You may not consider yourself to be rich but if you have an estate in excess of $2 million, you certainly need an estate plan. Here are five common mistakes that are made in relation to estate plans, along with simple solutions to avoid them.
Not Having an Estate Plan
It’s a fact -– most people do not have estate plans. They have living trusts and wills — but these are not estate plans. Unfortunately, most people believe that their estate planning process is completed merely with a living trust and a will but nothing could be farther from the truth for wealthy individuals. A living trust helps rid your estate of probate but it doesn’t solve your estate planning needs. Likewise, a will may help in expressing your post-mortem desires but it is not an estate plan.
This is a crucial mistake. For example, John Wayne didn’t have an estate plan, he had a will. Yet 25 years after his death, his estate is not yet settled. Again, trusts and wills are not estate plans. Some people recognize this mistake and take the necessary step of going to an attorney and having an estate plan developed. However, it is only too common that they then fail to actually implement the plans, such as putting their assets in a trust or follow-up on other aspects of the plan.
The solution is straightforward: Find a competent professional, get an estate plan and implement it.
Not Maintaining an Estate Plan
People may have completed estate plans when real estate values were less, when stock or other investment portfolios were dramatically different, or when family members were different. For example, divorced in-laws may still be in the estate plan -– is that what you really desire?
It is important to recognize that changes in the value of your estate need to be regularly evaluated. Many parents want to assure equity in division of assets but unknowingly set the stage for an inequitable division of assets because of the directives of the estate plan. Your plan needs to be reviewed regularly for such updates.
Also, the laws may have changed in many areas of the tax code. Estate plans need to be reviewed for such potential ramifications. If anyone thinks that estate taxes will be eliminated, it is foolish planning. There is a “sunset provision” in the tax code that is scheduled to disappear after 2010. It will be tax suicide for the government to not have some type of implementation of estate taxes. As individuals continue to accumulate wealth, rest assured that the government will continue to find ways to tap into it.
On another note, like anything else, change happens – we get older, we may have different values or philosophies, and we might decide to distribute our estate differently than we felt at the time when our estate plan was written. The solution is to put on your calendar to evaluate your estate plan once a year. Do this on a regular basis and you may surprised at how frequently major or minor aspects of your estate plan need to be updated.
Not Involving Your Adult Children in Your Estate Plan
Failing to involve your adult children in your estate plans is a huge mistake because ultimately it is your children who will be writing the check to Uncle Sam. Yet since people don’t like to talk about their mortality, or want to avoid sticky subjects such as inequitable division of assets, they avoid the discussion totally with their heirs.
It is very common for parents to pass away and then the children scramble around to determine what are the estate’s assets, what is their value and what to do with them. For example, children may find something in a safe deposit box and not know what to with it. Or they find a trust deed for a piece of raw land that no one seems to know about. This happens all the time and it is a big mistake.
The solution is to communicate with your kids. Tell your children what you have done and how to implement your estate plan. Discuss the value of your assets. Your children will find out eventually so why not take the time now to tell them something that will help them, is of potentially great value, and you can express how you want it handled.
Not Understanding the Asset Mix in an Estate
It is common for someone to think “I’ve got plenty of money in my estate, let the kids handle the estate taxes.” This is a mistake because people often do not have the amount of liquid assets that might be necessary to pay estate taxes in the best manner.
When we die, the government requires that within nine months of the second death the estate must be settled. In many cases, estate taxes must be paid. You are then asking your children/heirs to write a check to the government. The mistake that people make is that they have assets that are very illiquid, which cannot easily be converted to cash in a short period of time. I call this scenario “liquidity confusion” because people are confused about the liquidity of the assets in their estate.
Other examples include businesses, private placements, private stock investments, personal loans, which are all highly illiquid assets that add to net worth but are difficult to convert to cash without a potentially significant loss in value of the asset and/or difficulties in converting the asset to cash within the required nine month time frame. Do you want your kids to be forced to sell your business in order to pay the estate tax?
It is very important to understand how you can achieve liquidity in enough of your estate in order to pay any necessary taxes. The solution is to understand the assets in your estate and what portion is truly liquid.
Estate Tax is a Voluntary -– We Choose to Pay or Not
Too many people believe that the estate tax is inevitable. However, the truth is that it is truly a voluntary tax. An individual can choose to set up different estate planning techniques to limit estate tax liability – or he/she can fail to do so and thereby “donate” a sizable portion of a life’s work to the government.
It is truly incredible what a well-designed estate plan can accomplish in terms of estate tax minimization. For example, Joe Kennedy had an estate in excess of $600mm. Ordinarily that would equate to around $300 million in estate tax liability. However, his heirs paid less than $200,000 because he chose to deal with the problem of estate tax.
The solution is to employ the help of estate planners. Numerous estate planning scenarios can be developed to limit the estate tax. Each situation is different, so seek professional advice.
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