South Central College
Regardless of the size of your estate, everyone should have a formalized estate plan in place. Everyone realizes this should be done, but every day many people die without a plan in place. People are concerned about estate taxes that may be due, but a very small percentage of estates owe any taxes. Failure to implement a plan often results in the distribution of assets in a manor you would not choose. Why does this happen?
Mistake No. 1
Often people feel they are not ready to decide who they want to get which assets, and they feel there is plenty of time left to plan. This is often true especially for farmers or other business owners. They can't or don't want to decide who should take over the family business or if they want anyone to continue the business. They also may not know who to ask to be the executor of their estate.
Often there is a lack of documents or out of date documents such as a will or a revocable trust. Sometime the documents are prepared but have not been properly signed. If you die without a will or trust in place state law will determine who gets your assets and when. It can also result in higher estate taxes than would be necessary, especially if you have a fairly large estate.
Wills, trusts and beneficiary designations should be updated at the birth or death of a child; at the marriage, divorce or separation of anyone named in your will or trust; whenever there is a major tax law change; if you relocate to a new state; if there are significant changes in income or wealth; or when there are any changes in needs, circumstances or objectives of either the decedent or beneficiaries.
Mistake No. 2 Lack of
property transfer rules
One of the biggest problems in this area is the improper use of jointly held property. Joint ownership will avoid probate, but title transfers without control of the decedent's will or trust provisions. The surviving joint tenant has the ability to leave property to anyone regardless of the deceased owner's wishes. As an example, if the surviving spouse remarries, then dies before the new spouse without establishing provisions for the children of the first marriage, the farm and/or other property could transfer to the new spouse and eventually to that spouse's children instead of to the children of the first marriage.
Beneficiary designation on retirement accounts, life insurance, etc. should be checked and up-dated on a regular basis. If these were designated many years ago and never changed, these assets could go to someone you no longer wish to have as the beneficiary. Examples are if an ex-spouse, parents or siblings were named beneficiary before your current marriage, for example, the named beneficiary will receive the asset, not your current spouse or children, even if your will states that your current spouse or children should receive them. Beneficiary designation over-rides any provisions in a will.
Mistake No. 3 "I Love You" will
An older, simple will that says to "leave everything to the surviving spouse" may not allow taking advantage of newer estate tax law provisions, and may result in more estate taxes being paid than necessary.
Mistake No. 4 I am worth less than
$5 million, so who cares?
Again, you may not be taking advantage of newer estate tax law provisions. Also, the Minnesota estate tax exemption is only $1 million, not $5 million as the federal exemption is. You need to plan for the Minnesota estate tax provisions as well as the federal provisions.
Mistake No. 5 Lack of
Do you know how much it will cost to settle your estate or where the money will come from? There may be expenses such as legal costs, maintenance of family members, estate tax liabilities, debt payments, and possibly other expenses. Funds may be needed to continue operation of a farm or other business. You need to establish where the funds will come from to cover these expenses.
Mistake No. 6 Proper ownership of life
The death benefit of a life insurance policy will become part of the estate and may be subject to estate tax if the policy is owned by the insured at the time of their death. The spouse, children or another relative should probably be listed as the owner of the policy. Also, the premiums on the policy should not be claimed as a business expense, or the benefit payment would be taxable income.
In two weeks we will look at the next six estate planning mistakes, so that hopefully you can correct or avoid these common mistakes.