5 Killer Estate Planning Errors

Estate planning word cloudIn the 20 years of my career, I’ve seen many very sophisticated people who have made major mistakes with their estate plans. I frequently hear that they have their estate in order. After I do planning, I discover a plethora of omission and mistakes. In many cases, the documents that have been created, do not follow the wishes of the individual. Here are 5 Killer Estate Planning Errors.

1. No estate plan at all
To a certain extent we all have an estate plan. It’s just whether you want to implement it or you would prefer the state you live in to do it for you after you die. Not having a will is probably one of the most common estate planning mistakes that I see. When you die with no will you are intestate. So the intestacy laws for the state you live in will make the decisions about who gets what. It may work out that those antiques you promised your niece will be hers, but there is a high likelihood that they won’t. Wills deal with probate assets. Those are assets that do not have a named beneficiary or titling, such as the furniture and heirlooms. Non-probate assets will not be affected. This would include investments like IRAs and 401(k) assets that require a beneficiary named at the time the account is established.

Bottom line-get a will. Even a simple one will help out tremendously.

2. Outdated beneficiaries
One of the most overlooked areas of an estate plan is not keeping beneficiary designations up to date. I see it with 401(k) accounts quite a bit. Someone gets a divorce and leaves the previous spouse on the form after remarrying. Another example would be not adding a new child to the list of contingent beneficiaries. The reason this is so important is that many people assume that their will dictates where these assets will go. Any designated beneficiary on an account super cedes the will. These are legal binding documents. So if the will says the new spouse gets the 401(k), and the beneficiary is the previous spouse on the form and was never changed, you may be in for some explaining.

Bottom line-review your beneficiaries regularly, at least annually.

3. Failure to consider the estate tax and gift consequences of life insurance
People tell me all the time that life insurance proceeds are tax-free. Yes, income tax-free, not estate tax-free. If you have any incidence of ownership in a policy, you are the owner or the insured, then it is part of your estate when you pass on to the afterlife. You can change the ownership of the policy to your children to remove the asset from your estate. Certain types of trusts will accomplish this as well. However, sometimes there are large cash values that have accumulated over the years to be considered.

Bottom line-consult a wealth advisor or estate planning attorney.

4. Not maximizing annual gifts
Gifting is one of the oldest and most used techniques in passing assets to your heirs. In 2012 the annual gift maximum is $13,000 per person. Giving this amount annually to each beneficiary is just smart planning for the wealthy. It’s a great way to reduce your future estate tax bill, and help your children and grandchildren. This amount can be accelerated for college 529 contributions. You can actually contribute five years up front to each college bound heir. Over the long run, by using gifting techniques, you can transfer significant sums out of your estate along with the appreciation.

Bottom line-think about gifting as a wealth transfer strategy if you have a large estate.

5. Failure to use your estate tax exemption
I see this mistake quite often with married couples that have accumulated significant assets. Each person receives an estate tax exemption currently of $5,120,000 in 2012. This is the highest it has ever been. For years it was stuck at $600,000. It may revert back to $1,000,000 if the Bush tax cuts expire on January 1, 2013. After the $13,000 gifts, you can give away this amount during your lifetime, or utilize a marital trust that will take advantage of both spouses exclusion amount.

Bottom line-you may be able to give away over $10,000,000!

Estate planning is one of the more complex areas of financial planning. People frequently use poor judgement and planning to achieve goals from the grave. With a little planning, you can avoid these killer mistakes. If you would like help with your estate planning, write me at write me at david@lexwealth.com, or call me at (859) 225-2596.