By: Martin M. Shenkman, CPA, MBA, JD
You can't plan properly if your basic assumptions about estate planning are wrong. You will never really hear what your professionals are telling you if you are filtering their advice through faulty misconceptions. The following are some common misconceptions:
I want to avoid probate Many people become so focused (obsessed) about avoiding probate that real planning isn't done. Avoiding probate makes sense in some circumstances, but rarely will it be your most important goal. Many people assume their revocable living trust accomplishes all they need. Reality check: it doesn't. Solution: Take a broad and holistic approach to planning that addresses all your goals. Be sure your plan addresses all relevant goals including sufficient funds for an emergency and retirement, asset protection, proper insurance coverage (not just life, but property and liability), management of your assets in the event of disability, and so on. If you have a rental property in another state, transferring it to a living trust may avoid probate, but not liability issues. Using an LLC to own the property may accomplish both. There are issues besides probate that are extremely important to consider, but unfortunately many people do not.
I signed my documents
Signing documents does not complete your planning. Almost every planning document will require regular follow through for it to be effective. Trusts need assets transferred to them (what good is an insurance trust if it doesn't own insurance?). Documents need to be kept current (property and other laws change frequently, not just tax laws), and the Power of Attorney you signed in 1986 is outdated! The will you signed before your grandchildren were born probably doesn't reflect the way you want your probate assets distributed on your death anymore. All documents need to be reviewed at least every few years and especially when there are major changes in tax and probate laws.
The ownership of assets (title to assets) needs to be adjusted to conform to all your plans, corporations should have annual minutes, and so on. Solution: Make up a "To Do" list with your estate and financial planner and be sure you don't stop until each item is checked off. Then meet once a year and get a quick review and update to be sure all issues are addressed and new ones tended to. It is a lot cheaper heading problems off at the pass then leaving them to fester. Just because you signed all of your documents does not mean that they can be discarded forever.
Remember: as you get older and your planning goals change, your estate planning needs to change as well. The goals you have in your 40's may not be the same as the goals you have in your 60's!
I have a will and life insurance- Planning is not only about dying. Estate planning should address retirement, disability, lawsuits and lots of other things that "go bump in the night". Failing to do so will give you a one dimensional plan, which is never enough. If you have the worlds greatest will, but you run out of money before you die because your investment planning is off base, the will is useless. Solution: Involve all your advisers in your planning process. The best way to do this is to have a big board meeting of key family members and advisers. A more cost effective way to keep your plan current is to meet with your key planner and have him or her conference call other advisers as needed. This will assure that your accountant, attorney, financial planner, insurance consultant all weigh in so that your plan addresses all aspects of your life, not just death.
My Uncle Joe will handle everything- Assuming friends and family are reliable and trustworthy can be true, but not every uncle is a Jim Anderson (Father Knows Best). Relationships change, the pressure people are under can change, so caution is important. Just because you feel comfortable trusting a certain person now, does not mean that you will trust him in years to come. Solution: Name co-trustees to have a check and balance. Consider naming an institution in appropriate situations. Provide detailed parameters as to what the various fiduciaries can do. Another example, make the guardian of your children a co-trustee so they can have input, but name another independent person as co-trustee with the guardian to have a check and balance. Instead of relying on a power of attorney, fund a living trust with successor co-trustees. For more sophisticated trust planning, name a Trust Protector, who can be authorized to replace trustees and take other actions to provide another safeguard.
We have planned for the estate tax- Estate tax is not the only tax you have to plan for. Income tax issues are a significant factor in estate planning. If you avoid the estate tax on mom's house through a gift plan, but you end up with a large capital gains tax when you eventually sell, you may be better off than had you done no planning, but you haven't really achieved the goal of reducing all taxes. Solution: Involve all your advisers, especially your accountant. Be sure your estate planner talks about income taxes, not just estate taxes. Remember assets given away during life will be subject to the same tax as the donor (carry over basis), whereas assets retained until death will avoid capital gains tax (stepped up basis). Only discussing estate tax with you financial planner is not the best idea.
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