Estate planning can be very complicated. We often see stories in the news of celebrities who have passed away and, despite their wealth and access to legal counsel, have made estate planning blunders. James Gandolfini, the actor who played Tony Soprano on The Sopranos, passed away in 2013 with an estimated $70 million estate. One simple mistake exposed 80% of his estate to estate taxes. He could have avoided this entirely if his estate plan had been structured differently. While you may not have a $70 million estate, a mistake in your plan could nevertheless be costly. Let’s look at some common estate planning mistakes.
1. Having no plan at all. This is the worst estate planning mistake one can make. First, with no plan in place, you will have no control over distribution of your assets. Second, without planning, your heirs will likely have to go to probate court just to have the ability to distribute assets. Finally, valuable techniques used by planners to manage estate tax exposure will go unutilized without a written plan.
2. Doing it yourself. Many times, clients come into the office with ideas for their estate plan. Most of the time, after discussing things with us, they are happy they did not do what they were considering. For example, most people think that executing a last will and testament is sufficient. But did you know that even with a will, assets would have to go through probate? Or sometimes, for whatever reason, people want to transfer their homes to their children while they’re living instead of having it pass through the estate. But what if you transfer your house to your child and they get sued or get in other financial trouble? You could lose your home. There are serious tax consequences to such a transfer as well. People generally decide not to do it.
3. Failing to update existing plans. If you have an estate plan in place, congratulations. But when is the last time you looked at it? If you did a will twenty years ago, do you still want the same people to be your personal representative and the same people to receive your estate assets? Are there provisions in the will to cover what happens if one of your beneficiaries pre-deceases you? We generally advise clients to review their plans every three to five years. (And by the way, “executors” don’t exist anymore in Massachusetts).
4. Ignoring beneficiary issues. Another mistake some people make is ignoring, or not considering, important issues related to beneficiaries. For example, are any of your named beneficiaries, or contingent beneficiaries, receiving government benefits? If so, a distribution of assets from your estate could interfere with those benefits. This can be managed with a proper plan. Or do you have a beneficiary who has terrible spending habits. This too can be taken into consideration and managed with a proper plan. Additionally, do you have contingent beneficiaries named in your estate planning documents and on other financial assets such as IRAs or life insurance policies? If not, and something happens to the primary beneficiary, a probate would likely be necessary.
5. Estate Tax. Massachusetts is one of the states that has its own estate tax. If your assets total more than $1M when you pass, including all real estate and life insurance owned by you, your estate may be exposed to an estate tax liability. This exposure can be managed or even eliminated if the proper planning is done. This liability could also be managed by gifting, but there is a limit on how much can be gifted each year without filing a gift tax return.
6. Lack of Funding. “Funding,” for the purposes of this article, refers to the process of getting assets into a trust. A trust, in general terms, is a document that names fiduciaries to manage an estate and beneficiaries to receive assets of an estate. Once the trust is established, assets must be put into it in order for it to be useful down the road. For example, if John and Mary establish a joint living trust, they would then need to put their joint bank account into the trust so that the beneficiaries could receive the funds in the account. Occasionally, people will establish a trust but forget to put the asset, such as a bank account, into it. This would mean that upon the death of the last joint owner, a probate would be needed for that account, which is the exact scenario that the trust was established to avoid.
As you can see, there are many possible pitfalls in the estate planning process. And there are many that we have not discussed here. These mistakes can cause delays in administration of the estate and cost heirs untold sums of money. Please seek out an experienced attorney to help you through the process.
Attorney Michael Coleman earned his Juris Doctor degree from Hofstra School of Law. He is also a member of the American Academy of Estate Planning Attorneys and the National Academy of Elder Law Attorneys, Inc. Attorney Coleman focuses his practice on various estate planning, estate administration, probate, retirement planning, and real estate matters. Lantz Law, Inc. has served the communities of Southcoast, South Shore, Cape Cod, and the Islands since 1969.