8 Critical Real Estate Planning Mistakes

I’d like to talk about eight critical estate planning mistakes that can cause serious problems for those you leave behind. These estate planning mistakes can be easily avoided.

1. No plan at all: Probably the biggest mistake you can make is not having a plan at all. It is estimated that between 50% and 70% of Americans do not have a will. You are the only one who can protect yourself, your loved ones and your hard-earned possessions. Connecticut law determines who inherits your property if you do not have a will. You can refer to the February 2009 issue of STRUCTURES to see what that will would look like. Also remember to regularly review and update your estate plan.

2. No Estate Tax Planning: With proper planning, a married couple can protect up to $4 million from Connecticut estate taxes and $7 million from federal estate taxes. The basic level of planning to achieve this is called a “Credit Shelter Trust”. In larger estates, irrevocable life insurance trusts, qualified personal residence trusts, charitable trusts, and family limited partnerships can be used to protect assets from estate taxes. Without such planning, an unexpected and surprisingly large estate tax may be owed.

3. No disability planning: There is more to estate planning than distributing assets after death. A comprehensive estate plan starts with planning your own disability. If you can’t, you’ll need to appoint a health care representative to make health care decisions for you. You must have an advance directive to avoid unnecessary or unwanted life support. There must be a durable power of attorney or living trust to manage your affairs if you cannot.

4. No Guardians for Minor Children Named: Parents spend a lot of time looking after their children’s needs. But those same parents often do not appoint a guardian for their minor children when both parents are away. Who should be the guardians to raise your minor children? What special instructions would you give them? You must legally designate the guardians in your will. Most importantly, a stanby guardian is an absolute must. Many people rely on a guardian in their will. But this would be completely ineffective if the parent is disabled or cannot be found immediately.

5. No Life Insurance Planning: Life insurance is a convenient financial tool for many Americans to support a surviving spouse and minor children or to pay estate taxes. One of the biggest tax myths is that life insurance is tax free. While the death benefit is tax-free for your beneficiary, the full value of the death benefit is counted for estate tax purposes. You can structure life insurance to avoid estate taxes and still achieve your goals through a well-structured “irrevocable life insurance foundation”. Otherwise, you could inadvertently make the IRS the beneficiary of nearly half of your life insurance policy.

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6. No Planning for “Out of State” Property: If you own property outside your home state, probate proceedings may need to be opened in that other state to transfer title to that “out of state” property. This can be avoided if you make the right legal plans in advance. The probate process is much more cumbersome in some states than in others.

7. No Tax Planning for Qualified Retirement Plans: Much of America’s wealth is currently in qualified retirement plans. Without careful coordination, more than half of your retirement assets could go to the IRS instead of your loved ones. The effect of taxes on these assets can be significantly reduced with proper planning.

8. No Lifetime Giving Plan: A great planning option is the annual gift exclusion. You can give up to $13,000 each year to as many people as you like, with no gift tax due. This removes the value of the gifted property from your estate and removes any future appreciation of the gifted property. But be careful, as lifetime gifts may be subject to capital gains tax later on.