Mistake: Assuming that estate planning is only appropriate for the very
wealthy. Although estate taxes generally won’t affect estates with less
than $1,000,000 of assets (valued at fair market value), there are other reasons
to consider estate planning. If you have minor children, you need to make
provisions for guardians and to provide for their support in the event of your
death. Individuals who are involved in second marriages need to make special
arrangements to ensure that children from a first marriage are protected.
Mistake: Placing too much reliance on the unlimited marital deduction.
leaving all of your assets to your spouse, you forfeit the use of your
$1,000,000 estate and gift tax exclusion, compounding the problem of estate
taxes when your spouse dies. For estates in excess of $2,000,000, full use of
each spouse’s $1,000,000 exclusion will save the heirs $345,800 in estate
Mistake: Believing that joint ownership of property eliminates the need
for more formal estate planning. Although joint ownership of assets can
simplify estate planning, this may not be the most appropriate or
cost-effective way to distribute your assets.
Mistake: Waiting until death to use the $1,000,000 estate and gift tax
exclusion. The $1,000,000 exclusion can be used to make gifts in excess of
$10,000 per year during your lifetime. It may make sense to gift an
appreciating asset to your heirs during your lifetime to remove all future
appreciation from your estate.
Mistake: Not using the annual gift tax exclusion of $10,000 ($20,000
with spouse) per donee. Over a number of years, an annual gifting program
can remove a substantial portion of your estate from estate taxes. In
addition, any income generated by the gifted assets becomes taxable income to
Mistake: Believing that a revocable living trust will save estate taxes.
Although living trusts can provide substantial estate planning benefits,
such as removing assets from probate and preserving the use of the $1,000,000
estate and gift tax exclusion, they have no impact on estate taxes.
Mistake: Not sheltering life insurance proceeds from estate taxes if
your total estate, including those proceeds, will exceed $2,000,000. Although
the proceeds will be free from income taxes, they will only be free from
estate taxes if you set up an irrevocable trust or make your heirs the owners
of the policy. Specific tax guidelines must be followed to ensure the property
tax treatment of the proceeds.
Mistake: Not updating beneficiaries. Beneficiaries can be named for
many assets, including life insurance policies, retirement plans, brokerage
accounts, and bank accounts. Review these beneficiaries after major changes,
such as marriage, death, or the birth of a child.
Mistake: Relying on the marital deduction for a spouse who is a U.S.
resident, not a U.S. citizen. The unlimited marital deduction is not
available for spouses who are not U.S. citizens, unless a special kind of
trust is established. Annual gifts of $100,000 may be made tax-free to spouses
who are not U.S. citizens.