Blog

Estate planning is complicated. There are many moving parts to organizing your finances and determining where they will go after your passing. People often sign a stack of documents at their attorney’s office and think the job is done.

The result? Making mistakes that lead you to estate planning pitfalls. Here are a few that you should try to avoid...

Pitfall #1: Naming the Wrong Executor

Executors are appointed to take legal control over your assets when you pass away. They collect the deceased's assets, pay final debts and expenses, and file federal and state estate tax returns (if needed). Unfortunately, it is not uncommon for the named executor, years after the documents have been signed, to be deceased or no longer suited for the position because they are too elderly. If a professional like an attorney or CPA is named, are they still in business? Meanwhile, children too young to serve when the documents were signed may now be capable of taking on the executor role.

The Solution to #1

Periodically check to see who has been named executor in the estate documents. Is that still appropriate?

Pitfall #2: Not Updating Documents to Reflect the Maturity and Financial Conditions of the Children

Estate planning documents created when children were young will have named a guardian, but when the children reach maturity, that would no longer be necessary. The document may leave assets to trusts on behalf of the children when it makes more sense to distribute them directly to the adults they have become. In some cases, an unequal distribution of assets might make sense, for example, if one adult child has become financially successful while others are struggling. Finally, when children are minors, they typically don’t need health care powers of attorney, living wills, or advance health care directives. Once they become adults, they should consider having these documents in their own right.

The Solution to #2 

Check the child-related provisions in your will or trusts and update when necessary.

Pitfall #3: Inappropriate Healthcare Directives

Under the Health Insurance Portability and Accountability Act, medical records and other personal health information are confidential, meaning they cannot be shared with anyone, including family members, without written authorization. Lack of this information and specific directives could impede decision-making by others when you’re incapacitated or approaching the end of your life. 

The Solution to #3 

Check and update your family’s healthcare powers of attorney, living wills, and advanced healthcare directives.

Pitfall #4: Inappropriate Estate Tax Provisions

In 2024, individuals are legally permitted to transfer assets valued at $13.61 million ($27.22 million for married couples) free of federal estate and gift taxes. However, outdated estate documents might include planning appropriate for much lower exemption values – for example, forcing a trust for the heirs to be funded up to the applicable exclusion amount, which might impoverish the surviving spouse.

The Solution to #4

Review the formulas in the estate documents with your attorney or tax professional.

Pitfall #5: Estate Documents Drafted in a State Where You No Longer Reside

Every state has its own estate and income tax laws; some are common law property states while others are drafted with community property laws. There can be significant differences between them when it comes to transferring assets. Moreover, 17 states also impose some form of estate or inheritance tax, with different exemption amounts. Some estates that would not be subject to a federal estate tax might be subject to state taxes. If your documents were drafted in a different state from where you currently reside, they could be outdated and misapplied.

The Solution to #5

Review your estate plan to see if it is still appropriate, to reduce state estate taxes and ensure they reflect your current residency.

Pitfall #6: Not Utilizing Portability

The federal estate rules say that a surviving spouse can take advantage of any unused portion of the deceased spouse’s exclusion amount. But that’s only true if the estate files a federal estate tax return within nine months of the deceased’s passing (unless an extension is granted). In the normal case where the deceased’s estate would not have to pay estate taxes, often nobody realizes that the federal estate tax return (showing zero taxes have to be paid) has to be filed. This can be costly in some larger estates.

The Solution to #6  

Some families set up a credit shelter, bypass, family, or exemption trust to be funded with assets from the first spouse’s estate. That preserves not only the portability of those assets but any growth in those assets would not be counted in the estate tax calculation. The surviving spouse could also disclaim part of the deceased’s assets, allowing them to pass to the children. Whatever route you choose, it is important to consult with an experienced estate and trust planning team to ensure the portability election is made properly and timely.

Pitfall #7: Failing to Plan for Capital Gains Taxes

Most estates will never pay a federal estate tax meaning the tax planning should be concentrated on income tax. One important consideration is the step-up in basis for appreciated assets, which means that, for the heirs, the capital gains tax obligation on the amount of appreciation during the deceased’s time of ownership will vanish. This is the closest thing to a free lunch, in the tax world, that you can get.

The Solution to #7

Save some highly-appreciated assets like legacy stock positions and shares of the family business from the normal rebalancing and diversification activities, and pass them on to heirs.

You may have noticed a pattern in our suggested solutions, which is that it's important to make an estate plan. It's just as important to make regular updates when necessary. This can be overwhelming and time-consuming, so ask for professional help if you need it. Fee-only financial advisors exist for that reason!                 

Estate planning is complicated. There are many moving parts to organizing your finances and determining where they will go after your passing. People often sign a stack of documents at their attorney’s office and think the job is done.

The result? Making mistakes that lead you to estate planning pitfalls. Here are a few that you should try to avoid...

Pitfall #1: Naming the Wrong Executor

Executors are appointed to take legal control over your assets when you pass away. They collect the deceased's assets, pay final debts and expenses, and file federal and state estate tax returns (if needed). Unfortunately, it is not uncommon for the named executor, years after the documents have been signed, to be deceased or no longer suited for the position because they are too elderly. If a professional like an attorney or CPA is named, are they still in business? Meanwhile, children too young to serve when the documents were signed may now be capable of taking on the executor role.

The Solution to #1

Periodically check to see who has been named executor in the estate documents. Is that still appropriate?

Pitfall #2: Not Updating Documents to Reflect the Maturity and Financial Conditions of the Children

Estate planning documents created when children were young will have named a guardian, but when the children reach maturity, that would no longer be necessary. The document may leave assets to trusts on behalf of the children when it makes more sense to distribute them directly to the adults they have become. In some cases, an unequal distribution of assets might make sense, for example, if one adult child has become financially successful while others are struggling. Finally, when children are minors, they typically don’t need health care powers of attorney, living wills, or advance health care directives. Once they become adults, they should consider having these documents in their own right.

The Solution to #2 

Check the child-related provisions in your will or trusts and update when necessary.

Pitfall #3: Inappropriate Healthcare Directives

Under the Health Insurance Portability and Accountability Act, medical records and other personal health information are confidential, meaning they cannot be shared with anyone, including family members, without written authorization. Lack of this information and specific directives could impede decision-making by others when you’re incapacitated or approaching the end of your life. 

The Solution to #3 

Check and update your family’s healthcare powers of attorney, living wills, and advanced healthcare directives.

Pitfall #4: Inappropriate Estate Tax Provisions

In 2024, individuals are legally permitted to transfer assets valued at $13.61 million ($27.22 million for married couples) free of federal estate and gift taxes. However, outdated estate documents might include planning appropriate for much lower exemption values – for example, forcing a trust for the heirs to be funded up to the applicable exclusion amount, which might impoverish the surviving spouse.

The Solution to #4

Review the formulas in the estate documents with your attorney or tax professional.

Pitfall #5: Estate Documents Drafted in a State Where You No Longer Reside

Every state has its own estate and income tax laws; some are common law property states while others are drafted with community property laws. There can be significant differences between them when it comes to transferring assets. Moreover, 17 states also impose some form of estate or inheritance tax, with different exemption amounts. Some estates that would not be subject to a federal estate tax might be subject to state taxes. If your documents were drafted in a different state from where you currently reside, they could be outdated and misapplied.

The Solution to #5

Review your estate plan to see if it is still appropriate, to reduce state estate taxes and ensure they reflect your current residency.

Pitfall #6: Not Utilizing Portability

The federal estate rules say that a surviving spouse can take advantage of any unused portion of the deceased spouse’s exclusion amount. But that’s only true if the estate files a federal estate tax return within nine months of the deceased’s passing (unless an extension is granted). In the normal case where the deceased’s estate would not have to pay estate taxes, often nobody realizes that the federal estate tax return (showing zero taxes have to be paid) has to be filed. This can be costly in some larger estates.

The Solution to #6  

Some families set up a credit shelter, bypass, family, or exemption trust to be funded with assets from the first spouse’s estate. That preserves not only the portability of those assets but any growth in those assets would not be counted in the estate tax calculation. The surviving spouse could also disclaim part of the deceased’s assets, allowing them to pass to the children. Whatever route you choose, it is important to consult with an experienced estate and trust planning team to ensure the portability election is made properly and timely.

Pitfall #7: Failing to Plan for Capital Gains Taxes

Most estates will never pay a federal estate tax meaning the tax planning should be concentrated on income tax. One important consideration is the step-up in basis for appreciated assets, which means that, for the heirs, the capital gains tax obligation on the amount of appreciation during the deceased’s time of ownership will vanish. This is the closest thing to a free lunch, in the tax world, that you can get.

The Solution to #7

Save some highly-appreciated assets like legacy stock positions and shares of the family business from the normal rebalancing and diversification activities, and pass them on to heirs.

You may have noticed a pattern in our suggested solutions, which is that it's important to make an estate plan. It's just as important to make regular updates when necessary. This can be overwhelming and time-consuming, so ask for professional help if you need it. Fee-only financial advisors exist for that reason!