes. Whether it is a basic will or includes other strategies, such as a trust, having a plan can help reduce estate taxes, save on estate administrative costs, and specify how your assets as to be distributed to your heirs, charity, or help a special needs family member. Also, a will is the only way that you can name a guardian for your minor children.
Not maximizing your marital estate exemption. The recently passed "portability" law provisions ease some of the estate tax planning burden. Each individual is allowed a $5.43 million federal estate tax exemption in 2015. If one spouse dies without using up his or her $5.43 million, the unused portion may be transferred to the other spouse for use at the survivor’s death.
Consider an estate of $8 million. If the husband dies first, his estate can elect to use the unlimited spousal exemption and can also transfer his unused $5.43 million federal estate tax exemption to his spouse. If the spouse dies in 2015 with the $8 million of assets her estate would have a total of $10.86 million in federal estate tax exemptions to use. The $5.43 million exclusion transferred from her husband and her own $5.43 million exclusion. The result is none of the estate would be subject to federal estate tax.
Note though that portability does not address the appreciation of assets from the first spouse’s estate. It also does not offer creditor projection. There are other instruments that can do a potentially better job in meeting these goals.
Also, consider state estate taxes when reviewing your strategy and make certain to discuss how portability is elected with your attorney or accountant.
Naming a family member as executor or trustee. Your executor is the person responsible for administering your estate once you are gone. It is important to have a person that will take the job seriously. Your loved one may be too emotional to focus on the job at hand and conflicts may be introduced especially if the executor is also a beneficiary. Consider using a professional along with the family member. This can save you both time and money.
Relying on advice from family or friends. Make sure the person you discuss your estate plans with is knowledgeable about the process. Look for a specialist -- one who knows estate tax law, trust, and probate issues.
Estate planning is something everyone should do and having the documents in place provides for a certain peace of mind that things are going to happen as you wished upon your passing. Make sure your finances reflect your plans once you are done with the documents. For example – transfer your brokerage accounts into the name of your trust if you have set one up. Update your IRA and life insurance beneficiaries to reflect the beneficiaries you have chosen.
As each situation is unique make sure you have a team in place. This means an attorney, accountant and financial planner to help you review your needs. Estate planning is not done once -- continually monitor your plan for changes in your life.