Estate Planning The Ten Most Avoidable Mistakes

May 15, 2020

1. Dying Intestate

If you die without a Will or some other form of estate planning, the state in which you reside and the IRS will simply make one for you. Of course, they have no interest in avoiding or reducing estate taxes, minimizing estate administration costs or protecting your family and legacy. The distribution of your assets will just be turned over to the Probate Court. The probate process is needlessly time consuming, frustrating and expensive. It is also open to the public, meaning creditors, predators or anyone else will have complete access to all information about your estate. For the vast majority of people, the benefits of a Will or other estate planning tools far outweigh any initial costs.

2. Having an “I love you” Will

An “I love you” Will is one in which all the decedent’s assets have been left to the spouse. On paper, it might seem to be a caring, thoughtful gesture, but the reality is quite different. That’s because such a Will simply passes the complex issues and problems associated with transferring and protecting wealth onto the spouse or other loved ones. An “I love you” Will creates more problems than it solves, particularly for future generations.

3. Giving property outright to your children

Here is another “solution” that might sound good at first, but ignores several important realities. For instance, what if the child in question is too immature to handle the responsibility of a large sum of money on his or her own? What if the child suffers a severe financial setback that puts the inheritance at risk to creditors? What if the child marries a fortune-hunter, is addicted to drugs or alcohol, gets divorced or remarried? In short, you may need to protect your children and heirs from their own poor decisions.

4. Owning property jointly

There are two types of joint ownership, Joint Tenancy with Right of Survivorship (JTWROS) and Tenants in Common (TIC). Problems with JTWROS include postponement of probate until last tenancy, loss of the double step-up in tax basis, and outright distribution. With TIC, you also lose the double step-up in tax basis, and your property is subject to the estate plan of each tenant as well as probate for each tenant.

5. Not having a trust

A trust is the single most effective estate planning tool available. There are many different types of trusts. Among the better known and more commonly used are revocable trusts, irrevocable trusts and testamentary trusts. In addition to protecting your privacy, a trust will help you leave what you want, to whom you want, in the way you want—at the lowest possible cost.

6. Not funding your trust

A trust can be thought of as a safe. It can do a great job of protecting your hard earned wealth, but if there’s nothing in the trust—i.e. nothing in the safe—what good does it do you? None whatsoever. Which begs another question, why would someone go to the trouble of creating a trust and then not fund it? The answer is quite often that the person in question simply never gets around to it. He or she procrastinates, resulting in an unfunded trust—which is worse than no trust at all. Estate Planning The Ten Most Avoidable Mistakes

7. Not having your documents reviewed and updated

Once they have their estate planning and other documents created, many people simply file them away and never look at them again. Big mistake. An outdated plan can be as bad or even worse than having no plan at all. Your documents should be reviewed, at the very least, every two years. Why? In a word, change. Your needs and goals change; your financial situation changes; your children grow older and their needs change. The law itself is constantly changing. And even if you’ve specified a trustee or executor, the named person’s ability to follow through on your wishes may change as well. Updating your plan allows you to take these changes into account and avoid unintended consequences.

8. Dying in 2011

We may say this tongue in cheek but, given the current status of the laws governing estate taxes, there is nothing funny about how much of your estate will be lost to estate taxes should you pass away in 2011. That’s because the Bush administration’s 2001 estate tax modifications will expire in 2010, meaning the exemption amount will return to the 2002 level of $1,000,000 (down from $3,500,000 for 2010) and the maximum rate will increase from 45% to 55%. If you think this is unusual, consider this: laws governing estate taxes have changed more than 20 times since 1986. Which only underscores the importance of getting expert legal advice to prepare for and cope with continuous change.

9. Thinking a Living

Trust alone is enough The Living Trust is a powerful estate planning tool, but to truly ensure your wishes are carried out should you become incapacitated and incapable of making decisions for yourself, addendums can be extremely helpful. For example, an Advanced Healthcare Directive can dictate how you wish to be cared for and what steps you authorize medical personnel to take to prolong your life. A HIPAA Authorization can ensure your privacy while still making crucial medical information available to the people you want to have it. A Power of Attorney for financial affairs determines in advance who will be able to make financial decisions for you. Other commonly used addendums include Pourover Wills, Assignment of Personal Property, Community Property Agreements, Appointments of Guardianship or Conservatorship, to name a few.

10. Not understanding that the biggest problem is not the IRS

If the biggest threat to preserving your wealth is not the IRS, who or what is? Frankly, it is human nature. None of us wants to think about our own deaths or the possibility of becoming incapacitated. Consequently, we tend to put off taking the steps necessary to prepare for what the future may hold. We procrastinate. And our loved ones often suffer the painful financial consequences. Perhaps Walt Kelly put it best: “We have met the enemy and he is us.”

Related Posts:
Wills vs. Trusts in Michigan

Planning for the Future

Many people interested in estate planning are unsure of the difference between wills and trusts. While both instruments allow you to distribute your assets after death, there are some key differences between the two. Keep reading to learn the differences between wills and trusts in Michigan to make the best decision for you and your family.

Wills

A will is a document that directs how your property will be distributed after you die. You can use a will to:

  • Name an executor who will oversee the distribution of your property.
  • Appoint a guardian for your minor children.
  • Designate beneficiaries for your property, including family members, friends, charities, or organizations.

Trusts

A trust is another way to direct how your assets will be distributed after you die, but with some important differences from wills. Trusts can be revocable or irrevocable. Revocable trusts can be changed at any point during the settlor's lifetime, while irrevocable trusts cannot be changed once they are created. This means that with a trust you can:

  • Place conditions on how and when assets are distributed.
  • Avoid probate, which is the legal process of distributing a person's assets after they die.
  • Reduce or eliminate estate taxes.

Differences Between Wills and Trusts

While wills and trusts both allow you to direct how your assets will be distributed after you die, there are some important differences to consider. These include:

Probate

As mentioned above, one of the main advantages of using a trust is that it can help you avoid probate. With a will, your assets will go through probate after you die. Probate can be time-consuming and expensive, so avoiding it can be a major advantage.

Control

With a will, you have less control over your assets' distribution than with a trust. With a trust, you can place conditions on how and when assets are distributed, which gives you more control over what happens to your assets after you die.

Taxes

Another advantage of using a trust is that it can help you reduce or eliminate estate taxes. With a will, your assets may be subject to estate taxes when you die.

Work with an Estate Planning Attorney

Deciding whether to use a will or a trust is an important decision in Michigan estate planning. If you have questions about wills vs. trusts, or any other aspect of estate planning, contact an experienced Michigan estate planning attorney today.

October 11, 2022

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