We sometimes speak with people that have been negatively impacted by the estate planning mistakes of their deceased loved ones. These situations are disturbing because they could have been easily avoided.
In an effort to spread awareness, we are going to share a few of these commonly made estate planning errors in this post.
Automatic Utilization of a Simple Will
A lot of people think that estate planning boils down to one simple act. You take some time to draw up a simple will, and that’s the long and short of it.
People that take this approach often purchase generic, fill in the blanks documents from websites and they assume that they are good to go. They are under the impression that the estate administration process is simple and straightforward when a will is utilized.
In reality, this is not the case at all. If you use a will to state your final wishes, you name an executor to act as the estate administrator after your passing. When the time comes, the executor would admit the will to probate, and the court would supervise during the administration process.
No inheritances can be distributed while the estate is being probated by the court, and it will typically take eight to 18 months in most jurisdictions.
The cost factor is another negative. There is a filing fee, the executor in entitled to remuneration, and there can be legal and accounting expenses.
When you add in the appraisal and liquidation charges and other incidentals, a significant portion of the estate can be consumed before it is transferred to the heirs. Another negative is the loss of privacy, because probate records are available to anyone that has an interest.
If you use a living trust as an alternative, you control the assets, because you would act as the trustee throughout your life. After your passing, the successor trustee that you designate would distribute assets to the beneficiaries. Probate would not be a factor, so the drawbacks would be avoided.
This is one reason why a living trust can be better than a will, and you can include a spendthrift clause to protect the principal from the beneficiary’s creditors. If you choose to do so, you can instruct the trustee to distribute limited assets incrementally over an extended period of time.
Failure to Update the Existing Plan
When you put your estate plan in place, you should recognize the fact that updates will probably be necessary over the years. There can be additions and subtractions to the family, and your marital status may change.
In addition to events that take place within your own life, there can be changes to relevant laws. Far too many people procrastinate when they know that they should update their estate plans. This is one of the mistakes that you should avoid, because you never know what the future holds.
No Recognition of Potential Estate Tax Exposure
Inheritances are not looked upon as taxable income by the IRS or the state income tax authorities, and that’s the good news. The bad news is that there are estate taxes that can take a heavy toll on your legacy if you have been very successful.
There is a certain amount that can be transferred before an estate tax can be levied. This is called the credit or exclusion, and on the federal level, it is $12.06 million this year. We also have a state-level estate tax in New York with an exclusion of $6.11 million in 2022.
You should be aware of the parameters at all times, because they are subject to change. For example, the federal estate tax exclusion is scheduled to go down to $5 million adjusted for inflation at the end of 2025.
If you own property in a state that has its own estate tax, it could be a factor for you, even if you are a resident of New York. For example, Massachusetts has an estate tax, and the exclusion is just $1 million.
Schedule a Consultation!
If you are ready to create an error-free estate plan that is ideal for you and your family, we are here to help. You can schedule a consultation at our Manhattan estate planning office if you call us at 212-973-0100, and you can use our contact form to send us a message.