Updated: May 14, 2020
Two things are certain in life – death and taxes. Neither can be avoided, but much of their detrimental consequences can be mitigated through estate planning. Whether you are rich or poor, young or old, there is no telling when death can come knocking on your door. Estate planning is crucial to helping you manage risk and take control of the situation at the end of your life and beyond. Of course, to get the most benefit out of your estate
planning, there are a number of things you should avoid doing to further mitigate the risks. In this article, we’ll be sharing with you 7 estate planning pitfalls to avoid.
1. Not Updating Your Plans Over Time
It is understandable that a person faced with so many responsibilities and expectations nowadays, they may not prioritize giving much time to reviewing and updating their estate planning documents. However, not updating your will can be just as dangerous as having none at all. Time moves on and with it comes changes.
A new member could be born in the family or someone could have passed away, you could have moved to a new state, relations could change and thus beneficiary designations might need to be modified, laws could change at the state or federal level – all of this will impact your estate planning and if you want the legal outcome to remain favorable when you pass, never delay making the necessary changes.
2. Forgetting This Key Information
Estate tax liability is something people think that only rich people need to worry about. To a degree, right now that somewhat true with the estate and gift tax exemption is $11.58 million per individual. However, this policy is set to expire in 2025, reducing the amount back to $5 million (inflation-indexed).
This potentially makes a lot more Americans liable for estate taxation and as the deficit worsens, likely new laws could be made to lower the ceiling even further to increase government revenue. With estate planning, one should not neglect thes
e prospects in the equation.
3. Not Making Gifts
As of right now, gifts up to $15,000 a year per spouse are exempt from taxation. If your estate value is above the federal estate exemption, gifting can help you significantly cut down your tax liability. You can super fund a 529 college savings plan for grandchildren for example. You can begin to gift money away now since you're allowed to gift up to $15,000 per recipient and per giftor/donor, so that if you and your spouse have 8 grandchildren, then you could each gift them $15,000 for a total of $240,000 each year without triggering any gift taxes. Even if you gifted more, you could apply the difference against your lifetime exemption and file a no tax due (presumably) gift tax return. Please discuss with your CPA as we do not offer tax advice.
4. Not Taking Disability or Long-Term Care into Consideration
People are living longer but whether the quality of life is improving or not that’s up to debate. It is expected that around 70% of Americans aged 65 or
above will need some form of long-term care in their remaining years. Healthcare-related costs remain the biggest financial risk for retirees today. A private room today costs $385 a night and the majority of insurance companies do not provide coverage for it. Meanwhile, nationwide, the average hourly wage for a home aid is $22, with the figure significantly going up for major cities. With this in mind, it makes absolute sense to include some form of planning for such aspects. You will need to take into account how will you want to receive long-term care and how it would be funded.
5. Putting Your Child’s Name on the Deed
Many people do it, but it is typically a terrible idea to do. By putting your child’s name on your deed, bank accounts, or any other assets you own, you could be increasing future tax liability since the asset would likely not get a step up in cost basis on the portion considered owned by the child. Therefore, it is better to create an inheritance plan instead to ensure that any taxable gain is calculated with the value of the passed assets at the time of your death as its cost basis.Also, when you add someone's name to a deed or account, then the asset may very well be subject to that person's creditors from a car wreck, business deal, liability situation, or even a divorcing spouse. Ouch. Therefore, it is better to create an inheritance plan instead to ensure that any taxable gain is calculated with the value of the passed assets at the time of your death as its cost basis. It's just usually not a good idea to give present ownership to an heir.
6. Not Having Enough Liquidity
Having enough liquidity is essential for a smooth transfer or spilt of your assets among your children, spouse, or other heirs. This
is especially the case when it comes to your business assets, where its operation or transfer could be delayed or even cease without adequate liquidity. It is therefore essential to consult a trusted financial advisor and estimate ho
w much liquidity would make sense in your circumstance and what would be the means of generating it. Having life insurance can be beneficial in helping you create estate liquidity, split up the assets, and pay off any outstanding debts. This last aspect leads us to our next pitfall.
7. Thinking, incorrectly, that you home automatically passes to your spouse
Most people in Texas are wrong in thinking that their spouse will inherit their jointly owned home without cost or time delays. That is simply wrong. Most homes in Texas are owned as tenants-in-common, as that is the default ownership in Texas. That's unfortunate because it means that the deceased spouse's estate needs to pass through the court system in order for the surviving spouse to get full title to the home. Until they have full ownership, they won't be able to sell the home. We can help you with a fairly simple fix to this problem, but it must be done before death. Call us to hire us to help you with this.
Hire an Estate Planning Attorney
Drafting a proper estate plan can be difficult. Most people lack the knowledge and experience. If you do-it-yourself, then costly mistakes may be the result, creating hardship for your loved ones upon your demise. Hiring a professional estate planning attorney is crucial to reducing stress, avoiding pitfalls in your estate planning and ensuring the best outcome for your legacy. To talk to one of our estate planning attorneys or probate lawyers by calling Mike Massey Law at 888-407-2407 or emailing email@example.com
The estate planning attorneys at Mike Massey Law would be honored to speak with you regarding your living trust, last will & testament, powers of attorney, probate situation, or other estate related needs. You can book a free phone consult with the Texas estate planning attorneys at Mike Massey Law here: https://www.mytxwills.com/book-a-meeting