Thank you to Larry Metzler for providing a nice overview of the many aspects of estate planning. From gifting, to wills and trusts, to taxes, to the general process of probating and dispersing assets, Larry discussed many important considerations that are involved in estate planning. Oftentimes, there are many myths surrounding estate planning and this can lead to many common mistakes. Let’s take a look at the 14 most common mistakes as it relates to estate planning.
1. Procrastination
The most common, and perhaps the biggest mistake people make when it comes to estate planning is procrastination. “What’s the rush?”, “I’m too busy right now”, and “I don’t like to think/talk about it” are all common responses to estate planning. While it doesn’t seem important at the time, we never know what may happen to us and making sure that our affairs are in order for the inevitable can save our loved ones time, money, and stress in the event of our passing.
2. Overconfidence
Once we have our estate plan, we may think that everything is finished. However, estate planning is an iterative process that should consistently be evaluated and, if necessary, changed depending on how our lives change. It is recommended that wills and trusts be reviewed no less than every 3 years to make certain that your estate plan is still in keeping with your dispositive wishes, changes in the law, changes in the tax code (both federal and state), and changes in your family relationships and/or composition. Power of attorney and living wills (advanced medical directives) should be reviewed every 2 years to make certain that these documents are in compliance with the current laws and are consistent with your wishes, the changes in your family relationships and composition, and the then current policies of banks and brokerage firms where you keep your investment assets.
3. Making a Will Disposes of All My Property
Many people think that what is contained in a will is the final say, including marital assets and financials such as retirement accounts or life insurance payouts. In fact, in a typical marital situation, at the death of the first spouse, less than 15% of the total dollar value of the married couple’s combined estates is controlled by the decedent’s will. There are different asset classes and each one is transferred differently upon death:
- Probate – made up of your tangible (“stuff”, like jewelry, cars, furnishings), intangible (cash, bank accounts, money market accounts), and real (real estate) property. These assets are transferred based on what is written in your will. If there is no will, then they become the property of the estate.
- Joint – made up of assets that are titled in more than 1 name or held jointly, such as a joint bank account or a residential property. This also includes residential property that 2 legally married parties are living in, even if the deed is only in the decedent’s name. The transference of these types of property are determined by state laws, irrespective of the directives in a will.
- Life Insurance, Annuities, and Benefits (Retirement) – These types of financial assets require a contract and will only transfer ownership or provide monetary payouts to the beneficiaries listed in the contract.
The total value of the above assets represents the gross estate, which is used for Federal Estate Tax and New Jersey Estate and Inheritance Tax purposes.
4. Significance of How Assets are Titled
It is often assumed that everything should be titled in the decedent’s name or their spouse’s name, but that might not always be best. For example, if your life insurance goes to your spouse, and they decide to remarry, it could ultimately end up in the hands of your spouse’s new partner. Additionally, if your spouse has outstanding liens or debts, any money they receive may be subject to creditors. Perhaps most importantly, depending on how much money you or your spouse has, your estate might be liable for the payment of any state inheritance tax and federal estate taxes at a rate of 40%.
5. Failure to Take Full Advantage of the Federal Estate Tax Exemption
Every individual has the ability to shelter up to $13,610,000 ($27, 220,000 for married couples) from the imposition of Federal estate taxes as an exemption in 2024. However, if one spouse dies, the living spouse’s federal exemption still remains at $13,610,000 unless federal estate taxes are filed and the “portability” benefit is claimed. Portability allows for any unused exemption from one spouse to be transferred over to the other spouse. For example, if the decedent only had $1,000,000 for their estate, they can effectively “give” their remaining unused portion ($12,610,000) to their spouse, increasing their spouse’s individual exemption to $26,220,000. Be aware though, the current federal estate tax exemption will “sundown” on December 31, 2025; if Congress does not act to maintain the current level, the new exemption will be reduced significantly to $6,200,000.
6. Failure to Understand and Take Advantage of the Benefits of a Revocable Living Trust
A revocable living trust is a great way to safeguard your money and financial assets, both before and after your death. There are three parties to any trust – grantor, trustee, and beneficiary. You can designate yourself as all three should you choose to ensure your assets are handled exactly according to your wishes. Benefits of a revocable living trust include:
- Avoids probate (and associated fees) as well as public disclosure of those assets
- Avoids delays in your spouse’s and/or other beneficiaries’ access to assets and income from those assets
- Provides a tax effective mechanism to capture the federal equivalent exemption at death of first spouse and maximizes both spouse’s federal estate tax exemptions
- Provides a tax effective mechanism to create generation skipping trusts or dynasty trusts upon death of first or second spouse
- Can provide protection of beneficiary’s assets from creditors, future spouses, divorce of children/grandchildren, and poor judgement by the beneficiary
7. Failure to Understand the Relationship Between Federal Estate Tax Exemption and Any State Estate Tax
Some people assume that there is congruency between the federal and state tax exemptions, but that is not always the case. As of 2024, New Jersey has eliminated the state estate tax, but this can change at any time. However, New Jersey still has an inheritance tax in which the transfer of any benefits at death to any non-exempt beneficiary (other than spousal our lineage beneficiaries) are taxed at 15%.
8. Failure to Understand the Federal Gift Tax Rules
A popular strategy to reduce the value of an estate to avoid paying any federal and/or state estate taxes is to give away assets periodically throughout one’s life. While this is certainly feasible, there is a federal gift tax exclusion that can change from year to year. All gifts that exceed (or in the past have exceeded) the annual gift tax exclusion in place in the year the gift was made will be added back to the value of the taxable estate upon your death. For 2024, the federal gift tax exclusion is $18,000 per year, per donee. For example, a married couple with 2 children can effectively gift up to $72,000 to their children ($18,000 gifted to each child from each parent) per year for as long as the federal gift tax remains at $18,000. This can occur even if the asset is only owned by one of the parents. Additionally, any time you place property in joint name with another person or persons, you are making a gift and depending upon the value of the property at the time of the gift, you may incur a gift tax liability. However, there is no limit on the transfer, or gifting, of property between spouses.
9. Failure to Properly Plan to Protect Your Assets from being Spent Down on the Cost of Long-Term Care
While we might like to think that we won’t need nursing care or long-term care, in reality 43% of seniors will require nursing home care and 70% will require long-term care prior to their death. Additionally, we may drastically underestimate the cost of that care, which can range from from $6,000-$7,000 a month for home care and increase to $10,000-$14,000 a month for nursing home care. This is a growing problem and depending on how you plan to pay for that care, you may have to start “spending down” your assets many years in advance to qualify for Medicaid.
In order to qualify for Medicaid in New Jersey and have that program pay for home/long-term care, an individual’s income can be no more than $3850.50 per month and they cannot have more than $2,000 in assets, including a home. Medicaid will look back 60 months to ensure that these qualifications have been met; if care is needed before the end of that 60 month period, the individual will have to continue to spend down any assets for the remainder of the 60 month period. Failure to do so can cause Medicaid to put a lien on a primary residence or deny care, causing the individual to pay for services already rendered out-of-pocket.
According to current rules, primary residences and IRA’s are NOT protected and will need to be spent down/transferred. Placing an asset in joint name with a child or children will not be protected, unless the child/children can prove contribution to that account. Additionally, you can no longer transfer assets to your spouse to avoid spending down any excess. The non-institutionalized spouse can only retain the greater of $30,828 or 50% of the couple’s joint assets, up to a maximum of $148,420 of countable assets, excluding the primary residence.
10. Failure to Properly Select Fiduciaries
Choosing who will act on our behalf can be extremely important to ensure that your wishes, both while alive and in death, are carried out correctly. Be sure to choose someone whom you trust wholeheartedly; oftentimes we choose a spouse or child, but those can be the wrong choices, especially if those individuals have problems such as addictions, debts, or trouble managing money. Fiduciaries you should consider include:
- Guardian of the person and estate of a minor child or legally incompetent person
- Executor named in a decedent’s Last Will and Testament
- Trustee named in a trust
- “Attorney-in-fact” named in power of attorney
- “Medical decision attorney-in-fact” named in an advanced medical directive (living will)
When making your fiduciary decisions, make certain to inform the individuals you select, name several successors, and provide your personal insight into your expectations, instructions, etc. to make sure that everyone is on the same page.
11. Failure to Have a Power of Attorney and Have it Updated on a Regular Basis
Unless someone is specifically designated as your power of attorney, the management of your personal, financial, and business affairs is not transferred automatically to next of kin. If there is no power of attorney in place or it is invalid or out-of-date, someone will have to petition the court to be appointed as your guardian, which can take weeks, even months. This can tie up your finances and assets from being properly dispersed or your final wishes carried out. You should have your power of attorney updated every 2-3 years, even if it is the same designee, especially since most banks, brokerage firms, and insurance companies will not accept a power of attorney that is older than 2-3 years.
12. Failure to Have an Advanced Medical Directive and Have it Updated on a Regular Basis
Should you become incapacitated or unable to make your own medical decisions, an advanced medical directive is necessary to ensure your medical care wishes are carried out, such as a DNR (Do Not Resuscitate). This will ensure that all necessary parties clearly understand your wishes and are committed to carrying them out should the time come. Without an advanced medical directive, your care can be contested between concerned individuals and may be decided by a judge. As with a power of attorney, your advanced medical directive should be updated regularly, roughly every 2-3 years.
13. Failure to Properly Plan for the Eventual Income Taxation on the Transfer of IRAs and Other Qualified Assets
While is was legal for beneficiaries to stretch out payments from IRAs and other qualified assets over the course of their lifetime to escape any income tax liabilities, current law requires that all disbursements be withdrawn within 10 years from the date of death of the account owner. The IRS rules governing these accounts are some of the most complicated within the tax code so careful planning is needed to ensure that your beneficiaries are able to collect the totality of these accounts with the least amount of tax impact as possible. Additionally, improper planning of these assets could result in the entire value of these accounts being taxed in one year, creating a large financial problem for your beneficiaries.
14. Failure to Properly and Legally Name Guardians of the Estate and of the Person for Your Minor Children or Grandchildren
Care of children in the event that both parents are deceased or incapacitated does not automatically revert to next of kin, neighbor, or close family friend. Even if these parties are willing and able to care for your children, unless they are specifically named in a Kids Protection Plan, minor children can be taken from your home and placed in the care of child protective services, often for days or weeks until the proper parties can petition the court for their care.
If you have any questions, please reach out to Larry Metzler at lmetzler@metzlerlaw.net. To schedule an appointment with Larry, please visit https://calendly.com/lmetzler-1/60min. You can view the recordings at the links below:
Part 1 – https://youtu.be/HIhO_MnSGaA
Part 2 – https://youtu.be/P4Q3iUdzp7A
You can also download copies of the handouts below:
Copy of the Presentation
Estate Planning Questionnaire
LIFE Plan 2020
Sequence of Returns White Paper
