Three Biggest Mistakes in Estate Planning

Other than “failing to plan”, the three biggest mistakes in estate planning are:       

(1) failing to re-title assets so they work with the plan and permit maximum sheltering of applicable credit,

(2) failing to co-ordinate beneficiary designations on IRA’s, and  

(3) failing to remove proceeds of life insurance from exposure to federal estate tax.

Many people use revocable trusts to maximize family privacy and avoid the delay and extra cost associated with probate.  If assets are not re-titled properly into the name of their trust, then the purpose of avoiding probate may not be accomplished.  Also, if assets are kept as “joint tenants with right of survivorship” when trusts spell out formula or option to disclaim to shelter the applicable credit, the ability to shelter assets (from the federal estate tax) may be lost.  Assets owned as joint tenants with right of survivorship do NOT pass in accordance with the terms of a Trust.  Instead, by operation of law, they pass to the survivor/s.  This can frustrate the tax planning aspects of any good estate plan.  Also, if there are no other assets to use to shelter the credit other than IRA type assets, then it is VERY IMPORTANT to provide a mechanism where these qualified assets can be used to fully fund the credit shelter trust.  This would happen in a case where husband, for example, had a large IRA. 

Life insurance proceeds are subject to the federal estate tax unless the policy is not owned by you.  Who would own it?  An irrevocable trust created by you.  There is a lot to this strategy.  Care must be taken to accomplish desired results.

The moral of this story is that it is a good idea to review your asset titling and beneficiary designations with a professional.  It is also a good idea to consider an irrevocable trust to own life insurance.  I have seen many estate plans where the asset titling was not in accordance with the trust planning and where the beneficiary designation on IRA’s or other retirement benefit plans failed to consider estate tax planning and failed to consider income tax deferral of these plans.   In each of these cases, the estate tax exposure was substantial and NOT necessary.  Avoiding unnecessary negatives is at the heart of any good estate plan.  Professional advice is always advisable.  The rules are sometimes counter intuitive.  Making sense is not something the Internal Revenue Service is always good at doing. 

Contributed by:

Mark F. Winn

Attorney at Law, PLLC