South Florida Hospital News
Tuesday June 2, 2020
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March 2005 - Volume 1 - Issue 8

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Top Ten Fatal Estate Planning Mistakes

In this article we will warn you about 10 fatal estate planning mistakes before it is too late. [Note: The danger posed by any given mistake will vary depending on your unique circumstances...and this list is by no means all-inclusive.]

No Plan

Probably the most fatal mistake is the failure to plan. Period. Statistically, 70 percent of Americans have no plan at all. Why? Good, old-fashioned procrastination. Nevertheless, as a matter of personal responsibility, only you can make your estate plan a top priority. Otherwise you expose yourself, your loved ones and your hard-earned assets to unnecessary probate and avoidable death taxes. Take time to carefully think through, implement and then update your estate palm. You and your loved ones will be glad you did.

No Incapacity Planning

A comprehensive plan begins with planning for your own incapacity. The law requires every adult American to make their own personal, health care and financial decisions. However, if you have not legally appointed the agent/decision-maker of your own selection in advance of your incapacity, then a probate judge, who may not know you or your wishes, will appoint one for you. This process may invade your privacy by making your personal and financial circumstances a matter of public record.

No Back-Up Parents

Parents typically fail to legally appoint guardians (i.e. back-up parents) for their minor children in the event both parents die. Who would you appoint as guardians to take your place and rear your minor children to adulthood? What special instructions would you give the guardians regarding their upbringing? You must legally appoint the guardians in your Last Will and Testament in advance of tragedy.

No Inheritance Protection

If you do not incorporate inheritance protection into your estate planning, your hard-earned assets could be squandered by your surviving spouse’s new spouse, your children/grandchildren, or lost to their divorces, lawsuits or bankruptcies.

No Basic Estate Tax Planning

A married couple may lawfully protect up to $3 million* of their assets from federal estate taxes through proper estate planning. However, if your plan includes the joint ownership of assets between spouses, with reciprocal beneficiary designations and simple, Sweetheart Wills, then you are likely shortchanging your loved ones and unnecessarily enriching the IRS. In fact, on an estate of $3 million, the taxes could exceed well over $600,000.

* Note: The future of this tax exemption amount is uncertain under current federal tax law and many states are imposing their own estate taxes, independent of any federal estate taxes. Accordingly, careful monitoring of the economic, political and legal climate is required.

No Estate Tax Planning For Life Insurance

Most Americans do not own enough life insurance and/or do not own their life insurance properly. One of the greatest tax myths is that life insurance death benefits are tax-free. While a lump sum payment of the death benefit may be income tax-free when received by the beneficiary, the entire value of the death benefit is part of the policy owner’s estate for estate tax purposes. This is true if the policy owner held any incidents of ownership (e.g. access to any cash value or even the authority to change beneficiaries) at the time of their death or transferred ownership of the policy within three years of their death. You may structure your life insurance to avoid estate taxes and still fulfill your objectives through a properly structured and coordinated estate plan. Otherwise, you unintentionally may have made the IRS beneficiary of nearly half of your life insurance.

No Probate Avoidance Planning For Multi-State Real Estate

Real estate is subject to probate in the state in which it is located. Accordingly, if you own real estate outside your home state, then such real estate may go through probate in that state before being transferred to your loved ones. Probate, whether in your home state and/or in another state may be avoided if you make appropriate legal plans in advance

No Income Or Estate Tax Planning For Retirement Plans

Without careful coordination between one’s financial plan and one’s estate plan, over 50% of a married couple’s retirement monies may go to the IRS instead of their loved ones. With proper coordination between the two, the impact of taxes on these unique assets can be substantially minimized and perhaps even replaced (through special life insurance arrangements).

No Business Succession Planning

Just like individuals, business owners fail to make plans, have the wrong plan or even an outdated plan for the eventual transfer of their business. A comprehensive estate plan should incorporate planning for the business succession, especially when it is the major family asset. For example, if some children are active in the business and others are not, how do you treat everyone equally (or at least fairly) when you are gone? Or, if the business is to be sold to other shareholders, key employees or a third-party purchaser, how do you structure the sale to protect your loved ones when you are gone? Will there be sufficient cash liquidity in your estate to pay any death taxes due or will illiquid assets be sold to raise the cash needed?

No Tax-Savvy Lifetime Giving Program

One overlooked and therefore underutilized opportunity under the tax code is the annual gift exclusion. This allows you to give up to $11,000 each year to as many individuals as you desire without incurring gift taxes on the transfers. For estates already subject to potential federal estate taxes at rates over 40% this technique not only removes the gifted asset’s value from the donor’s estate valuation, but also any future appreciation on the asset. Note: Competent professional advice should be sought before making a gift of appreciated property because of special capital gains treatment such assets receive upon the death of the owner. In addition, it may be prudent to consider using all or part of your $1 million lifetime gift exemption, sooner rather than later.

Conclusion

We have reviewed 10 fatal estate-planning mistakes that can destroy your plans for yourself, your loved ones and your hard-earned assets. To safely navigate them make sure you seek competent legal counsel.

Neil R. Covert, Esq. and Barry D. Siegel, Esq. are from the Law Firm Covert Siegel LLP located in Boca Raton, Fort Lauderdale, Miami, and Clearwater. Covert Siegel specializes in Estate Planning, Elder Law and Medicaid Planning. For more information visit their website at www.covertlaw.com.

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