Estate Planning Risks

There are many issues to consider as you organize your finances and decide what happens to your assets after your death. While there may be similarities between people, each person does have unique characteristics – and that is one reason why estate planning can be complex. Because of this complexity, there may be several unintentional mistakes made. Here are a few common things you should try to avoid.

Issue 1: Naming the Wrong Executor
The executor is the person who will be in charge of your assets after you pass away. They will collect the assets, pay debts and expenses, and file any necessary tax returns.

Unfortunately, the original named executor, years after the original documents were signed, may not be in a position to assist (death / elderly, etc.). If a professional was chosen, such as an attorney or accountant, they may be out of business and/or long retired. Children who may have been to young when the original documents were signed, may now be an appropriate choice.

Suggestion: Every few years, make sure to verify who has been named your executor and evaluate if they are still an appropriate choice.

Issue 2: Not Keeping Documents Up-to-Date to Reflect Maturity of Children
When children are young, it is common that a guardian and/or trust may be created if their parents die. Once the children reach maturity, the guardian provisions are likely not needed and leaving assets to a trust should, at a minimum, be re-evaluated. It may make sense, when the children are adults, to distribute assets directly to them – as opposed to a trust.

Your wishes may have changed as well. One of your children may be struggling financially while another has met with great financial success. Or maybe a grandchild has special needs.

Suggestion: Check to see that the provisions in your will/trust, as it relates to your children are appropriate and update if necessary.

Issue 3: Inappropriate Health Care Directives
Under the Health Insurance Portability and Accountability Act (HIPPA), people’s medical records are confidential and cannot be shared with anyone without written permission. Not having this information could prevent any decision-making by others in case something happens to you.

Suggestion: Update and check your living wills, advanced health care directives and your health care powers of attorney.

Issue 4: Inappropriate Estate Tax Provisions.
In 2021, individuals are allowed to transfer assets valued up to $11.58 million ($23.16 million for married couples) free of gift taxes and estate taxes. However, outdated estate documents might include planning that was appropriate for much lower exemption values. For example, requiring the funding of a trust for heirs up to the applicable exclusion amount, might have the unintended consequences of impoverishing the surviving spouse.

Suggestion: Review the details in your estate documents with your attorney and/or tax professional.

Issue 5: Estate Documents Created in a State You No Longer Reside
Each state has its own income and estate laws. Some states use community property laws while others are common law states. As a result, there can be significant differences in how assets are transferred.

In addition, 17 states impose some form of estate / inheritance tax, with different exemption amounts. It is possible that an estate not subject to federal estate tax is subject to state estate taxes. If your estate planning documents were created in a state different than where you currently reside, they may be outdated and could be misapplied.

Suggestion: Review your estate plan to see if it is still appropriate, and make it reflects your current residency.

Issue 6: Not Using Portability
Portability is the ability of a surviving spouse to use any unused portion of their deceased spouse’s exclusion amount. Portability is a relatively new tool in the estate planner’s toolkit. Documents should be reviewed to ensure they properly allow the use of portability. In addition, portability only works if the first estate files a federal estate tax return within the allowed time frame. If they do not file a return at the first spouses death, this could be a costly mistake if the surviving spouse dies with more than $11.58 million.

Suggestion: Review your estate plan with your attorney to ensure portability.

Issue 7: Failing to Plan for Capital Gains Taxes.
Most estates will not pay a federal estate tax. As such, tax planning should generally be focused on income tax planning (as opposed to estate tax planning).

For example, planning for a step-up in basis for appreciated assets. This means that, for the heirs, the capital gains tax obligation on the amount of appreciation during the deceased’s time of ownership will disappear. In the tax world, this is probably the closest thing one can get to a free lunch.

Suggestion: Working with your financial team, consider keeping low cost basis assets so heirs could receive the step up in basis.