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Mistakes to Avoid in Estate Planning

These include not having a financial plan and failing to maximize contributions.

By David Nierenberg

Estate planning involves the management of assets during one’s lifetime, and the disposition and management of those assets at death. It requires an ongoing review and evaluation of personal, family and business circumstances, with periodic adjustments when necessary. Here are 11 mistakes people make when planning their estates.

1. They fail to take inventory of and value their assets regularly. If you don’t know what you have, you can’t protect it. Many people are not even aware of their assets, such as company benefits. They may also own assets that change in value regularly, such as a home or stock portfolio.

2. They fail to maximize pension/profit sharing contributions for themselves and their spouses beyond the traditional 25 percent of pay, and in some circumstances, even up to 100 percent of pay.

3. They fail to coordinate or have a financial plan. Life cycle changes, including birth, death, marriages and home purchases, usually require modifications to a variety of planning documents like wills, benefit plans, insurance policies and trusts. Failing to coordinate these documents and plans as a result of life cycle changes can lead to unintended consequences and loss to family.

4. They fail to take advantage of bypass trusts to “save” unified credit equivalent. The tax code allows individuals to shield the first $1 million for 2002 of estate-taxable assets with a tax credit. Spouses who allow assets to pass to each other upon death without preserving this tax credit are exposing their estates to unnecessary taxation. Preserving this credit is most effectively done through a special “bypass” or “credit shelter” trust, and properly structured asset ownership. After EGTRRA, the wording for these trusts and the use of “disclaimers” must now be integrated into wills that were previously effective.

5. They develop an estate plan that uses the marital deduction when it is unavailable. The marital deduction allows assets to be transferred between spouses with no gift or estate taxes; however, jointly held property does not qualify. Spouses who are not U.S. citizens are ineligible for this benefit but may be able to accomplish similar objectives with the use of certain trusts (QDOTs).

6. They fail to maximize gifts. Estate values can be reduced, along with potential estate tax liability, through the use of gifts or transfers of property with little or no value exchanged in return. Individuals can gift up to $11,000 per person every year, and spouses can combine or “split” their gifts. This technique is especially effective with assets that may have little current value but high potential value in the future.

7. They make gifts to someone who uses those gifts to pay for education or medical expenses. Payments made directly to education or medical providers are not subject to gift tax. Hence, a parent or grandparent who pays tuition for a child directly to a college can still transfer up to $11,000 of additional assets without gift tax.

8. They make improper use of jointly held property. Property held jointly automatically passes to a survivor without restriction, which may not be in the best interests of the survivor. Unfavorable tax consequences can also result.

9. They improperly structure their life insurance policies. Life insurance policies are more complicated than most people realize. As such, careful consideration needs to be given to ownership and beneficiary arrangements, dividend and settlement options. Seemingly inconsequential details can lead to disastrous results, such as when a beneficiary receives a lump sum of money with no restrictions on how that money can be used, or when a policy is inappropriately owned or transferred. This results in unnecessary taxation of policy proceeds. Also to be considered is the problem of a minor beneficiary receiving a lump sum at age 18.

10. They fail to use 529 plans to allocate monies for college expenses in a manner that is the most cost effective for parents and grandparents beyond $11,000 per child.

11. They have inadequate amounts of life insurance. Studies consistently indicate that most Americans are underinsured. The result is that survivors suffer from a lower standard of living and are unable to achieve their objectives, such as attainment of educational goals. Many people also lose coverage or have it reduced because of policy expirations, automatic reductions at later ages, and/or group coverage cancellations on company changes.

12. They fail to fix and maintain property values: The IRS is in the business of generating tax revenues. Therefore, in valuing estates, it always pushes for the highest possible values. Fixing and maintaining property values can help you—not the IRS—get control. Valuations are especially important with closely held businesses: these values can be built into buy-sell agreements for unrelated owners and, if properly structured, must be honored by the IRS.

(This information is designed to be of a general nature. If legal, accounting or other advice is required, the services of a competent professional should be sought.)

David Nierenberg is president of National Pension Consultants II, Inc. He consults with individuals and owners of closely held businesses about financial strategies to reduce income and estate taxes. You can reach him at


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