The Top Five Planning Mistakes

The top five estate planning mistakes are:

(1) failing to plan,

(2) naming your estate as the beneficiary of your IRA,

(3) wasting your credit,

(4) allowing insurance proceeds to be exposed to the estate tax, and

(5) leaving assets outright when leaving assets in trust would be better. 

1.            Failing to plan

If you don’t create an estate plan, then the state has a plan for you.  The results may or MAY NOT be what you wish.  Also, not having an estate plan increases the likelihood of family disputes, unintended results and unnecessary costs and taxes being due.

2.            Naming your Estate as the Beneficiary of your IRA

If you name your estate as the beneficiary of your IRA, then the plan will be required to distribute all it’s assets within five years of death and the concomitant income taxes will be due as well.  You see, the estate is not a “designated beneficiary”.  If there is no “designated beneficiary” then the ability for your family to continue to defer the taxable distributions can cost your family a tremendous amount of wealth.  Not naming a beneficiary or naming your estate as the beneficiary of an IRA can be a costly mistake.

3.            Wasting your Credit

In the case of a husband and wife, if all assets pass by operation of law to the survivor because they are owned as “joint tenants with right of survivorship” then you could WASTE one spouse’s credit amount.  Currently, this credit amount is $2,000,000.  At a 45% tax rate, that could result in $900,000 unnecessarily being due to the federal government.  Wasting your credit can be a costly mistake.

4.            Allowing Insurance Proceeds to be Exposed to the Estate Tax

Allowing insurance proceeds to be exposed to the federal estate tax is a mistake that can easily be avoided.  The procedure here is to create a separate entity to own the life insurance.  That entity is an irrevocable trust and since it would be the owner, the proceeds would escape the federal estate tax.  Of course, directions can be specified as to what the funds will be used, for, how they will be distributed, and whether or not they will be left in trust for the benefit of loved ones.

5.            Leaving Assets Outright When Leaving Assets “in Trust” Would be Better

Leaving assets outright and free of trust can leave these assets EXPOSED to frivolous spending by immature beneficiaries, claims of equitable distribution in a divorce proceeding, claims of a loved one’s creditors, and estate taxes in loved one’s estate.  Using trusts to SHELTER assets from unnecessary taxes and divorce claims and creditors’ claims can be quite beneficial for your family and future generations.  Leaving assets free of trust can be costly. 

And so the moral of the story is… when it comes to estate planning, mistakes are things you want to avoid.  Every case is unique and raises unique family considerations and objectives.  Avoiding the above mistakes will help ensure that your estate planning will do what it is supposed to do…give you peace of mind in knowing you have done what you can to protect and preserve your assets for generations to come.

Contributed by:

Mark F. Winn

Attorney at Law, PLLC