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In estate planning, we’re told the ultimate goal is to pass as much wealth to the next generation as possible in a tax-friendly manner. But with constantly changing demographics and tax laws, there should also be a focus on protecting and preserving one’s family legacy.

There are a number of ways to accomplish the above goals: education funding and charitable family endowments, as well as family safety-net trusts and family investment banks that benefit descendants. Unfortunately, there are a lot of ways to do estate planning the wrong way, too.

Following are some of the most common estate planning pitfalls you should try to avoid:

1. Forgetting about income tax consequences of trusts

Remember the assets of a revocable trust count toward the federal estate tax exemption. Estate tax is imposed on that portion of the value of a deceased taxpayer’s estate that exceeds the gift tax exclusion applicable during the year of the taxpayer’s death ($5.43 million in 2015).

One income strategy is to gift assets during your lifetime so they won’t be taxed after your death. The annual gift exclusion amount is currently $14,000, so you can leave that amount to your loved ones each year without having to pay federal estate tax.

2. Not carefully considering who you should trust 

In estate planning, you’ll have to make decisions for several separate documents, and the answers may be different for each one. Don’t make hasty choices; rather think long and hard about the trustworthiness of each individual to whom you are leaving your assets and counting on for important decision-making. For instance, you probably won’t want to bequeath significant funds to a sibling that has recently declared bankruptcy, or depend on a teenage child for medical decisions.

Also, make sure you clearly state in a separate document who should and should not be granted custody of your children. Many people misunderstand these decisions need to be noted in a separate document from their will.

3. Not getting appraisals of assets

This is true even for non-taxable estates, because your heirs will need to know those numbers later for distributing your estate.

Make sure you have a full appraisal report for all of your most important assets. The main benefit of having a trustworthy appraiser is that he or she can assist an attorney in structuring an estate plan that will maximize your tax benefits by providing strictly a “value” point of view. The appraisal can provide a benchmark of value for an asset or collection so subsequent appraisals will illustrate the growth (or decline) in value.

4. Not planning for aging parents

Don’t rely on an expected inheritance as part of your retirement plan. Statistics reveal our parents’ generation is living longer and spending more money, which may cause our inheritance may be minimal—if there’s any money left at all.

In many instances people may find themselves financially supporting parents who living longer than expected. It’s also important to note that 24 states have enacted filial support statures that may allow creditors to hold children accountable for the cost of a parent’s care, with possible criminal penalties for non-compliance.

5. Not planning for incapacity

Incapacity means you are unable to make decisions for yourself due to an injury or other medical condition that may be temporary or permanent.

If there is a problem with your power of attorney, you don’t have one, or someone that has your assets (like a bank) will not accept it, a probate court will have to appoint someone (possibly a stranger) to manage those assets for you until you either recover or die.

Setting up a Revocable Living Trust could be a better way to handle things. In this estate planning strategy, you transfer assets from your name to the name of your trust, which you can control as the trustee. Because you no longer own the assets in your own name, the court cannot control it if you become incapacitated. You can also name anyone you wish as your successor trustee, and all business can be conducted privately.  If you recover from your incapacitated state, you simply resume being trustee.

6. Being dishonest in your estate plan

The audit rate for estates with more than $10 million is 116%, so the more disclosure you provide, the better. If auditors find one issue, they will typically continue investigating into your affairs. The results could be devastating.

For instance, if you lie on legal documents such as your life insurance application, the discovery of such deceit could lead the insurer to cancel the payout altogether by reason of fraud.

7. Not accounting for unusual personal property

Several assets could prove particularly complicated in a bequest. A firearm, for instance, could create liability troubles if the weapon is prohibited or if the heir has a felony offense. Other common assets that can be difficult to pass on to heirs include airline miles (some airlines have restrictions) and reproductive assets, such as frozen sperm. It’s important to research the rules behind any unusual asset you wish to pass to your loved ones sooner rather than later.

8. No contingency planning for retirement assets 

Make sure you confirm both primary and contingent beneficiaries, as well as conduct a plan for what would happen if a beneficiary predeceases you. If you leave assets to a child and he or she has passed away, many states would redistribute that money among other siblings rather than to that child’s own heirs.

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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