The Ten Most Common Estate Planning Mistakes

#1 No Plan

Easily the most common mistake is the failure to leave a legally valid, written estate plan.  What applies here is the adage “People don’t plan to fail; they fail to plan.”  It would be an understatement to say that this causes a number of problems.  The most likely problem is that the estate may have to go through probate, a lengthy and expensive court-supervised distribution of the decedent’s assets.  The second most likely problem with the “no plan” option is that the distribution plan that the state has written for people who leave no written plan rarely reflects the wishes of the decedent, had they left their own written plan.  Often, this leads to bad feelings among heirs and, sometimes, estate contests.  When estates are contested, there is one class of individuals guaranteed to benefit: lawyers.

#2 Joint Tenancy

Sometimes called the layperson’s substitute for estate planning, joint tenancy has a number of problems.  When spouses are involved as joint tenants, joint tenancy “wastes” the federal estate tax credit that could have allowed as much as $10,000,000 (currently) to be passed to heirs, free of federal estate tax.  When everything is passed to the surviving spouse, as a joint tenant, the surviving spouse can only pass on $5,000,000 (currently) to the heirs, free of federal estate tax.  Additionally, property held as joint tenants does not receive favorable capital gains tax treatment, should the surviving spouse want to sell.  When non-spouses are joint tenants, different problems arise.  Most of the problems center around the possibility of losing the asset because of the rights of creditors (Uncle Sam, prevailing parties in lawsuits, etc.), who might sell the property to get their share of the joint tenancy.

#3 Failure to Properly Divide the Estate to Maximize Estate Tax Savings

Sometimes the estate planning documents will not provide for such split at the death of the first spouse.  Even more problematic is the situation where the estate planning documents provide for such a division, but it is never done on paper.  The $5,000,000 (currently) that could grow free of any estate tax is endangered by such an omission.

#4 Failure to Re-Title Assets in the Name of the Living Trust

This is known as an unfunded living trust.  It is basically an empty shell, whose effectiveness is never utilized.  Unless a schedule of assets is attached to the trust document and accurately portrays the current assets, probate may be required.

#5 Failure to Create a Community Property Agreement

As indicated above (#2 Joint Tenancy), favorable tax treatment to the surviving spouse of property that is worth more than what was paid for it, may not be available to joint tenants.  A properly drawn community property agreement avoids this outcome.

#6  Failure to Create a Schedule of Trust Assets/Failure to Avoid Probate on an Unfunded Living Trust

Creation of a schedule of trust assets is necessary because a period of time necessarily occurs between creation of the trust and the time all assets have been re-titled into the name of the trust.  If such a schedule exists and the creators of the trust die before the assets have been re-titled, the court can be petitioned so that probate can be avoided on all assets listed on such a schedule.

#7 Belief That a Simple Revocable Living Trust Provides Lawsuit Liability Protection

The truth is that it does not.  Asset protection is a complex and rapidly changing area of the law.  Be wary of asset protection schemes “hyped” at seminars.  Some I’ve seen are very dangerous.  More complex, recently drafted trusts can provide this kind of protection but they are uncommon.

#8 Failure to Fix Estate Values at the First Death

Everything properly put into a decedent’s Trust “B” at the first death in a couple will never again be subject to estate tax.  (Capital gains and income tax are another matter.)  The emphasis here is on the word “properly”.  One must fix values in a way with which the IRS will agree.  An estate planning lawyer should help you with this.

#9 Holographic Will Witnessed By A Beneficiary

The law shifts the burden of proof on to such a person.  They must prove, by a preponderance (more than 50%) of the evidence, that they did not unduly influence the decedent when they were making out their holographic will.  That is why, contrary to a formally prepared (typed) will, a holographic will need not be witnessed.

#10 Leaving $1 Eliminates Estate Contests

Where this chestnut got started I don’t know.  Think of the situation practically for a moment.  If all you were left was a dollar (if you didn’t challenge an estate plan), what would you lose if you challenged and lost?  One dollar, right?  What incentive is there for you not to challenge the estate plan, if you were treated unfairly?  None that I can see.  There must be enough left to make the potential challenger think twice about losing.

I’m sure other estate planning lawyers could come up with their own top ten.  But I think this will give you food for thought.  Please call me if you have any questions about a topic I’ve raised here or about any other estate planning questions.  I would be glad to talk with you.