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17 Major Mistakes in Estate Planning

 Estate planning involves the management of assets during one's lifetime, and the disposition and management of those assets at death.  It requires an ongoing review and evaluation of personal, family and business circumstances, with periodic adjustments made, as necessary.  An estate planning attorney can help you develop and maintain an estate plan that accomplishes your objectives, and will work with you and your other advisors to coordinate that effort.

For your information, the following are 17 common and significant mistakes that people make with regard to estate planning.

1.         Failing to regularly take inventory of, and value, assets.  If you don't know what you have, you can't protect it, and may have trouble giving it away.  Many people are not even aware of the assets they have, such as company benefits.  They may also own assets that change in value regularly, like a home or a stock portfolio.

2.         Omitting foreign-owned assets from estate.  Foreign-owned assets are part of one's taxable estate.  Omitting such assets can understate tax liability and force the unplanned liquidation of other valuable assets.

3.         Failing to coordinate financial plan.  Life cycle changes, including birth, death, marriages and home purchases, usually require changes to a variety of planning documents, including wills, benefit plans, insurance policies and trusts.  Failing to coordinate those various documents and plans as a result of life cycle changes can lead to unintended consequences.

4.         Failing to take advantage of bypass trust to "save" unified credit equivalent.  The tax code allows individuals to shield the first $1.5 million of estate-taxable assets for the years 2004-2005.  Under current law this amount increases to $2,000,000 in later years.  Spouses who allow assets to pass to each other upon death without preserving this tax credit are exposing their estates to unnecessary taxation.  Preserving this credit is most effectively done through a special "bypass" or "credit shelter" trust.

5.         Developing an estate plan that uses the marital deduction when it is unavailable.  The marital deduction allows assets to be transferred between spouses with no gift or estate taxes. Non-U.S. citizen spouses are ineligible for this benefit but may be able to accomplish similar objectives by the use of certain trusts.

6.         Failing to maximize gifts.  Estate values can be reduced, along with potential estate tax liability, through the use of gifts or transfers of property with little or no value exchanged in return.  Individuals can gift up to $11,000 per person every year, with spouses able to combine or "split" their gifts.  This technique is especially effective with assets that may have little current value, but high potential value in the future.

7.         Making gifts to someone who uses those gifts to pay for education or medical expenses.  Payments made directly to education or medical providers are not subject to gift tax.  Hence, a parent or grandparent who pays tuition for a child directly to a college can still transfer additional assets up to $11,000 per year without gift tax.

8.         Improper use of jointly held property.  Property held jointly automatically passes to a survivor without restriction, which may not be in the best interests of the survivor.  Unfavorable tax consequences can also result.

9.         Improperly structured life insurance.  Life insurance policies are more complicated than most realize: Careful consideration needs to be given to ownership and beneficiary arrangements, dividend and settlement options.  Seemingly inconsequential details can lead to disastrous results, as when a beneficiary receives a lump sum of money with no restrictions on how that money can be used, or when a policy is inappropriately owned, resulting in unnecessary taxation of policy proceeds.

10.       Inadequate amount of life insurance.  Studies consistently indicate that most Americans are underinsured, with the result that survivors suffer a diminished standard of living and/or inability to achieve objectives like attainment of educational goals.  Many people also lose coverage or have it reduced due to policy expirations, automatic reductions at larger ages and/or group coverage cancellations.

11.       Failing to fix and maintain property values.  The IRS is in the business of generating tax revenues.  Therefore, in valuing estates, they always push for the highest possible values.  Fixing and maintaining property values can help you—not the IRS—get control.  Valuations are especially important with closely held businesses: These values can be built into buy/sell agreements and, if properly structured, must be honored by the IRS.

12.       Failing to keep adequate records.  Good recordkeeping helps keep track of assets, changes in value and ownership of property, all of which are critical for tax and family planning needs.

13.       Choosing the wrong executor.  An executor is responsible for administering or "winding down" your estate.  Such responsibilities include taking inventory of assets, notifying creditors, paying off debts and maintaining or selling a business, along with other responsibilities.

14.       Choosing the wrong trustee.  A trustee manages assets on behalf of beneficiaries, according to the provisions of a trust.  He/she must have the ability to follow such provisions and/or make decisions on behalf of the trust when, and if, necessary.

15.       Choosing the wrong guardians.  Guardians are responsible for the care and well-being of individuals under their charge, who might range from minors to those unable to take care of themselves, such as an elderly parent or grandparent.  Guardians must be able and willing to serve in such capacity, especially since this responsibility may extend for many years.

16.       Failing to plan for the inability to care for oneself.  An individual may become too sick or disabled to care for himself.  If he or she owns or controls assets, it may be difficult or impossible for someone else to access those assets on behalf of the sick or ill individual.  Further, other family members may fight over control of such assets at a time when one is incapacitated.  Two possible solutions are use of a power of attorney, or use of a trust.  With a power of attorney, someone can be given the right to manage your financial affairs upon the occurrence of a specified event (for example, becoming incapacitated).  A trust can also be used to own assets, with a trustee directed to manage one's assets when triggered by the specified event.

17.       Failing to periodically review and make adjustments.  A plan is only as effective as its ability to be flexible and responsive to changing circumstances.  Changes happen throughout life in so many areas, including family status, health, financial status and career.