Have You Discovered these 7 Estate Planning Mistakes? Avoid Them Now

With a few simple actions and the stroke of a pen, you can ensure your estate planning is effective. Whether your estate plan is simple or complex, there are many details that are often overlooked, and when they are, it can undermine your plan's effectiveness. Are you aware of these common estate planning mistakes? Stay tuned. I'm going to give you seven points that I am sure will help you make the most of your estate planning.

Welcome to another edition of We Are Talking Money. I'm Phil Clark, founder and CEO of OmniStar Financial Group, and I'm excited to share some tips that I believe will help you build a better estate plan. Before we get started, please subscribe to our channel, hit the like button and ring that bell so you never miss a great episode. So let's get into it.

Mistake number one: titling property jointly with your children as a substitute for a will. Now, we see this often. A will is a simple document, and it's not very expensive, yet I'm surprised every year by the number of people that don't have this simple document. Unlike a will, transferring interest in your property is an irrevocable move, and it may prevent you from changing the disposition if circumstances change before your death. Also, titling your personal residence jointly, that can result in partial loss of the capital gain exclusion if that property is sold before your death.

Mistake number two: failing to plan for the possibility of your children getting divorced or maybe having problems with their creditors. Over the years, I've noticed that parents love to make gifts. There's nothing wrong with that. I think when you're able to make a gift, it can be an inspiring thing. It can feel really good to make those gifts, but proceeding with caution is always my advice when it comes to this way of giving. If the children subsequently divorce and, let's say, an ex-son or daughter-in-law is awarded an interest in the gifted property by the courts, regret is usually the parent's first emotion.

Beyond divorce, gifted property could be taken pursuant to a legal judgment against your child. Such problems, they can be minimized through the proper use of trusts or a business entity, maybe a limited liability company, or an LLC.

Mistake number three: failing to make sure that all your assets pass in accordance with your wishes upon death. Many types of assets, including life insurance, IRAs and brokerage accounts, they can be passed to your heirs or others based upon beneficiary designations. Now, the provisions of your will cannot change the beneficiary designation, though many people mistakenly believe that it can. You need to account for things that you've already designated. Our firm recommends that you review your will as well as all other beneficiary designations whenever you're formulating or even updating your estate plan.

Now, mistake number four: this is understanding the true value of your estate for federal estate tax purposes. Many people are unaware that the proceeds of their life insurance is actually includable in their taxable estate if they own the policy. This could bring the total value of their estate to more than the amount that's sheltered from estate tax by the applicable exclusion amount. For people who pass away in 2022, that exemption was 12.06 million dollars. In 2023, it's up to 12.92 million dollars. For a married couple, that comes to a combined exemption of nearly 26 million dollars. A large amount, most people won't have to worry about it, but things like life insurance can quickly add to an already large estate, and you just might hit that number.

Mistake number five: failing to consider state death taxes in light of recent changes in the law. And we're talking state tax here, not the federal estate tax. Many states have decoupled their death taxes from the federal estate tax. What does that mean? It means your estate could be subject to death tax in a state even if no federal estate tax is due. Keep in mind, 17 states and the District of Columbia, they may tax your estate. They may also tax inheritance, and sometimes both. This could result in a very unpleasant surprise to your heirs upon your death.

Now, mistake number six: owning property in multiple states. This has become more common in recent years. We see clients all the time with a second home or rental properties, and they could very well be owned in multiple states. The laws of each state where you might own property, they should be carefully reviewed. You need to determine the potential exposure to state death taxes and, more importantly, how to minimize them. Even without tax, properties owned in another state, well, that means that your heirs will probably be probating in each state that you own those properties. It's okay to own property in states other than your resident state. I'm not saying that you shouldn't, but not planning properly can create a lot of unnecessary work and cost for your heirs.

Finally, mistake number seven: failing to maximize the benefits of the income tax basis, or stepped-up basis, at your death. One of the most common mistakes we see is low-basis, high-value assets being given to heirs prior to the owner's death. People love making gifts, remember, we talked about that earlier, but that's not always the smartest move. We strongly discourage this kind of planning. In fact, many families want to remove assets to protect against spend-down, particularly as it relates to long-term care planning. However, we subscribe to not giving away major assets during your lifetime.

The basis for capital gain computation purposes will be increased to fair market value on the owner's death, but the basis remains at the property's original cost if the asset is given away before death. So if it's gifted prior to death, your beneficiary is going to assume your basis. If it's given away after death, or at death by way of a will, they will get a stepped-up basis. The bottom line: whoever inherits the property will avoid capital gains if the asset is immediately sold. That is a big reason to avoid early gifting.

Now, I hope this episode of We're Talking Money has inspired you to review your estate plan and look for any of these mistakes that we've talked about in today's show. If you need help with this exercise, we welcome your call. Our second opinion service could be the perfect option if you're not sure where to start. Be sure to subscribe, like and share. These episodes are timely. They're coming out every week, and they're designed to help you make better financial decisions. I'll see you next time on We're Talking Money.

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