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The 10 Most Common Estate Planning Mistakes

By David T. Phillips, CEO

Estate Planning Specialists

My intentions for writing this article were to draw upon my 42 years of experience in planning estates and outline the 10 most common mistakes I see daily. It became apparent that to list all ten at one time would take up too much space, so I will begin with the first 5.

I will be listing only the mistakes. To find the solutions to each problem, and the last 5 mistakes you will want to call our offices, 1-888-892-1102 and request a copy of my recently revised book, The Ten Most Common Estate Planning Mistakes and How to Avoid Them, at a discount of $5.00 ($49.95 on Amazon) or click here to be taken to the request page.

While it is true that planning one’s estate isn’t an exciting event – it’s vital to the sanctity of the family. Archeologists have proven the ancient Egyptians wrong – YOU CAN’T TAKE IT WITH YOU! We all need an estate plan, so it is important that you avoid making mistakes. So what are the 10 most common estate planning mistakes?


Mistake 1:

Failure to have any plan at all, or having an antiquated or improper plan.

We often hear of families torn apart because a parent or grandparent fails to predetermine who gets what. “She wanted me to have it,” claims one child. “No she didn’t, she promised it to me,” retorts another. Who is right? Only the deceased knows for certain. Too bad she didn’t write it down. Too bad he didn’t take a few minutes to let his true wishes known.

At a time when we want the best feelings to exist, when we want them to find comfort in each others’ arms, family members, out of selfishness, can foster the worst traits in the spectrum of human emotions. Anger, envy, jealousy – even hate – can be found when confusion is wrought because of a failure to preplan the distribution of even the most modest estate. Sins of omission are still sins.

Antiquated plans are just as problematic. A will drawn up 10 years ago is unlikely to reflect your current situation. Think of how much happens during that time. In fact, I have seen more problems resulting from outdated wills than any other situation. New marriages, new domiciles, new tax laws, growth, more children and grandchildren, retirement income, new investments; the reasons to update your plan are endless. Anyone who has a will or a revocable living trust that hasn’t been reviewed since the passage of the Tax Relief Act of 2010 last January is asking for serious trouble. At a minimum, all estate planning documents should be reviewed every five years.

Improper plans also create problems, such as do-it-yourself kits that are never completely finished, non-funded revocable living trusts and/or multiple conflicting wills. All you accomplish with an improper plan is to create confusion, making life difficult down the road for your heirs, encouraging disputes.

Mistake 2:

Believing that The American Taxpayer Relief Act of 2012 will actually provide tax relief.

It seems like yesterday, but it has only been a one year since the major concern as 2012 came to a close was how Congress was going to avert the so-called Fiscal Cliff. Remember, in unprecedented fashion the Senate reconvened on New Year’s Day 2013, and in the early morning hours passed The American Taxpayer Relief Act of 2012 (ATRA). Then hours later the House approved the bill after the spending cut provisions were abandoned.

The joke of the day was: How do you know if a politician is lying? Answer: “His lips are moving.” Congress and the President know all too well that ATRA provided very little relief. In fact the name is one of grandest oxy morons of our day. The only apparent relief came in the estate tax arena.

Because the federal estate and gift tax exclusions were set to be reduced to $1,000,000 at midnight on December 31, 2012, Congress was forced to make a move. As part of ATRA both exclusions were set at $5,000,000, indexed for inflation ($5,250,000 in 2013), with a top 40% federal estate tax rate for assets greater than the exclusion.

One constant that I know as an estate planner for the past 40 years is that tax laws are never permanent. I have seen the estate tax exclusion as low as $60,000 and the top estate tax bracket as high as 75%. Because of the gigantic deficit, the growing government monster needs revenue. They have pledged to tax the main source of wealth in the country…..the rich and small businesses, so don’t expect outrage or sympathy from the press as taxes increase.

Don’t be lulled into a false sense of security. Plan your estates immediately. Don’t wait another minute. The other shoe has not yet fallen. The estate and gift tax exclusion increase was a bone that was thrown to America. It looks good and benevolent and yet it only affected a few families either way. Don’t rest easy.

A few days after ATRA was signed into law Nancy Pelosi proclaimed, “we are not done raising taxes.” President Obama said as much the following Saturday during his radio address while vacationing in Hawaii. How will they raise taxes? By sleight of hand. Magic.

With the elimination of certain deductions, exemptions, credits, etc., taxes can be increased. One minute you have it and the next you don’t. Last year President Obama released his Green Book proposals for 2014 with a litany of desired changes to many popular planning tools used by affluent Americans, most of which would raise revenues without raising tax rates. The Obama Green Book proposals include:

• Elimination of the non-spousal “lifetime stretch option” currently available for all inherited qualified accounts (IRA, 401k, etc.), with a complete distribution over a maximum of 5 years;

• Minimum term of 10 years for Grantor Retained Annuity Trusts;

• Limitation on the number of years you may skip generations;

• Elimination of the valuation discounts associated with intra-family asset sales and gifts;

• The inclusion of the entire value of a Grantor Trust in one’s taxable estate.

• The loss of the tax-free step-up in basis on appreciated assets at death. Currently we can transfer all capital gains to our family at death, tax free. While the estate tax exclusion may be beyond the reach of most estates, the elimination of the step-up in basis would seriously impact most estates.

With the passage of The American Taxpayer Relief Act one may logically put their guard down. Don’t be duped into believing that you now have plenty of time to plan because the estate and gift tax exclusions are supposedly permanent at a lofty $5 million. If you haven’t already done so, have all of your planning options put in place now. DO NOT WAIT!

The Obama administration has shown their hand. They are not going to stop trying to raise revenue (code word for “taxes”) to offset spending cuts. Forewarned should be forearmed.

One last word of warning: When planning your estate don’t forget state inheritance taxes. Currently 26 states impose a tax on transferred assets at death, some as high as 19%. The state of your domicile at the time of your death determines whether or not you will be taxed! Failure to plan for this tax could have serious financial consequences.

Mistake 3:

Blindly leaving everything to your spouse because of “portability”

Since the Tax Act of 1981 and the introduction of the 100% marital deduction, 80% of America’s affluent have elected to pass their total estate to their surviving spouse, usually the wife. In fact, for a joint estate valued in excess of $5.25 million in 2013 or an estate with the potential to appreciate beyond that figure, not passing everything to your spouse will be the most expensive and needless mistake you will ever make. To put it in dollars and cents, currently an individual estate valued at $6 million will pay over $300,000 in needless federal estate taxes. The estate of a married couple valued at $10.5 million will generate an estate tax of zero. If you are married, you should maximize the generosity of the government by using both of the exclusions. In that case, any federal estate taxes you pay are voluntary and unnecessary.

A provision known as “portability” was introduced with The Tax Act of 2010 and reconfirmed with the passage of the recent American Taxpayer Relief Act of 2012. Simply stated “portability” allows a couple to use both federal estate tax exclusions regardless of when the survivor passes away. Many could fall prey to this deceptive strategy and not plan their estates, believing that even if their estates grow to $10 million no federal estate taxes would be due. On the surface “portability” may appear tantalizing, but there are so many reasons why we shouldn’t use it to substitute proper planning.

I know you want the solution to this mistake right here and now. Let me give you a hint of the answer with two words: Dynasty Planning. For a comprehensive you’ll need to request my book The 10 Most Common Estate Planning Mistakes and How to Avoid Them by calling 1 888 892 1102.

Mistake 4:

Paying too much income and capital gains tax

In an ideal world we would all pay the same percentage for the services we receive from our governments. But unfortunately the biggest burden seems to always land on the shoulders of the affluent. With the incomprehensible national debt, the re-election of President Obama and the increase in “big government,” it is no secret that taxes on our earned and unearned income (investments) are increasing.

The American Taxpayer Relief Act of 2013, actually increased taxes in many key areas:

• Estate and gift taxes increased from the 35% top rate in 2012 to 40% for the foreseeable future;

• Income taxes to a new top rate of 39.6% for income over $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly.

• Capital gains and dividends increased from 15% to 20% for top income earners

• All taxpayers saw a 2% income tax increase (return to 6.2% from 4.2%) in the employee portion of the Social Security tax.

• The Health Care Surtax of 3.8% will be imposed beginning in 2014 on earned and investment income for taxpayers with income of $250,000 (joint) and $200,000 (single).

The Fiscal Cliff’s, American Taxpayer Relief Act was just a first blush attempt at raising revenue. The message from Washington is clear, “we are not done increasing taxes!”

The more we pay in taxes the less we will have in our estates. A grave mistake that most of us fall prey to is that we simply pay too much. It is always wise to pay as little as legally possible, but the loop holes are closing and for those on salary, the wiggle room is tiny. For most the only tax saving area we have is with our investments. We need to deduct as much as possible and find investments that do not incur a tax on the gains and the eventual income.

Mistake 5:

Not properly using the IRS-approved annual and lifetime gift allowances

The vast majority of affluent Americans don’t comprehend the need to share their wealth with their loved ones while they are still alive. Furthermore, they don’t understand the power that “leverage” can create and the many tax benefits that can and will be realized if they apply this simple concept. In fact, in most cases, by leveraging the IRS gift allowance, all estate shrinkage can be totally eliminated. Yet only a handful of prudent taxpayers utilize this basic, but powerful, strategy.

Each and every American can, by current law, gift $14,000 annually – completely tax free – to anyone they want. I often joke in estate planning seminars that I can legally drive up to a homeless man on the corner and really make his day by telling him that by virtue of the gifting laws, I would like to cut a check in his name for $14,000 that would be totally income, gift and estate tax free.

Of course, doing so may not be the wisest move. But it would be very effective in shrinking one’s estate. Consider how such a gift would benefit those you really care about, at the same time reducing your estate annually by the amount of the gift. A married couple can each gift this allowance, meaning that they could gift up to $28,000 per year per beneficiary. A couple with five children, five grandchildren and two great grand-grandchildren, can gift up to $336,000 per year. By maximizing this tax free strategy annually, one’s estate could shrink with relative ease. That is, of course, if the growth doesn’t outpace the gifts.

Annual gifts are a “use it or lose it” proposition, with no carry forward provisions. Another option to consider is transferring all or a portion of your lifetime gift allowance, currently unified with the estate tax exclusion of $5.25 million. By establishing an Integrated Dynasty Trust, you will be able to retain control, continue to receive income and FREEZE the transferred asset so that all future growth is out of your estate. Of course, once you have used your lifetime gift you cannot use it again when you die. Transferring your lifetime exclusion in an Integrated Dynasty Trust is an advanced estate planning strategy and should be discussed with a top notch estate planning attorney. Call us toll-free for a referral.

True, some might question the wisdom of gifting these funds to your family while they are young, believing that if they start to depend on the annual or lifetime gift they will become counterproductive. However, there is no law requiring that the recipients actually have to receive the gift in cash; nor do they need to have access to the gift immediately.

Why is it that the vast majority (70%) of America’s affluent fail to successfully distribute their assets to the next generation? Why haven’t you properly planned your estate?

There isn’t just one answer. Fear, lack of education, cost, denial, etc., all contribute to one human trait – procrastination.

Webster defines procrastination as: “postponing or deferring taking action.” I must admit I have fallen victim to procrastination just like any other human being. I even have daily, weekly, monthly and annual checklists and often time the item in question has been on my list for ages. It happens to all of us. But when you procrastinate your estate planning… eventually there isn’t a tomorrow to turn to.

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