Nearly all those owning real property and other assets can benefit from a quality estate plan. With proper guidance, drafting, and implementation, your estate plan will be effective to avoid probate, unnecessary taxes, and court control of your assets at your death or in the event of incapacity. Proper implementation of your estate plan is not a difficult task however, it is easy to make mistakes. Other than simply delaying the creation of a Living Trust and waiting until it is too late, the following is a list of the most common estate planning mistakes.
Inaccurate assumptions may lead some people to wrongly believe that a Living Trust is not necessary. For example, believing that outright gifts during lifetime, such as placing your son or daughter on the deed to your home, either outright or as a joint tenant, is a great way to avoid probate. The fallacy in this approach is that once your child becomes an owner of the house, they could force a sale against your wishes. In addition, your child’s creditors could take the home to satisfy your child’s debts, bankruptcy, divorce, or lawsuits. Furthermore, your family loses the benefit of receiving the stepped-up cost basis on your home at your death, leading to unnecessary capital gains taxes.
Another common misconception is believing that a Will functions as a Living Trust. Unlike a Living Trust, any Will must go through probate. And a Will is of no use in the event of temporary or permanent incapacity. Powers of attorney are needed to handle property, finances, and medical decisions during incapacity, otherwise the expense and hassle of a conservatorship may be necessary.
Trying to Do it Yourself
Relying on the advice of non-attorneys for estate planning and trust drafting is a mistake. Serious omissions or errors may go unnoticed, until after you die. You are taking great risk by not allowing your Living Trust to be prepared by an experienced trust attorney. It is critical that the trust be drafted and funded properly or it could be worthless when you die. Paralegal services and online software and document services owe no legal duty to their customers to make sure the proper documents are executed, or that the trust is formed or funded correctly, or to notify you in the future of critical legal developments or changes in the law. They may not be California specific nor up to date and often fall into the category of one-size-fits-all estate planning, which very often fails to address your specific needs, wishes, assets, family dynamics, or taxes. You might own a business or a vacation home, be a part of a blended family, have a child with special needs, or be married to a non-citizen. If your estate is worth more than the estate tax exemption threshold, an omission of critical language could subject your estate to hundreds of thousands of dollars in unnecessary taxes. Even trying to amend your trust yourself could be a huge mistake. For example, handwritten changes may not be valid.
Improper Funding of the Trust
There is a common misconception that your estate plan is complete once all of your estate planning documents have been signed. To be complete, all assets must be transferred to the trust; leaving out assets can defeat the purpose of your estate plan. This includes failing to ensure all financial accounts are owned by the trust, or failing to name the trust as contingent or primary beneficiary for tax deferred retirement accounts. Funding your Living Trust with bank/investment accounts, business interests, and real estate are critical, as is changing the beneficiary of your life insurance to name your trust as either the primary or contingent beneficiary. While most people are aware that life insurance proceeds are not subject to income tax, many do not realize life insurance proceeds are subject to estate tax. Therefore, special trust planning may be required for life insurance.
Another common funding mistake can arise when a bank asks you to temporarily transfer your home out of the trust in order to help the bank facilitate a refinance. Very often the bank doesn’t bother to transfer the property back into the trust or even remind you to do so, leaving the home out of the trust. Even if your home or rental property was originally transferred to the trust, a mistake may later occur if the property is sold and a newly acquired property is not transferred into your existing Living Trust. Also, if your rental property is held by your LLC, it is important to not overlook the transfer of your LLC membership interests to your Living Trust.
Drafting Issues/Wrong Type of Trust
Failure to make a thoughtful distinction between percentage allocations versus specific gifts can lead to beneficiary distribution problems. For example, in leaving specific dollar amounts to a specific beneficiary, the funds may not later exist, or may be far too small or too large, depending on size of the estate at death. A specific property may no longer exist, or be worth far more or less than when the trust was initially drafted. Percentage allocations often alleviate these potential problems.
Other mistakes can be made by not designating whether inherited assets should go to the children of a pre-deceased beneficiary, or to the other named beneficiaries who do survive. Another may be failing to regulate distribution rather than leaving assets outright to heirs who are prone to mismanagement or may quickly squander their inheritance, or who may be subject to creditors or an ex-spouse. Additionally, selecting the wrong person to act as successor trustee can lead to foreseeable disputes between the beneficiaries and trustee.
In some cases, having a mandatory A-B trust split after the death of a spouse may be beneficial for reducing estate tax. However, smaller estates could suffer from a loss of step-up in tax basis after the death of the surviving spouse if there is an unnecessary mandatory split. One solution is utilization of a Disclaimer A-B trust, which allows the surviving spouse to delay the decision of whether to split the trust, until nine months after the death of the first spouse, at a time when estate tax rates, exemptions, values, and other figures may be better ascertained.
When properly executing and funding a Living Trust, your real estate will not be reassessed and your property taxes will not increase. Even if you already have a good estate plan, including a well drafted and funded trust, you could make a mistake by not telling your beneficiaries or successor trustee that you have a trust and where it can be located. Finally, selecting the cheapest option in order to save money is a mistake which can create a very expensive surprise for your heirs. Remember, your estate plan will eventually need to take care of the people you care about the most.
Michael K. Elson is a premier estate planning, wills and trusts attorney in the Los Angeles area. He is the principal of The Law Offices of Michael K. Elson which provides estate, business and asset protection planning, including trusts, LLCs, corporations, probate, trust administration and family law. He may be reached at (818) 763-8831 or by visiting http://www.LimitLiability.com