To ensure your estate is distributed to your intended heirs at a minimum estate tax cost, you need to avoid these common estate planning mistakes:
Mistake: Believing you don’t need estate planning because your estate won’t be subject to estate taxes. Even if your estate is less than the exclusion of $5.49 million in 2017 there are other reasons to plan your estate (up from $5.45 million in 2016). You probably still need a will to provide for your estate’s distribution and to name a guardian for minor children. You may also want to consider a durable power of attorney and a health care proxy.
Mistake: Relying solely on the unlimited marital deduction. With the unlimited marital deduction, you can leave all your assets to your spouse without paying any estate taxes. However, if you have assets in excess of the unified applicable exclusion amount (detailed above), your heirs do not get to utilize that exclusion amount when you leave all your assets to your spouse. Thus, when your spouse dies, they may pay more estate taxes then if you had left some of your assets to them.
Mistake: Not implementing an annual gifting program. You can make annual gifts, up to $14,000 or $28,000 in 2017 (unchanged from 2016) if the gift is split with your spouse to any number of individuals without paying federal gift taxes. Since estate tax repeal is only scheduled for one year, this strategy removes assets from your taxable estate as well as any future appreciation or income generated on those gifts. Over a number of years, an annual gifting program can remove substantial assets from your estate.
Mistake: Failing to skip a generation on a tax-free basis. Leaving assets to children who already have sizable estates may mean the assets will be taxed again when they bequest them to your grandchildren. A better strategy may be to transfer those assets directly to your grandchildren, although you can only transfer $5.49 million in 2017 before triggering an additional tax called the generation-skipping transfer tax (up from $5.45 million in 2016).
Mistake: Forgetting that some assets bypass your will. Jointly owned property will transfer directly to the co-owner, while assets with named beneficiaries will transfer directly to those beneficiaries. If you don’t keep this in mind, some of your heirs could receive a higher percentage of your estate than you intended.
Mistake: Not updating beneficiaries. Beneficiaries for assets such as life insurance policies, 401(k) plans, and individual retirement accounts should be reviewed after major personal changes, like a marriage, divorce, death, or birth.
Mistake: Owning an insurance policy on your own life. While life insurance proceeds are always free from federal income taxes, owning the policy yourself will cause the proceeds to be included in your taxable estate, possibly subjecting them to estate taxes. Instead, you may want another individual or trust to own the policy, so it is excluded from your taxable estate.
If you need help with estate planning, give us a call. We can help you set up a plan and to prepare your executor for his/her responsibilities.