Whether your estate plan is simple or complex, many details can undermine your plan’s effectiveness. Are you aware of these estate planning mistakes?
As a substitute for a will, titling property jointly with your children.
Unlike a will, a transfer of an interest in your property is irrevocable. Titling property jointly with your children may prevent you from changing the disposition if circumstances alter before your death. Titling your residence, jointly, can also result in partial loss of the capital gain exclusion if, before your death, the property sells.
Don’t Overlook the Possibility of Children Getting Divorced or Having Problems with Creditors.
Parents may regret having made outright gifts to their children if they subsequently divorce and an ex-in-law is awarded an interest in the gifted property by a court. Gifted property may also be considered under a legal judgment against the child. Minimize problems through the proper use of trusts or a business entity, such as a limited liability company.
Make Sure All Your Assets Pass by Your Wishes Upon Your Death.
With beneficiary designations, you can pass many assets, including life insurance and IRAs, to your heirs. The provisions of your will cannot change a beneficiary designation. Remember to account for things you’ve already designated. When formulating your estate plan, you should review your Will and all other beneficiary designations.
Don’t Underestimate the Value of Your Estate for Federal Estate Tax Purposes.
Many people are unaware that their taxable estates include proceeds from their life insurance policies. Underestimating the value of your estate can bring the total value to more than the amount sheltered from estate tax by the applicable exclusion amount. For people who pass away in 2022, the exemption amount will be $12.06 million, $11.7 million for 2021. For a married couple, the combined exemption is $24.12 million.
Consider State Death Taxes in Light of Recent Changes in the Law.
Many states have “decoupled” their death taxes from the Federal estate tax. Your estate could be subject to a state death tax even if no Federal estate tax is due, resulting in an unpleasant surprise to your heirs upon death. Carefully review the laws of each state where you own property to determine the potential exposure to state death taxes and how to minimize them. Avoid this mistake easily with proper planning.
Maximize the Benefits of the Income Tax Basis “Step-Up” at Death.
Do not give away low-basis/high-value assets during your lifetime. The basis for capital gain computation purposes will increase to fair market value at death. However, the basis remains at the property’s original cost of the asset given away.
