By: Brian Tullio

A great deal of time and consideration is often spent creating an estate plan to protect and provide for your family and loved ones.  All too often a single, costly mistake can derail that plan.  Below are five such pitfalls and ways to avoid them – do not let these mistakes jeopardize your careful planning.

1. Not having an estate plan.

The most egregious estate planning error is having no plan at all.  By not having a will or trust, you empower the state to determine who shall receive your property.  That determination will vary drastically by state and is not always straightforward.  At a minimum, you should document your testamentary wishes in a will to avoid passing that authority to the state.  Ideally, a complete estate plan is created that includes power of attorney, medical directives, and trusts, if applicable.  These additional documents may be needed to ensure your legacy and family are protected.

2. Failing to update and coordinate beneficiary designations.

Diligently coordinating your beneficiary designations between your estate plan and the account beneficiary forms for certain assets is critical.  Retirement accounts, annuities, and life insurance often have beneficiary designation forms that are completed when the account is opened.  These designations need to conform with the provisions of your estate plan, or you risk the possibility of having someone inherit an asset outside of what your plan directs.  For example, an outdated designation form could result in the proceeds of a retirement account being left to a minor, or to an ex-spouse, despite what is stated in your will.  Reviewing beneficiary designation forms when your estate plan is created or updated will prevent such mistakes from occurring.

3. Failing to update an estate plan.

Similar to pitfall #2, an estate plan needs to be revisited every so often to ensure its provisions are not outdated.  Grantor and beneficiary needs change over time and unexpected circumstances may prompt you to review your plan.  Life events such as death, divorce, incompetency, the failure of a business, or even addiction could drastically alter your goals for your estate plan and beneficiaries.  A proactive advisor who keeps an active line of communication open with you is critical in many respects, but especially when estate planning is involved.  Discussing these types of events with your advisor should prompt a conversation to reevaluate your plan and implement the necessary revisions to achieve your goals.

4. Failing to utilize proper tax planning.

Although the current estate and gift tax exemption is $12.06m per individual ($24.12m per married couple), its highest level ever, affluent families are still tasked with mitigating potential taxes.  Adding to the complexity, unless an extension is passed before 2025, the exemption will revert to its prior $5m level (with COLA adjustments).  Although the window for the current iteration of a Biden tax proposal seems all but shut, such legislation could present significant planning challenges.  Past considerations contemplated by the Biden administration include reducing the exemption to as low as $3.5m per individual, increasing the gift tax rate to 50%, or even eliminating the highly coveted step-up basis.  Dismissing tax worries because the value of your estate was under the exemption threshold at the time your plan was created can lead to serious issues down the road.  Clients and their advisors need to be proactive and vigilant when it comes to tax planning.  The tax code changes frequently, but the effects brought by those changes can be mitigated or avoided with proper, proactive planning. 

5. Not accounting for charitable intentions.

Charitable planning can take place over the course of your lifetime, as well as at the time of your passing.  Testamentary gifts to your favorite charities are an effective way to preserve your control and enjoyment of an asset during your lifetime, and still provide charitable support in the future.  The designation of your bequest can be generic (ex: to support cancer research) or specific (ex: to support a unique endowment or research project).  Generally, generic bequests provide the most flexibility to the charity by allowing it to allocate your bequest to any priority project within the area you wish to support.  With specific bequests, it may behoove you or your advisor to periodically touch base with the charity to ensure your designation is not outdated and the nature of the project named in your estate plan has not changed.  Additionally, there are several planning vehicles that can be utilized in addition to bequests to maximize tax savings and charitable impact.

More details on Estate and Gift Tax Planning for 2022 can be found in this linked whitepaper.