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10 Common Estate Planning Mistakes

1. Failing to properly fund a revocable trust. Creating a revocable trust is only the first step; if you want an asset to be subject to the terms of your trust (and avoid probate on your death), the asset must be titled in the name of the trustee of the trust. This means changing bank accounts and brokerage accounts to read “Jane Smith, as Trustee of the Smith Family Trust,” recording a deeds transferring real estate from Jane Smith to Jane Smith, as Trustee of the Smith Family Trust, etc.

2. Failing to act timely after someone’s death. There is a myth that having a revocable trust means that nothing needs to be done after death. While the administration of a trust is generally simpler and less time consuming than a probate, there can still be much to do and deadlines to be met. Beneficiaries of a trust must be given timely notice. If a disclaimer is to be made, it must be done soon. If the trust divides into two or more sub-trusts following the death of the first spouse, depending upon the funding clause in the trust, a capital gain may be generated, which capital gain can be minimized if the sub-trusts are funded soon. An estate tax return may be due. If the trust becomes irrevocable, income tax returns for the trust will be necessary. For a more complete list of issues to be addressed and tasks to be performed after a death, 19 Significant Tasks After a Death.

3. Unintentionally favoring one beneficiary over another. It is certainly okay to favor one child over another, but people often do not realize that they are. For example, parents create a trust leaving all of its assets equally to their son and daughter, but then they hold title to their bank accounts with their son as a joint-tenant. On their death, son will receive all of those bank accounts; none of them will go to daughter.

4. Failing to coordinate the disposition of assets in trust with assets outside of trust and failing to properly address the payment of estate tax. A trust that requires all estate tax due to be paid by the trustee (or a Will that requires all estate tax due to be paid by the estate) might result in an unintended burden to some beneficiaries (and an unintended gain to others). For example, assume that there is a $3,000,000 estate made up of a $1,500,000 brokerage account in trust left to son and a $1,500,000 insurance policy paid to daughter. The trust states that the trustee is to pay all of the estate tax due on account of the death of the creator of the trust. Under the current law, the estate tax due on a $3,000,000 estate is $450,000. The trustee would have to pay the entire $450,000 estate tax, leaving the son with $1,050,000. The daughter would still get the $1,500,000 insurance. Had the trust instead stated that the trustee would only be required to pay the estate tax generated by trust assets, the son and daughter would have equally shared in the estate tax.

5. Holding assets in joint tenancy in inappropriate circumstances. Adding a child as a joint tenant to real estate (or any asset) presents problems if (1) that child later has creditors who attach the asset, or (2) you decide you want to leave the asset to someone else, but the child refuses to consent to the transfer. Joint tenancy is also not generally a good way for husband and wife to hold title because, on the death of the first spouse, assets held as joint tenants receive an adjustment in income tax basis on only ½ of the value, while assets held as community property receive an adjustment in income tax basis on the whole value.

6. Failing to plan for incapacity. A simple Advanced Health Care Directive can allow someone to make health care decisions for you if you are incapacitated. Similarly, a simple power of attorney can allow someone to make financial decisions and pay bills for you.

7. Improper designation (or even failing to designate) primary and contingent beneficiaries under retirement plans or life insurance policies. Proper care should be taken when determining beneficiaries of any retirement plan, life insurance policy, annuity contract, etc. Failure to designate a beneficiary often means that the plan or policy has to be probated. Paying an IRA to an estate is almost never a good idea because, in addition to the probate time and expense, the payout under the IRA cannot be stretched out beyond five years. Designating a minor as a direct beneficiary is often also a bad idea because that will mean a guardian will have to be appointed by the court.

8. Selecting an inappropriate successor trustee. Especially for a trust that will go for some time, the selection of a proper successor trustee is critical. You want a person (or institution) that is honest, responsible and diligent. You also want to be careful of potential conflicts. Having one child as trustee for another child can cause discontent. So can having a spouse from a second marriage be the trustee for children from a first marriage.

9. Failing to anticipate and avoid disputes or conflicts with partners, co-owners and family members. Will members of a closely-held business be able to get along with the family of a deceased shareholder? Will all children be able to get along after the death of a parent? If not, planning now to address those issues will save much time and expense later. Perhaps a buy-sell agreement is necessary for the business. Maybe children active in the business should receive that asset and non-active children should receive non-business assets.

10. Failing to update or revise estate planning documents when a material change occurs in either personal circumstances or the law. Estate planning documents should always get revised upon marriage (or divorce). Other events that should cause a review of estate planning documents would be the birth (or death) of a beneficiary, the death or incapacity of a named successor trustee, or a change in financial fortune. Changes in the law are also important; for example, trusts that were drafted in the 1980’s, when the estate tax exemption was only $600,000, may no longer be appropriate with today’s $2,000,000 estate tax exemption.