Protect Your Family’s Future By Avoiding These Estate Planning Mistakes

Planning for your family’s future involves a lot more than just designating beneficiaries.

Underestimating the complexity of the process (and following commonly held but often inaccurate assumptions) leads many people to make the following common mistakes with respect to estate planning.

Improper Use of Jointly Held Property: A potential misuse of jointly held assets arises if a parent adds a child as joint owner of property to avoid probate, such as when a parent adds a child as a joint owner of a bank account, investment ac- count, or on the deed for real estate. In some circumstances, adding a child as a joint owner may constitute a taxable gift and require a gift tax return.

In addition, the parent may now need the child’s consent to sell the asset. Further, the child’s creditors may attach a lien on the property. If the parent has more than one child, adding only one of the children as a joint owner raises additional issues upon the death of the parent: (1) if the child shares the property equally with his or her siblings, the child may be making taxable gifts, and (2) if the child does not share the property with his or her siblings, the parent may have unintentionally disinherited the other children with respect to that asset.

Improperly Arranged Life Insurance: Although not subject to income tax, contrary to popular belief, life insurance is subject to estate tax. In addition, the amount subject to estate tax is not the cash value of the policy but rather the amount of the death benefit.

Individuals should review their life insurance beneficiary designations to verify that they have designated a primary and a contingent beneficiary. If there is no living beneficiary designated, the life insurance proceeds will be paid to the insured’s estate and, therefore, are subject to the claims of the insured’s creditors, whereas they would be protected from creditor claims if transferred at death to a designated beneficiary.

If the individual has significant assets in addition to the life insurance policy, it may be beneficial to have an irrevocable life insurance trust be the owner and beneficiary of the life insurance policy. Upon the insured’s death, the life insurance proceeds will be paid to the life insurance trust and not be subject to estate tax.

Believing that Estate Planning is Only about Estate Taxes: There is more to estate planning than simply saving estate taxes. Everyone, including those whose estates do not exceed the estate tax exemption and therefore will not be subject to estate taxes, should consider several non-tax issues. For example, individuals with minor children may want to consider establishing trusts for their children and be able to select the age at which the child will receive outright ownership of the inheritance. If the will does not establish a trust and a distribution is to be made to a minor child it will be held in a custodial account until the child attains the age of majority. Parents of a minor child may also want to select guardians until the child attains the age of majority. A parent with a disabled child may also want to establish a “special needs trust” so as not to disqualify the child from certain government benefits and services.

Other Important Considerations

A thorough estate plan will also involve a determination of the proper beneficiary designation for annuities, individual retirement accounts, life insurance, and qualified retirement plans to ensure that such assets pass in a tax efficient manner and in accordance with the client’s overall estate plan. An estate plan also should include the preparation of a Power of Attorney and a Health Care Directive to ensure decisions can be made in the event you become incapacitated.

It is important to understand all the pieces that go into an estate plan and that employing experienced counsel can help ensure your wishes are fulfilled.

Frank Baldino is an estates and trusts attorney who helps people protect assets for their families and future generations. For more information, contact him at 301-657-0175 or [email protected].