7 Common Estate Planning Mistakes & How to Avoid Them

Estate planning is a critical component of a comprehensive financial plan.

Anyone can easily misunderstand its complexities and nuances, leading to costly mistakes if not done the right way.

Let’s explore seven common mistakes people often make with estate planning and how you can avoid them.

Failing to Establish an Estate Plan

This step may sound straightforward, but it’s critical to avoid. If you fail to create an estate plan that addresses all your goals, needs, and assets, you’re making a lot of extra work for your family and loved ones.

Without the proper estate documents, such as a Will, Trust, and proper beneficiary designations, your estate will likely incur unnecessary expenses and drag on longer than need be, making your family struggle needlessly to settle your affairs.

Failing to Fund Your Living Trust

Creating a living trust provides lots of benefits to protect important assets. It wields greater control over where and to whom you want to leave your wealth. But a Trust is just a piece of paper if you don’t fund it.

When we say “fund your trust,” we simply mean retitling your assets into the name of your Trust. This step is needed to transfer your assets into your Trust.

If you don’t move your assets into the Trust, the Trust doesn’t own those assets, and the terms of the Trust won’t control them. This can result in a big mess for your family, who are left trying to get those assets transferred into the Trust after you die– Forcing your estate to be subject to the cost and delays of probate.

Failing to Update Beneficiaries After Life Changes

Designating beneficiaries for assets, such as retirement accounts, annuities, and life insurance policies, is a critical piece of estate planning.

But the beneficiary designation process isn’t a set-and-forget transaction process. It’s vital to review your beneficiary designations on a regular basis, particularly after significant life changes, and to make any necessary updates.

For example, say you initially designate your daughter and son-in-law as beneficiaries on your life insurance policy. But then they get divorced.

You likely don’t want to keep your ex-son-in-law as a beneficiary at that point, so you’ll have to file an updated beneficiary form removing your former son-in-law. Otherwise, he’d still be entitled to a portion of the death benefit proceeds when you pass.

Failing to Plan for Estate Taxes

Many people may not think they’ll owe estate taxes because of today’s exemption amount of roughly $12.9 million per person.

But given that Estate Tax exemption amounts are set to expire in 2025, the current limits are scheduled to sunset, lowering the lifetime exemption amount down to around an inflation-adjusted amount of $6 to $7 million per person.

If your estate is valued at $3 to $4 million today, in a decade, that could easily double, meaning you’d likely have a taxable estate. With current estate tax rates set at 40% for most taxable estates, there can be a lot of tax dollars on the line.

There are tools and strategies you need to explore to protect your family against paying unnecessary estate taxes. Everyone’s situation is unique, and it’s important to consult with a team of estate planning professionals (Financial Planners, Tax professionals, and Estate Planning Attorneys) to explore which solutions will work best for you.

Failing to avoid “Gift-Splitting.”

Current tax law allows you to gift up to $17,000 per person to as many individuals as you want without triggering any federal gift tax filing requirement. This law can be a great approach to transferring wealth and limiting the amount of potential estate taxes due on your estate.

Some years you may want to make gifts for someone more than the annual gift tax exclusion maximum amount. A couple will want to use a portion or all of their annual gift tax exclusion amount individually.

For example, if you want to give your daughter $20,000, it’s better to write two separate $10,000 checks — one from mom and one from dad — rather than one single check for the total amount of $20,000.

Using this strategy, you’re avoiding “Gift Splitting,” which would automatically trigger the requirement for a gift tax return to be filed while still gifting your daughter the same amount of money.

Failing to Properly Title Assets

This one applies in the nine community property states, including Arizona. You want to appropriately title your assets to ensure the surviving spouse or heir receives a full step-up in basis. This can help avoid capital gains taxes for the surviving spouse.

For example, let’s say a couple buys a rental home for $500,000. It appreciates to a value of $1 million when one of the spouses dies. So long as the property was held in their Trust and held as community property, the surviving spouse will receive a full step-up in basis not only on his or her half of the property (from that initial $250,000 to $500,000) but on
the deceased spouse’s share of the property as well.

That means the surviving spouse could turn around and sell the $1 million rental home and pocket the total sales amount without paying any capital gains tax.

If the home were improperly titled, the surviving spouse couldn’t take advantage of their deceased partner’s step up in basis, resulting in a capital gains tax bill on 50% of the sales price when they sold the property.

Failing to Educate & Prepare Heirs

The laws and regulations surrounding estates and inheritance are complex. It’s critical that your beneficiaries and loved ones who will inherit assets understand the importance of working with a team of estate planning professionals.

Some folks believe they can take a DIY approach to their deceased parents’ estates. But such an approach is more likely to result in costly mistakes and errors that are easily preventable if they had worked with professionals.

Unfortunately, sometimes after a couple passes, their children may believe they can handle everything themselves.

Let’s say, for example, a couple dies and leaves a 4 million dollar IRA investment account to their son. Their son, who is under 59 and a half years old, decides to take a do-it-yourself approach and requests a check from his parents’ IRA brokerage account to roll it over into his own IRA.

What happened? For starters, an inherited IRA cannot be rolled over into an existing IRA. As a result, the son must now recognize income and pay taxes on the entire $4 million IRA account because he’s under the 59-and-a-half-year threshold. And there’s also going to be a 10% early withdrawal penalty.

If, instead, the son understood he should have sought professional advice, he could have saved himself a bunch of taxes and penalties on his inheritance.

Get the Help to Avoid Estate Planning Mistakes

Laws and guidelines surrounding estate planning change regularly, so it’s essential to work with a team of estate planning professionals who understand the ever-changing complexities of estate planning regulations.

The highly experienced team at Hosler Wealth Management can help you avoid estate planning pitfalls and create a plan that meets your goals.

Request a call or email us to see how our financial experts in Scottsdale and Prescott can help you avoid the pitfalls of estate planning and create a plan that meets your goals and ensures your heirs receive what they’re entitled to.

This material is intended for informational/educational purposes only and should not be construed as specific tax, legal or investment advice. Individual circumstances may vary.

Disclosure: Securities and advisory services offered through Commonwealth Financial Network®, Member www.FINRA.org/www.SIPC.org, a Registered Investment Adviser. 700 S. Montezuma Street, Prescott, AZ 86303. Phone: 928.778.7666. This communication is strictly intended for individuals residing in AK, AZ, CA, CO, FL, GA, HI, ID, IL, MA, ME, NE, NJ, NM, NV, OH, TX, UT, VA, WA, WI. No offers may be made or accepted from any resident outside these states due to various state requirements and registration requirements regarding products and services. Fixed Insurance products and services offered through CES Insurance Agency. Tax preparation and accounting service offered by Hosler Wealth Management, LLC are separate and unrelated to Commonwealth. Any tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding Federal or State tax penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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