Avoiding Pitfalls in Estate Planning – Making it Work

Even with recent revisions to the Federal Estate Tax System, many people are still rightfully concerned over costs when their assets pass to their heirs; hence the motivation to do estate planning. In spite of the best intentions, even the most sophisticated estate planning tools can go awry due to some simple oversights. After 30 years of working with clients, I have compiled a list of the top ten most common pitfalls:

(1) Not Funding Your Living Trust: It really does not matter how thorough the Living Trust document is. If the appropriate title transfers are not made so that the trust becomes the owner, assets may be subject to probate and eventually, estate taxes. Generally, to be effective property and assets must be moved into the trust by making the trust the legal owner.

(2) Too Much JTWROS Property: Titling assets under joint-tenancy-with-right-of-survivorship does avoid probate, yet does not avoid estate taxes. It is important to keep in mind that property titled JTWROS goes to the surviving joint tenant regardless of what a will or trust says.

(3) Leaving Too Many Assets to a Surviving Spouse: Thanks to the Unlimited Marital Deduction, we can leave as much of our estate to our surviving spouse as we wish. The problem (and extra tax) may come when those assets in turn pass to the next generation. A major goal of a Living Trust is to preserve the first spouse's "Unified Credit" (now referred to as the first-to-die spouse's applicable exclusion amount). Bottom line; it may be better to pay some estate taxes (at a lower marginal tax rate) upon the first spouse's passing.

(4) Not Equalizing Assets Through Gifts Between Spouses: This is another example of improper titling and wasting the applicable exclusion amount. Having all property titled in one spouse's name can create problems when the non-titled spouse dies first and does not pass on any property under his/her credit.

(5) Not Having a Will: For those who die without a will, the disposition of property falls under the purview of the state intestacy laws. In effect, a judge decides who gets what according to a preset formula based on lineage. Not only can your wishes of who gets what be thwarted, but this process can also bring additional legal costs, taxes, delays and frustrations to your heirs.

(6) Improper Ownership of Life Insurance: Policies are often owned by the insured, payable to the insured's estate or survivors. This makes them includable in the owner's taxable estate and therefore subject to estate taxes. Strategies to avoid this include giving the policies directly to the beneficiaries or transferring them to an irrevocable trust.

(7) Being Donor & Custodian of a UTMA Account: Creating and contributing to a Uniform Transfer to Minors Account of which you are the custodian will cause the account to be includible in your estate and possibly subject to painful estate taxes.

(8) Not Knowing Where All the "Stuff" Is: All too often, heirs are burdened with having to hunt down accounts and documentation. A scattered estate plan by a secretive decedent may cause some assets to be left uncollected, undistributed and even lost. It is best to keep copies of documents, recent account statements, safe deposit box information, etc. in a notebook and to make your trusted heirs aware of its contents.

(9) Naming the Wrong Executor: The tasks facing an executor are often formidable and demanding in all but simple estates. If you are concerned that your spouse and/or close relatives or friends are not up to the task, consider a professional or trust company.

(10) Not Periodically Updating an Estate Plan: It is human nature that we simply do not like to think about dying. That makes estate planning one of the most frequently procrastinated aspects of our financial plans. Often when the original documents are drafted, people are tempted to put it on a shelf and be done with it. However, life if anything involves change, whether it be with our economic situation, health, family or the tax code. Even absent any major changes, it is advisable to review your estate plan at least every couple of years. It's best to work with an experienced financial planner who can help make the necessary modifications.

I always tell clients that the best thing we can do for our loved ones is, upon our death, allow them to resolve our estate quickly and easily so they can get on with their lives. Understanding and avoiding these common errors can help assure that, as well as that your wishes can be fulfilled and minimize the tax bite for your heirs. Be sure to work with an experienced financial planner or other professional to help you achieve your estate planning goals.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary, no obligation "Second Opinion" that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This information is not considered a recommendation to buy or sell any investment or insurance. We strongly recommend an advanced tax and estate planning expert be contacted for further information.

Written by
Mitchell E. Kauffman, MBA
Certified Financial Planner^TM
Masters of Science in Financial Planning

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine's prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the 20 years prior.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman's articles have appeared in national publications, and he is often quoted in the media.  He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara City College, and Pasadena City College.

For more information, visit www.kauffmanwealthservices.com or call (866) 467-8981. Kauffman Wealth Services is an independent Registered Investment Advisor and serves clients from two office locations: 140 South Lake Avenue, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108.  Securities offered through Raymond James Financial Services, Inc., member, FINRA/SIPC.