Will your estate be subject to any of these common pitfalls?

  • Titling 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 is called an “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.
  • Not leaving cash exclusively 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 $1,000,000 per person. For couples, the exclusion is often not utilized at the passing of the first spouse due to poor planning, meaning the survivor inherits all and is still subject to a $1,000,000 exclusion. The more popularly discussed Federal estate tax exclusion is considerably higher and easily portable between spouses.
  • Most things related to gift tax. First, the annual exclusion amount has increased to $15,000 for 2018. This means each person can gift any other person up to $15,000 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 $5.49 million (2018).  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 (primary homes have an 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.

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?