Smart Estate Planning: 7 Common Mistakes You Should Avoid | Axos Bank

Smart Estate Planning: 7 Common Mistakes You Should Avoid


 
Couple sitting on a couch, using their laptop to help plan their estate 

Who would you rather give your money to – your family or the IRS?

While most Americans would rather see their hard-earned assets with loved ones, their actions suggest otherwise. Every year, small oversights and blunders cost families up to thousands of dollars in unnecessary estate taxes.

In this post, we’ll walk-through seven of the most common mistakes, plus tips on how to avoid them.

1. Trying to Do It All Yourself

We understand the rationale behind this. As a self-made man or woman, you didn’t earn your wealth by throwing it away on frivolous expenses.

However, estate planning is not an area where you want to cut corners. The difference between a well-designed plan and its amateur counterpart could be thousands of dollars lost to taxes. While we respect your ability to conduct research, sometimes you just don’t know what you don’t know.

Fill in the gaps by hiring professionals.

The difference between a well-designed plan and its amateur counterpart could be thousands of dollars lost to taxes.

To get started, you’ll want both a financial advisor and estate planning attorney on your team. Together, these professionals will help you:

  • Create Your Estate: Should you write a will or create a living trust? Should you use a revocable or irrevocable trust? Which arrangements will help you avoid hefty taxes?
    These are some of the questions your estate team will help you answer.
  • Execute Your Estate: Who will be the best person to manage your assets? Executing an estate is a large responsibility, so the decision should not be based on sentiment alone. Placing this responsibility into the wrong hands could cause undue stress and strife amongst your family.

    Instead, let your team of professionals make objective decisions on your behalf.

2. Not Funding Living Trusts

Living trusts are excellent alternatives to wills. They allow you to transfer assets while avoiding court interference, probate, and additional taxes.

However, without proper funding, your living trust is essentially worthless. In order to reap its benefits, you must take time to change all titles and beneficiaries to the name of your trust.

Failure to do so will cause unnecessary heartache for your family.

3. Not Planning for Taxes

With respect to taxes, you can reap large savings by making small adjustments. Consult with your financial advisor when considering:

  • Tax-Exempt Gifts: Because certain gifts are tax-exempt, you can gradually pass wealth to loved ones during your lifetime without incurring penalties.
    Currently, you may give annual gifts of up to $15,000 (or $30,000 per married couple) to as many people as you wish. As long as lifetime gifts do not exceed $11.2 million – or $22.4 million for couples – neither you nor the gift recipient will incur taxes.
    In addition to annual gifts, education and medical expenses are also tax-exempt.
  • Avoiding Taxes on Life Insurance: If your estate is large enough to be taxed, your life insurance policy will be absorbed into it. To avoid this, consider establishing an irrevocable trust and designating it as your policy’s beneficiary.
    However, if you transfer your policy less than three years before passing, it will still be considered part of your estate (and, consequently, taxed).

4. Not Reviewing or Updating Documents

Many events can occur during a person’s lifetime. Births, deaths, marriages, divorces – all significant life events will impact your estate. To ensure your assets go to the right people without confusion or court interference, be sure to review and update your documents on a regular basis.

We recommend reviewing your estate at least once every three years.

We recommend reviewing your estate at least once every three years. Be sure to review all beneficiaries closely. While an ex-spouse will automatically be excluded from a will, beneficiary designations trump both wills and trusts.

In addition to reviewing your documents, we recommend consulting with your estate planning team after each significant event, such as the death of a spouse or acquisition of new property.

5. Giving Too Much, Too Soon

Transferring assets at the wrong time can incur large penalties, or - even worse - irresponsible spending on behalf of your loved ones. Two common examples of this are:

  • Naming Children on Deeds: Parents often try to add children to the deed of their homes as an effort to ensure property will be easily transferred upon death.
    However, doing so will cause a major headache during your lifetime - if the house is valued over $14,000, it will be considered a taxable gift. Furthermore, if you sell your house, each child named on the deed will be responsible for paying a capital gains tax.
    Not to mention, should your child face any lawsuits, divorces, or tax liens, your home – which your child would be the co-owner of – will be used as collateral.
  • Giving at Inappropriate Ages: According to the U.S. courts, a child becomes an adult at age 18. However, common sense would also dictate that 18 year-olds have no business making large financial decisions.
    With this in mind, consider dividing the inheritance over the course of your beneficiaries’ lifetimes.

6. Not Including Healthcare

In the event of an unexpected or long-term disability, do you know who would make decisions on your behalf?

While it’s not fun to think about worst-case scenarios, accidents can happen to anyone at any time. Save your family additional heartache by arranging a power of attorney ahead of time.

In addition to your own healthcare, consider that of your children as well. If you have a child with disabilities, for example, medical expenses can cause their inheritance to disappear within a matter of years.

Consult with your financial advisor to learn how your children can access public assistance while still drawing funds from their inheritance.

7. Procrastination

No one wants to think of their own imminent end, but unfortunately death is an inconvenience we all must consider. If you fail to make plans before passing, the state will make them on your behalf. Often, their plans will not coincide with your wishes.

It is never too early to start estate planning. However, at the very least, you should start when you reach your first significant life event, such as a marriage, the birth of a child, or acquisition of new property.

Once you’ve laid down the initial groundwork, planning your estate will become easier with the help of your trusted advisors.

Protect Your Assets with Axos Bank

Whether your estate is large or small, we have a network of financial advisors that can help. For a list of financial advisors, reach out to us here.

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