Now That You Have Signed Your Will and Your Estate Plan Is Finally in Order: What’s Next?

First off, congratulations! In my practice, I meet far too many people who put off making financial plans for their future (“I’m still working. I don’t need to think about that yet.”), a decision they regret when something unforeseen happens or they haven’t considered inheritance implications. When preparing for the future, there is no time like the present to be proactive.

That said, the following is a list of common estate planning mistakes that I have seen, with recommendations on how to avoid them.

Naming a minor as a beneficiary of an insurance policy or other asset

It is not uncommon for a minor to be named as a beneficiary of a life insurance policy or inherit other assets through a will. When a minor inherits an asset the Probate Court will get involved. The Court will likely hire a guardian (in legal language, a Guardian ad Litem) to represent the interests of the child. These types of cases may take years to administer and can be very expensive. All of the expenses are paid from the child’s inheritance. A better option that does not involve the Court is to set up a trust and select a trustee to manage the inheritance.

Failing to minimize or reduce estate taxes

If a married couple each had wills that left everything to the survivor, there would be no estate tax on the first death because of the unlimited marital deduction. Upon the surviving spouse’s death, he or she would only be able to claim their own estate tax exemption and would lose the estate tax exemption of the predeceased spouse. This can be fixed on the federal side by making a portability election. Unfortunately, Massachusetts does not allow for the portability of estate tax exemptions, but you can work around this by creating a revocable or living trust. Instead of the deceased’s assets passing directly to the surviving spouse, the assets would be placed in a trust for the benefit of the surviving spouse. This structure ensures that the Massachusetts estate tax exemptions for both spouses are not wasted.

Not understanding the tax consequences of gifting

Massachusetts does not have a gift tax. Lifetime gifts, regardless of when made, are not included in the calculation of MA estate tax (but they do figure in when determining if there is a filing requirement). For example, a decedent had $1.3 million before death and gave away $1 million. There is still an estate tax filing requirement for the remaining $300,000 and there will be an estate tax due; but only on the $300,000.

Utilizing a gifting strategy can be an excellent way to reduce estate taxes. It is important to keep in mind that assets that are later sold may generate unintended capital gain taxes. The capital gain tax is often higher than the MA estate taxes you saved.

Failing to understand the tax implications of adding children to deeds

When you add a child to the deed to your home you are making a gift. The child will receive a cost basis of one half of what you paid, and this amount will be used to determine any taxable gain in the event of a later sale. Gifting can result in unintended tax consequences. If your child instead inherits the home, the child’s cost basis would be the fair market value. A much better tax outcome results if the property is later sold. Another disadvantage of adding a child to a deed is that your property would be exposed to a child’s creditors and ex-spouses upon a divorce.

Assuming that all of your assets pass according to what your will instructs

Your will affects only those assets that are owned by you individually at your death.  These assets are commonly referred to as probate assets. It is important to understand that some assets you own at your death are not affected by your will, such as assets held in trusts, retirement plans, life insurance, and jointly owned assets.

Make sure that your beneficiary designations are up to date, because any asset that has a beneficiary designation will pass to the named beneficiary, regardless of what your will says.

Fear not: These types of mistakes can be minimized with an ongoing review process with your estate planning attorney. Your estate planning attorney should also be contacted about important lifetime events so that any potential issues can be addressed in a timely and proactive manner.