Common Estate Planning Mistakes

  1. Mistake: improper use of jointly-held property

If used excessively, or by the wrong parties, jointly-held properties (such as joint tenancy) can become a nightmare of unexpected tax and nontax problems. When creating a joint tenancy with someone other than your spouse, a gift is made and gift taxes may be due. A lawsuit against your joint tenant may unexpectedly expose your share of the property to a judgment. Jointly-held property can also result in additional estate taxes and be in conflict with your will and trust distributions provisions.

2. Mistake: improper disposition of assets

An improper disposition of assets occurs whenever the wrong asset goes to the wrong person, in the wrong manner, at the wrong time. Overutilizing the unlimited marital deduction (leaving a large and complex estate to a spouse who lacks the ability to manage it), leaving inappropriate assets to children, or transferring a business to family members who are not involved or interested in the business are examples of improper disposition of assets.

3. Mistake: Improper policy ownership and beneficiary designation of life insurance

Congress has provided strong incentives for an estate owner to purchase life insurance. If policy ownership is properly arranged, life insurance provides income-tax free death benefits, gift tax leveraging and removal of the proceeds from the insured's estate. Many people, however, unwittingly fail to take advantage of these benefits due to improper or poorly arranged, policy ownership. In addition, an improper beneficiary designation can also subject death proceeds to gift taxes!

4. Mistake: Lack of liquidity

Most people have no idea of the size of their estate and are surprised to learn how much it will cost to settle their estate at death, and how quickly taxes and other expenses must be paid. Since estate taxes must generally be paid within nine months of death — in cash — most estates may be forced to sell assets (at a fraction of their value) in order to raise adequate cash to pay estate taxes.

5. Mistake: Leaving everything to the surviving spouse

Depending on the circumstances, leaving everything to your spouse — estate tax free — may cause a considerable increase in estate taxes at his or her subsequent death. The first spouse to die also loses the opportunity to shelter — from estate taxes — an amount equal to the applicable exemption amount that would go to the next generation. Furthermore, the surviving spouse may have no interest or capacity in managing estate assets of business interests left in his or her care.