I want to cover eight critical estate planning mistakes that can cause serious problems for those you leave behind. These estate planning mistakes can be easily avoided.
1. No Plan at All: Perhaps the worst mistake you can make is to have no plan at all. It is estimated that between 50% and 70% of Americans do not have a will. You are the only one who can protect yourself, your loved ones, and your hard-earned assets. Connecticut wills will determine who inherits your assets when you do not have a Will. You can refer back to the February 2009 issue of STRUCTURES to see what Will looks like. Also remember to review and update your real estate plan regularly.
2. No Plantation Tax Planning: With proper planning, couples can protect up to $4 million from Connecticut State property taxes and $7 million from Federal property taxes. The basic level of planning to achieve this is called a “Credit Shelter Trust”. On larger estates, irrevocable life insurance trusts, eligible personal residence trusts, charitable trusts, and family limited partnerships can be used to protect assets from land taxes. Without such planning, unexpected and surprising property taxes could be due.
3. No Disability Planning: There is more to inheritance planning than distributing assets after death. A comprehensive estate plan starts with planning for your own disability. You should appoint a health care representative to make health care decisions for you if you cannot. You must have the Will of Life to prevent unnecessary or unwanted life support. Either a durable power of attorney or a living trust must be in place to handle your affairs if you are unable to.
4. No Guardian for Minors Named: Parents devote a lot of time to providing for their children’s needs. However, these same parents often fail to appoint guardians for their minor children if both parents are dead. Who should be the guardian to raise your young children? What specific instructions would you give them? You must legally designate trustees in your will. Most importantly, a standby guardian is an absolute must. Many people rely on the appointment of a guardian in their will. But, it will be completely ineffective if the parent is disabled or cannot be found immediately.
5. No Planning for Life Insurance: Life insurance is a useful financial tool for many Americans to help support a surviving spouse and small children or to pay land taxes. One of the biggest tax myths is that life insurance is tax free. Although the death benefit is income tax-free for your beneficiary, the entire value of the death benefit is calculated for property tax purposes. You can structure life insurance to avoid property taxes and still meet your goals through a well-structured “Irversible Life Insurance Trust”. Otherwise, you could inadvertently make the IRS the beneficiary of nearly half of your life insurance.
6. No Planning For “Out-of-State” Real Estate: If you own real estate outside your home state, probate proceedings may have to be opened in that other state to transfer rights to “out-of-state” real estate that. This can be avoided if you make a suitable legal plan beforehand. The probate process is much more burdensome in some states than in others.
7. No Tax Planning for Eligible Retirement Plans: Most wealth in America today is in eligible retirement plans. Without careful coordination, more than half of your retirement assets could go to the IRS instead of your loved ones. The tax effect on these assets can be reduced substantially with proper planning.
8. No Lifetime Gift Packages: A great planning opportunity is the annual gift exclusion. You can give up to $13,000 annually to as many individuals as you want with no gift tax to be paid. This removes the value of the gifted asset from your inheritance and eliminates any future appreciation of the gifted asset. But, be careful because lifetime gifts can be subject to capital gains tax at a later date.