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1. NOT
HAVING A "GAME PLAN"
If you don't know where you're going, it's certain tht you and your
family will end up someplace else. The bottom line is that every
estate is planned - either you do the planning OR the state that you
live in and the IRS will do it for you. the remaining 9
"Errors" in this outline are key examples of how many people
fail to properly plan.
As most people know, the federal estate tax is being "phased
out" through decreases in the top estate tax rate and increases in
the gift and estate tax credits. Under this "current"
plan, this tax will be fully repealed in 2010. Because of this,
many people now feel that they really don't need to do estate
planning. But, new rules apply for determining inherited
property's basis. The new rules limit basis step-ups and, in many
cases, will result in significantly higher capital gains taxes on the
sale of inherited property.
Keep in mind that estate planning involves a lot more than just
minimizing estate taxes. A well thought out and properly executed
estate plan will do many things including:
a.
Providing for minor children; and
b. Providing for your children from a previous
marriage; and
c. Making sure your property passes to your
intended beneficiary(s); and
d. Naming the proper executor, trustee or personal
representative; and
e. Excluding those that you don't want as
beneficiaries; and
f. Properly structuring your life insurance /
long term care insurance; and
g. Fulfilling your charitable wishes; and
h. Passing your business on to the next generation;
and
i. THE LIST GOES ON! |
2. LEAVING
EVERYTHING OUTRIGHT TO YOUR SPOUSE & NOT UTILIZING DISCLAIMER
PROVISIONS & CREDIT SHELTER TRUSTS.
Leaving everything outright to your spouse can present two major
problems. First, your entire estate may eventually wind up in the hands
of your spouse's new husband or wife and their children! The second, and
more common problem, is that an outright gift to your spouse will waste
your estate tax credit. This means that for a $3 million dollar
estate in 2004, your family will be paying $450,000.00 in federal estate
taxes that they didn't need to pay. The most effective way to
remedy this problem is to make sure that spousal disclaimer provisions
and credit shelter (or by-pass trusts) are included in your estate
planning documents AND that appropriate assets are re-titled so that
they are owned by your and your spouse as "tenants-in-common".
3. NOT HAVING AN UP TO DATE & COMPREHENSIVE DURABLE
POWER OF ATTORNEY.
A power of attorney is a legal document through which you authorize
someone to act on your behalf - usually if you become incapacitated and
are unable to handle your own affairs. You are the
"principal" and the person who is being given the power to act
for you is the "agent". Under a properly drafted durable
power of attorney your agent can sign checks for you, trade stocks for
you, make gifts on your behalf, sell, rent or refinance your house, set
up trusts, run or sell your business and perform numerous other
financial dealings. In effect, your "agent" steps into your
financial shoes and can do just about everything that you can.
The durable power of attorney will be the most important legal document
for you and your family if you ever suffer an accident or illness that
leaves you unable to handle your personal or financial affairs. If
you have not prepared a durable power of attorney while you were
competent, it is likely your family will have to go to court to have a
guardian appointed for you. Guardianship proceedings are expensive
and time consuming and give you no control over who will be appointed to
act for you or what your guardian will be allowed to do. Why would
you let a judge handle your affairs when you could have appointed your
spouse or other family member to do it?
Effective April 12, 2000, the law as it related to durable powers of
attorney in Pennsylvania changed. Because of these changes, many
of the documents that were prepared prior to this time are either
grossly inadequate or legally ineffective. Unfortunately, most
people don't realize this until they try to use the durable power of
attorney for a loved one and it is rejected by a bank, stockbroker,
title company, money manager, or any number of people who are involved
with your assets.
4. DELAYING OR AVOIDING THE PURCHASE OF LONG TERM CARE
INSURANCE.
In the practice of estate planning law, it is malpractice not to
discuss long term care insurance with a client. Why? Because
a plan to preserve one's estate is voided when the entire estate will
have to be liquidated and spent to pay for a stay in a nursing
home. When you turn 50, you must consider the purchase of long
term care insurance.
According to government statistics, approximately 43% of the
population currently over age sixty five (65) will need long term care
at some point in their lifetime. With the increase in life expectancy
and advances in medical technology, that number will certainly
rise. Currently, the average cost of long term care in
Pennsylvania is over $67,000 per year! The best care can cost between
$80,000 and $90,000 per year.
When a loved one enters a nursing home, someone has to pay the
bill. If you don't have long term care insurance, that bill is
paid out of your estate and your income. Regardless of your estate plan
the nursing home is paid first!
5. MISUNDERSTANDING ASSET PROTECTION AS IT RELATES TO
NURSING HOME COSTS.
Many people in their 70's, 80's and 90's did not or could not purchase
long term care insurance when they were younger. Despite what you have
heard, even if you don't have long term care insurance, there are still
many approaches that can be used to protect your home, business assets,
bank accounts, investments and just about every type of asset from being
used to pay for long term care or from being "recovered" under
the provisions of Pennsylvania's medical assistance law.
How can you avoid the Medical Assistance "Trap?" Congress
has made it as tough as possible to qualify for Medical Assistance. A
person can't protect his or her assets just by transferring them when he
or she is about to enter a nursing home. However, by adopting a medical
assistance strategy that fits your needs, you can avoid the medical
assistance trap and protect much of your savings from flowing endlessly
into a nursing home. There are many tools and techniques that one can
use to move assets and still qualify for Medical Assistance. But, it is
best if the strategies are done before entering a long term care
facility.
6. IMPROPERLY ARRANGED LIFE INSURANCE.
The proceeds of life insurance policies are often payable to a
beneficiary at the wrong time (before that person is emotionally,
physically or legally capable of handling it) or in the wrong manner
(outright instead of being paid over period of years or paid into
trust.) Often, no contingent (backup) beneficiary has been named.
All legal documents which pass property should contain, for every name
in the document, at least two backups.
Another problem that arises with the proceeds of most life insurance
policies is that these proceeds are includable in the gross estate of
the insured because the policy was purchased by and is owned by the
insured. This means that Federal Estate Tax is going to be owed on
the entire policy when it doesn't have to be. Also, whenever life
insurance is paid to the insured's estate, it is needlessly subjected to
the claims of the insured's creditors and in many states (including
Pennsylvania) unnecessarily subjected to state inheritance tax.
The probate costs are also increased and the proceeds are then subjected
to state inheritance tax. The probate costs are also increased and
the proceeds are then subjected to the potential for an attack on the
will or an election against the will.
7. IMPROPER
USE OF ASSET TRANSFER OR JOINTLY HELD PROPERTY.
Many people think that putting a child's name on your home, bank
accounts, and CD's is a good way to avoid probate and negate the
necessity of having a will. Nothing could be further from the
truth. This approach is a nightmare of unexpected tax and non-tax
problems.
There is a great potential for federal gift tax to be charged to the
donor. There is also the possibility of double federal estate
taxation; if the joint ownership is between individuals other than
spouse, the entire property will be taxed in the estate of the first to
die - except to the extent that survivor can prove contribution to the
property. In addition, if the gifted property is sold, a capital gains
tax will be charged to the child who has sold the property because no
step up in basis has occurred.
Once jointly owned property with right of survivorship has passed to the
survivor, the provisions of the decedent's will are ineffective. Many a
child has been unintentionally disinherited because Mom or Dad set up an
account with another child for convenience! Also, liability arises
if one of the joint (or individual) owners is sued, get divorced, files
bankruptcy of any of a hundred situations that can occur. The
parent will then be at the mercy of the creditor, ex-spouse, IRS and
court system.
8. CHOOSING
THE WRONG EXECUTOR IN YOUR WILL OR THE WRONG TRUSTEE FOR YOUR TRUST.
Naming the wrong person to be executor or trustee can be a
disaster! The job of an executor or trustee is to administer the estate,
often without compensation and with great personal financial risk.
They must collect & value all assets; pay all obligations and
distribute the remaining assets to the beneficiaries. Although it
sounds simple, these tasks can be highly complex, time consuming, and in
some cases technically demanding on the person in charge of fulfilling
this duty.
If one child is chosen over others to do this job, jealousy and distrust
can result. If all of the children are chosen, trying to get agreement
on even the simplest issues is nearly impossible. We often times
find that selection of a beneficiary as an executor can result in a
conflict of interest. That person may be forced to choose between
his interest and that of the other beneficiaries. Potential
beneficiaries have neither the time nor the inclination to devote to the
sometimes long and drawn out process of estate administration. Does the
executor even live in the state of the estator?
9. IMPROPERLY DISPOSING OF ASSETS.
An improper disposition of assets occurs whenever the wrong
asset goes to the wrong person in the wrong manner or at the wrong
time. Some examples include:
a.
Leaving a large estate outright to a teenager or disabled
child or relative; or
b. Leaving a complex estate consisting of investment
real estate directly to a spouse who knows nothing about real
estate; or
c. Leaving assets to a beneficiary who is on Medical
Assitance and therefore must forego their local, state of
federal benefits; or
d. Leaving a large undividable asset - like a farm or
closely held business - to 3 or 4 children who don't like each
other or want no parts of farming or staying in the family
business; or
e. Leaving assets to parents or wealthier relatives
who don't need the asset. |
Equal but
inequitable distributions are common. consider a family of four
children where one child is a wealthy and brilliant physician and the
youngest is a teenager with a serious learning disability. Or, how
about a family with a physically handicapped ("special needs")
child and three healthy children with no physical problems. In
both examples, the needs and circumstances of each family member is
different.
10. WILL ERRORS OR IMPROPER BENEFICIARY DESIGNATIONS.
One of the greatest estate planning mistakes is dying without a
valid will. This results in what is known as intestacy which is
another way of saying that the state will force its own will upon the
heirs it chooses. This plan is seldom what the decedent had in
mind.
Will errors usually occur as a result of not updating your will
or trust when major changes in your life take place. These changes
include: the birth, adoption or death of a child; the marriage, divorce
or separation of anyone named in the will; a major tax law change; the
testator moving to a new state; a significant change in income or wealth
of the testator or any of the beneficiaries. Your will should be
updated at least every 5 years to avoid a potential disaster during the
administration of your estate.
Examples of will errors include:
a.
Named beneficiaries or executors who have died;
b. Not having at least 2 "backup" executors and
beneficiaries;
c. Using improper or simplistic language to describe a
complicated distribution;
d. Not having your will acknowledge by witnesses (self
proving); |
Improper
beneficiary designations occur - like will errors - when a change occurs
in your life but you don't update your documents. An example is
getting remarried and not changing the beneficiary of your life
insurance policy from your former spouse to your new spouse.
Note: All of the above 10 estate planning errors can be
avoided by contacting competent legal counsel who is skilled in estate
planning. A few hours of time with a qualified estate planning
attorney can help you avoid many tax and non-tax pitfalls for your
family members after your passing.
Don't wait until it's too late!
If you have any questions about
your durable power of attorney or we can
assist in any way, please do
not hesitate to contact
L. Robert Frame, Jr., Esquire at (610) 431-3458.
You can also E-Mail me at framelaw@AOL.com
or check our website at
www.framelawoffice.com
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