10 Common Estate Planning Mistakes (and how to avoid them)

My Comments: As you can imagine, estate planning is not for the faint of heart. But it matters for some of us, who have spent years and years accumulating assets. While this happens, people get married, they get divorced, they have children, some of whom are considered responsible.

I had a recent conversation with someone whose father-in-law died recently. He was not a young person but had accumulated a reasonable estate, though less than $1M. Whenever his daughter-in-law, a CPA,  asked about his circumstances, she was told in no uncertain terms that it “was none of her damn business.”

Only now that he has passed, it is their business. She and her husband have to sort out all the details in order to make sure Mom is properly taken care of. Were there any insurance policies? No idea. Was the pension set up to continue after his death? No idea. Which banks did he place money in CD’s? No idea. And this is critical since there may have been as many as ten in different banks, none of which would generate enough interest to trigger a 1099 which would at least tell the family where the money was.

If you are reading this and have money in different places, and income from various places, for God’s sake, tell your children about it before you die.

By Stephan R. Leimberg | November 7, 2013

Estate planning is the process of planning the accumulation, conservation, and distribution of an estate in the manner that most efficiently and effectively accomplishes your personal tax and nontax objectives. Every estate is planned – either by the individual or by the state and federal governments. By your action now, you can strongly influence, if not determine, what will happen in your clients’ futures.

This list is devoted to the types of problems that can cost your clients dearly in terms of dollars and unbelievable heartache. And so, without further ado, here are ten areas of common (and serious) mistakes that can be easily solved by periodically reviewing your clients’ plans.

Mistake 1: Improper Use of Jointly-Held Property
If used excessively or used by the wrong parties (especially by unmarried individuals, or where one spouse is not a United States citizen) the otherwise “poor man’s will” becomes a poor will for an otherwise good man or woman. In short, jointly held property can become a nightmare of unexpected tax and nontax problems including:

A. When property is titled jointly, there is the potential for both federal and state gift tax, particularly with non-spouses and non-citizen spouses.

B. There is the possibility of double federal estate taxation; if the joint ownership is between individuals other than spouses, the entire property will be taxed in the estate of the first joint owner to die – except to the extent the survivor can prove contribution to the property. Then, whatever the survivor receives and does not consume or give away will be included (and taxed a second time) in the survivor’s gross estate. With non-citizen spouses, the typical rules associated with the marital deduction do not apply, and the client may need to utilize a Qualified Domestic Trust (QDOT) to avoid the immediate imposition of the federal estate tax.

C. Once jointly owned property with right of survivorship has passed to the survivor, the provisions of the decedent’s will are ineffective. This means the property is left outright to the survivor who is then without the benefit of management protection or investment advice or the property could be left to a person not intended to be benefited.

D. Even when property is jointly owned by spouses, the surviving spouse can give away or at death leave the formerly jointly owned property to anyone the surviving spouse wants; regardless of the desires of the deceased spouse. In other words, holding property jointly results in a total loss of control at the first death since the surviving spouse can completely ignore (and in fact may not know) the decedent’s wishes as to the ultimate disposition of the property. Whether this is an issue depends upon the specific facts of the situation. However, this loss of control can be especially horrendous when the joint owners are not related or are clearly not in agreement as to the ultimate recipient of the property.

E. Since the jointly held property passes directly to the survivor (who then could possibly squander, gamble, give away, or lose the property to creditors), the decedent’s executor could be faced with a lack of adequate cash to pay estate taxes and other settlement expenses. By the same token, since joint assets pass directly to the survivor, it is important to keep in mind how the taxes associated with these assets are to be allocated among the other beneficiaries of the estate. It is entirely possible that the joint assets can pass to one person, and the taxes associated with these assets be charged to another.

F. A well-drawn estate plan is designed to avoid double taxation – often by passing at least a portion of the estate into a CEBT (Credit Equivalent Bypass Trust). In this manner, up to $5,250,000 in 2013, can be sheltered from federal estate tax at both the first decedent’s death and then again (since the surviving spouse has only an income interest) escape estate tax at the death of the surviving spouse. But holding property in joint tenancy thwarts that objective. Instead of going to a bypass trust to avoid a second tax, the property goes directly to the survivor and will be taxed at the survivor’s death. So the unified credit of the first spouse to die is wasted.

G Some clients title assets in joint names in order to increase the FDIC insurance limitations. This occurs because FDIC insurance provides for $250,000 of protection for each owner on an account at that particular financial institution. Therefore, by titling assets in joint names, the amount of the protection is increased. However, by titling assets in joint names, these assets are bypassing the provisions of the estate documents, which can create other problems.