09-13-2007, 12:09 PM
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Join Date: Jan 2007
Location: New Jersey, USA
10 Most Common Mistakes of Estate Planning!
Estate planning is by no means an enjoyable experience, but it is necessary to ensure that as much of your wealth as possible goes to the use and care of your loved ones. After a lifetime of hard work, avoid these most common pitfalls to make certain that your money and property stays in the hands of the people you want it to.
- Avoiding the issue: Planning for your death is not pleasant, but it’s an uncertain world and you need to think ahead. You are never too young for estate planning. Putting off planning until it is too late can leave your estate riddled with problems and even debts after your death.
- Thinking you don’t have enough wealth for estate planning: Estate planning is not only for the rich, it is for all people who want to keep as much of their assets within their family as possible. Besides, after factoring in the value of their home or other real estate, many people are surprised by just how large their estate actually is.
- Not seeking professional help: These days the internet is loaded with forms to fill out or kits for making your will. In something as tricky as estate planning, sometimes the smallest mistakes can invalidate wills. A seemingly insignificant error can tie up your estate in the courts and cost your heirs thousands in legal fees. And even if your do-it-yourself will is perfectly legal, you will still be missing out on valuable strategies to avoid extra taxation that an experienced accountant, financial advisor, or lawyer could have provided you with.
- Failing to plan for disability: Many people forget that they may need extensive long term health care. These costs can be astronomical and most people incorrectly assume Medicare will cover them. However, if you surpass the benefit threshold, Medicare will not pay for your stay, and you, and your estate even after your death is responsible to pay for this. The effect of this is your hard earned money can go completely to the government, leaving your loved ones with nothing. This can be avoided with proper estate planning in ways such as setting your assets up in trust or investing in long term care insurance.
- Life insurance: It is often overlooked that insurance proceeds are considered part of the taxable estate. Improperly planned that can mean as much as 55% of the insurance money going to government taxes, leaving only 45% of the sum you thought you had coming for your family and final expenses. Life insurance is not subject to income tax, but it is subject to estate tax. A Life Insurance Trust can be set up relatively simply and can help avoid the taxation of your life insurance proceeds.
- Leaving everything to your spouse: The government allows for an estate tax credit. Yet, if you leave all your assets to your spouse, you basically sacrifice their share of this benefit. For people with estates which exceed $3,000,000, however, these wills leaving everything to the living spouse create thousands of dollars of unnecessary taxes. Doing this misses the chance to keep about $1,500,000 of assets free of estate taxes. Of a $3,000,000 estate, this type of will can cost $600,000 in extra taxes. A way around this is to have provisions in the will or living trust agreements which create a bypass trust at the death of the first spouse. A bypass trust basically puts all the couple’s assets in trust for their children with the condition that the surviving spouse has a right to use all the property during his or her lifetime. This trust significantly cuts down the tax burden on the living spouse.
- Lack of liquidity: Many times people find that the majority of their wealth is tied into real estate or a family business. This can be problematic because these assets are not very liquid and make it difficult to pay taxes on the total value of the estate, forcing the heirs to quickly sell the property or enter into a large amount of debt. This situation can be avoided easily with proper estate planning.
- Improper use of gifting: It is important in estate planning to know when to give a gift and when to wait. The government allows for giving up to $12,000 annually to as many individual people as you wish without taxing the gift. Consider giving away money you would like your family to have in this manner to avoid taxation. But be careful what is given as a gift, for example, stocks should not be given as gifts, as the recipient is responsible to pay taxes on the gains based on the original price to the current price. However if stocks are inherited, the heir would not have a gain to pay taxes on. It is better to gift money that will help lower the tax burden on the heirs but will have little effect on the giver during his or her life.
- Joint tenancy: Joint tenancy can be a problem because of the avoidable income taxes that result after the death of one of the owners. Also, joint tenancy may also result in unwanted beneficiaries such as creditors, or a divorcing spouse. The same may happen if property is in joint tenancy with a spouse. If the property is held in joint tenancy instead of in a trust, the surviving spouse is in danger of exceeding the unified credit exemption amount (the amount of assets that can pass without an estate tax or gift tax on the transfer) and being subjected to unnecessary extra tax.
- Not updating your estate planning: Unfortunately, estate planning is never totally complete until your death, and on a fairly regular basis it is wise to review and update your will. This helps to ensure the most current strategies in taxes; to change, remove or add beneficiaries, and just to sit down and review your situation to make the best decisions.
Ultimately the best way to go about estate planning is to start as early as possible, and ask yourself important questions about what will happen to your wealth and property after your death. By taking simple steps and avoiding the mistakes listed above, you can ensure the best outcome of your estate for your loved ones, instead of leaving a legacy of debt and legal issues.