All excerpts below are from the book: ESTATE PLANNING MADE EASY, published by Kaplan Publishing
Mistake #1 - Failure to have any plan at all, or having an antiquated or improper plan
We often hear of families torn apart because a parent or grandparent fails to predetermine who gets what. "She wanted me to have it," claims one child. "No she didn't, she promised it to me," retorts another. Who is right? Only the deceased knows for certain. Too bad she didn't write it down. Too bad she didn't take a few minutes to let her true wishes known.
At a time when we want the best feelings to exist in our family, when we want them to find comfort in each others arms, heirs, out of selfishness, can foster the worst traits in the spectrum of human emotions. Anger, envy, jealousy even hate can be found when confusion is wrought because of a failure to preplan the distribution of even the most modest estate. Sins of omission are still sins.
Antiquated plans are just as problematic. A will drawn up 10 years ago is unlikely to reflect your current situation. Think of how much happens during that time span. In fact, I have seen more problems resulting from outdated wills than any other situation. New marriages, new domiciles, new tax laws, growth, more children and grandchildren, retirement income, new investments; the reasons to update your plan are endless. Anyone who has a will or a revocable living trust that hasn't been reviewed since the passage of EGTRRA in 2001 is asking for serious trouble. At a minimum, all estate planning documents should be reviewed every five years.
Improper plans also create problems, such as do-it-yourself kits that are never completely finished, non-funded revocable living trusts and/or multiple conflicting wills. All you accomplish with an improper plan is to create confusion, making life difficult down the road for your heirs, and encouraging disputes.
Mistake #2 - Misunderstanding the 2001 Tax Act (EGTRRA) and the true impact it has on your estate
Many sighed in relief when President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) into law because they believed that estate taxes had been, or would soon be, abolished. But a closer look at the law reveals that although there is a scheduled increase in the estate tax exclusion credit from $2 million in 2007-2008 to $3.5 million in 2009, with total abolition in 2010, there is the onerous sunset provision, as a tag line. This sunset provision mandates that estate planning laws and credits will revert to pre-2001, or a meager $1 million credit.
Another critical element of the hidden EGTRRA agenda is the loss of the step-up-in-basis. Current law allows heirs to inherit our property with a cost basis based on the value at death. This is huge. If we loose that provision, when sold all gains greater than the original cost basis would be taxed to our heirs at the capital gains tax rate. For example; let's say you own some land in downtown Memphis with a cost basis of $100,000. Today it is valued at $1 million. Your gain is $900,000. Under the new EGTRRA provision, when your heirs sell the property they may not have to pay estate taxes, but they would be required to pay capital gains tax on all appreciation. Only the IRS and accountants will benefit from such a change.
Furthermore, because the federal estate tax credit has increased, states are losing a tremendous amount of death tax revenue. Since the passage of EGTRRA 25 states have decoupled from the feds and have implemented their own estate tax structure. The type and amount of state death tax varies from state to state, thus making planning difficult. For example, if a person owns property in one state and lives in another state, then both states will be allowed to impose a tax on the value of the property and the size of the estate.
The need for proper estate planning will become a thing of the past only when all federal and state inheritance taxes are totally abolished, all capital gains taxes on inheritance are abolished, the costs of probate are abolished, and everyone absolutely knows how everything is to be distributed. Because none of these events have happened (and probably never will), now is the time to wake up from the six year nap and establish a viable, flexible estate plan.
Mistake #3 - The improper use of jointly held property
For some reason, many feel that if they transfer ownership of their holdings to a close relative, the transaction will side step probate. Perhaps they saw this strategy on some movie or heard about it on a talk show. Don't be tempted! If your joint tenant or co-owner is sued or files bankruptcy, the creditors will attack your valued asset and you will lose it, even if it is your home. Furthermore, a spouse from a second marriage could totally disinherit children from a previous marriage. Again, proper prior planning avoids these mishaps, but it does require thought and action.
Mistake #4 - Blindly leaving everything to your spouse
Since the Tax Act of 1981 and the introduction of the marital deduction, 80% of America's affluent have elected to pass their total estate to their surviving spouse. While this is generally our goal, it isn't necessarily good estate planning. In fact, for a joint estate currently valued in excess of $2 million or an estate with the potential to appreciate beyond that figure, passing everything to your spouse will be the most expensive and needless mistake you will ever make. To put it in dollars and cents, at the survivor's death, a joint estate valued at $3 million will pay over $400,000 in needless federal estate taxes, not to mention state inheritance taxes. An estate worth $4 million will generate an estate tax of over $900,000, plus state taxes. All voluntary and unnecessary!
Mistake #5 - Not properly using the IRS-approved annual gift accounts
The vast majority of affluent Americans don't comprehend the need to share their wealth with their loved ones while they are still alive. Furthermore, they don't understand the power that leverage can create and the many estate tax benefits that can and will be realized if they apply this simple concept. In fact, in most cases, by leveraging the IRS-blessed gift allowance, all estate shrinkage can be totally eliminated. Yet only a handful of prudent taxpayers utilize this basic, but powerful, strategy.
Each and every American can, by current law, gift $12,000 annually completely tax free to anyone they want. I often joke in estate planning seminars that I can legally drive up to a homeless man on the corner and really make his day by telling him that by virtue of the gifting laws, I would like to cut a check in his name for $12,000 that would be totally income, gift and estate tax free.
Of course, doing so may not be the wisest move. But it would be very effective in shrinking my estate. Consider how such a gift would benefit those you really care about, at the same time reducing your estate annually by the amount of the gift. A married couple can each gift this allowance, meaning that they could gift up to $24,000 per year per beneficiary. A couple with five children, five grandchildren and two great grand-grandchildren, can gift up to $288,000 per year. By maximizing this free strategy annually, one's estate could shrink with relative ease. That is, of course, if the growth doesn't outpace the gifts.
It's a use it or lose it proposition. True, some might question the wisdom of gifting these funds to your family while they are young, believing that if they start to depend on the annual gift the can become counterproductive. However, there is no law requiring that the recipients actually receive the gift in cash; nor do they need to have access to the gift immediately.
Mistake #6 - Failure to properly plan the distribution of your pension retirement accounts
How would you like to toil your entire life, build a sizeable estate with $1 million in your IRA that you had rolled over from the lump sum you received at retirement from General Electric, only to have Uncle Sam confiscate $700,000 of it at your death? That's 70% gone forever! Nobody wants that, and yet, an alarming 80% of all pension/IRA monies are passed and thus taxed to named beneficiaries. That means only 20% of the nation's IRA monies are actually used as retirement income.
In other words, we build our fortune, set aside our pension money to provide a safety blanket for us just in case we need it, and then usually don't touch it. The problem is compounded by the fact that, because of investmentt gains, these retirement funds can grow to astronomical numbers. IRAs in excess of $3 million aren't rare these days. Yet only a few investment advisors, accountants and stockbrokers know the art of extracting these funds or passing them to the next generation without the government first tearing away the lion's share. That's because most are unaware of what I call the six Retirement Time Bombs.
Mistake #7 - Lacking liquidity to cover estate settlement expenses
On the day you expire, there will be a financial assessment. Whether you have debt, owe taxes, legal fees or owe probate fees, your heirs will need cash. And because 70 % of today's affluent do not have a sound estate plan, most heirs will have to liquidate assets to generate enough cash to cover estate costs. Which assets will be sold first? Faced with time constraints, will they command top dollar? What if the market declines during liquidation? Will the family summer cabin survive the tentacles of the IRS? These are the types of questions we will force our heirs to answer if we don't have a strategic plan in place beforehand.
Of course, your heirs could borrow the funds required to pay estate settlement expenses in order to avoid the liquidation of assets, but there are serious drawbacks to that solution. First, who is going to lend them the money? Second, not only will they have to pay back the principle, they will also have to pay the interest. Borrowing is, by far, the most costly method.
If you are fortunate to have sufficient liquidity, such as cash or highly marketable securities, your heirs could theoretically use those assets to pay the bills, including taxes. But is that really prudent? Isn't there a better way than paying 100 cents on each dollar?
Mistake #8 - Improperly arranged and owned life insurance
Recently, while reviewing a doctor's estate, I told him that his $2 million term life insurance policy would be included in his estate and consequently taxed just like any other asset. He was upset. He explained that his agent of many years had assured him that proceeds from his policy wouldn't be taxable. He even argued his point. I told him that his agent was partially correct. The proceeds will be income tax free, but not estate tax free. That is, unless the policy is owned by someone other than himself. That's a critical mistake we see all too often.
The next mistake we encounter is a failure to name a proper contingent beneficiary. Millions of dollars lay unclaimed simply because the insured named a secondary beneficiary that predeceased the insured. Furthermore, many people, for the lack of actually naming someone, list their estate as their primary and secondary beneficiary. By doing so, upon death, the proceeds are needlessly subjected to probate and the claims of the insured creditors.
The third error we see with regularity when reviewing estates is existing policies that aren't performing to their initial expectations. In other words, they most likely will not outlive the insured based on the assumptions that were originally presented. This is a huge problem because the insured and his or her family are counting on the insurance policies to protect them. If the problem is not corrected, the policies will disintegrate.
Finally, a less disastrous but just as common mistake is that many clients have antiquated policies that served a purpose when the children were young or the business was in it its infancy. Now that times have changed, those policies have little use to their owners, and often cost more than the client wants to be paying in their retirement years.
Mistake #9 - Not properly preparing for the exorbitant cost of long-term medical care
According to the Health Insurance Association of America, 4 out of 10 Americans, age 65 and older, will need long-term care at a cost of $40,000 to $80,000 a year. At that rate, a lengthy illness could wipe out many estates, especially considering the fact that before you can be eligible for Medicare's financial assistance for long-term care, you must first spend down your assets.
Are you prepared to take the chance that your assets will endure the potential costs? Have you taken any steps to shield your investments from the vicious arm of the medical industry? Could you financially survive a long-term illness or accident?
Mistake #10 - Not leaving your life story for your family to enjoy forever
It's a mistake to think of your legacy in financial terms only. One of the best benefits of my job is the privilege to hear my client's life stories. After more than 30 years in this business I've heard thousands. And although few of my clients think so, I am convinced that each one, if told properly, would make a riveting Hollywood movie. But for the most part, these unique histories are not recorded for posterity. Instead, like an intricate sand caste built too close to waters edge, they erode into our posterity's faded memories before ultimately disappearing forever.