While it is not a pleasant task, estate planning is necessary to effectively and efficiently transfer your assets to your heirs. Proper planning can help those to whom you are leaving assets avoid paying high federal income taxes and estate taxes. In addition, proper planning helps avoid confusion for those you love. The most common estate planning mistakes to be aware of are listed below.
- Not getting around to it. The most common mistake is not getting around to estate planning.
- Believing the myth that estate planning is only for the wealthy. This is a fallacy. Estate planning is important for everyone who is concerned about where their assets will end up upon their demise. Often, when taking the value of a home into account, people are surprised to find that their “estates” are larger than they thought.
- Not reviewing or updating your will. Birth, adoption, divorce, death, and other factors may change the beneficiaries in your will or the assets you plan to leave them. Major changes in your family structure and significant changes in assets or in tax legislation all present instances where you may wish to review and update your will.
- Not using tax-planning strategies. There are several ways in which you can minimize or even avoid paying estate taxes. Sit down with your accountant or financial planner to discuss estate tax planning strategies.
- Failing to provide information regarding assets and documents. Having all of your documents in order is useless if no one can find them. Someone you trust needs to know where your assets and important documents are kept.
- Leaving everything to your spouse. The government offers an estate tax credit. However, by leaving all your assets to your spouse, you essentially sacrifice their share of this benefit.
- Not planning for your children. While people typically mull over their assets, they can forget that guardianship of minor children is an important consideration. This entails some careful thought and decision making.
- Not accounting for jointly owned assets. Many people mistakenly believe that their will dictates where all their assets will go. However, many assets, including bank accounts, retirement plans, real estate, IRAs, and annuities may be cosigned, and therefore will become the property of the cosigner. While this may be as intended, it is a mistake not to review all co-owned assets when making up a will.
- Having life insurance in the name of the insured. Life insurance in the name of the insured can result in the payment of estate tax, which diminishes the value of the policy. By putting the policy into an irrevocable trust, this can be avoided.
- Not using a gifting plan. The government allows gifting, tax free, of up to $12,000 annually to as many individuals as you choose. Many people with significant estates neglect to use this as a means of giving away some of their assets tax-free to family members.
For more information, see the AllBusiness.com Personal Finance Center.