Families and individuals of any net worth can benefit from proactive estate planning to ensure their intentions are seen through. As you start deliberating your estate planning design, keep in mind common estate planning mistakes that are easily avoidable.

And remember, estate plans should be reviewed every 5 years or so. What makes sense for you now doesn’t also have to make sense for you 20 years down the line. It’s ok to create a plan to suit your needs in the moment and adjust as you have more information at hand and relationships take shape. Marriages, divorces, death, grandchildren, new wealth, lost wealth, and estate law all play a role in the logistics of your estate plan. It’s more important to HAVE an estate plan vs the “perfect” estate plan. 

Is your estate prey to these common estate planning pitfalls?

  • Owning property jointly with your children as a substitute for a will. While a good option in limited circumstances, it certainly doesn’t replace a will. First, this type of transfer is irrevocable, whereas a will gives you the freedom to change your mind on the benefactor. Numbers also become muddy related to calculating basis and capital gains.
  • Failing to plan for the possibility of children getting divorced or having problems with creditors. Parents may regret having made outright gifts or share ownership with their children if they subsequently divorce and their ex-spouse is awarded an interest in the property by a court. Such problems can be minimized through proper use of trusts or a business entity, such as a limited liability company (LLC).
  • Failing to make sure that all your assets pass in accordance with your wishes upon your death. Most assets are inherited based upon beneficiary designations. This transfer is done by “operation of law.” The will acts as a catch-all and it’s provisions do not override a beneficiary designation. When designing your estate plan, read the will, any trusts, and all beneficiary designations (including joint ownership). Creating a flow chart is extremely helpful to see how everything passes, and to whom.
  • Not leaving enough cash available for estate settlement. You’ve smartly made use of beneficiary designations and joint ownership to avoid probate. Great! However, who’s going to pay the estate settlement bills? By operation of law the benefactors receive inheritance in whole, bills are not paid off the top. In an ideal world, everyone would contribute their fair share from their inheritance, but as we know families aren’t perfect. This can be avoided by using a trust or going through probate so bills are paid prior to distribution.
  • Underestimating the true value of your estate for state estate tax purposes (that’s a tongue twister!) Many people forget to consider the value of their home and life insurance when thinking about taxable estates. In Massachusetts, the state estate tax exclusion is relatively low at $2,000,000 per person. For couples, each spouse’s exclusion is often not fully utilized since special estate planning needs to be done before the passing of the first spouse. This means, the survivor typically inherits all and is left with only their own $2,000,000 exclusion when they pass leaving the estate to their children or other heirs. In comparison, the more popularly discussed Federal estate tax exclusion is considerably higher and easily portable between spouses, therefore, triggering its hefty tax is a non-issue for the vast majority.
  • Most things related to gift tax. First, the annual exclusion amount has increased to $18,000 for 2024. This means each person can gift any other person up to $18,000 every year without having to report it on a gift tax return. If you’re looking to gift more, you also have a lifetime gift exclusion of $13.61 million (2024).  While you still won’t owe gift tax, you will have to file a gift tax return to report and track your gifting. This is an inconvenience most people aim to avoid by staying within the annual exclusion limits. However, capitalizing on these two gift exclusions is a tax-efficient way to transfer wealth to the next generation.
  • Failing to maximize the benefits of the income tax basis “step-up” at death. Basis is typically the purchase price plus certain improvements and expenses related to owning an asset. The difference between current market value and basis is considered a capital gain.
    • Sell: the gain is typically taxable (although primary homes have an extra exclusion).
    • Gift: the basis carries over to the new owner which simply defers the taxable gain.
    • Inherited: the basis steps up to match the market value thereby eliminating the gain created during the owner’s lifetime.

Seniors with low-basis stock or property may be wise to hold the asset until death and allow the beneficiary to inherit it receiving the stepped-up basis to minimize or eliminate gains tax. If charitably inclined, they may also choose to gift these assets to charity while living as opposed to using cash since qualified charities are tax-exempt. 

Early planning and periodic reviews can help you reach your financial goals, simplify estate settlement, and leave a lasting legacy.

Have you considered these pitfalls in your estate plan?

Below is my original video on the topic. The blog has been updated for 2024 including updated figures for annual gift tax exclusion of $18,000/year and MA state estate tax exclusion now up to $2,000,000 vs the previous $1,000,000 trigger point.