Estate planning is associated with ultra-rich individuals, but in reality, every person who has any financial assets can benefit from a well-thought-out estate plan. Moreover, many educated and successful people believe their estates will pass smoothly on to their loved ones. However, the complexity of estate tax laws and the possible traps created by various estate tax planning in Texas mean small mistakes can lead to costly tax bills, disagreement between heirs over how to handle their inheritance, and surprise burdens on heirs after they inherit an estate.
Assuming Estate Taxes Only Affect the Wealthy
While many families may not face federal estate tax due to the size of their estates being below federal exemption amounts, many states have their own estate and/or inheritance taxes, and as laws change, it could expose more families to future estate taxes. Many people will delay planning their estates since they think their estates are too “small” to matter, resulting in their loved ones being responsible for unanticipated costs. One way to avoid this situation is to regularly evaluate the current value of your assets, determining what your family will potentially be liable for in terms of estate taxes, both at the federal and state levels, and consulting an estate planning expert so they can help identify possible tax liabilities before they become a significant financial burden on your heirs.
Failing to Update Estate Planning Documents
Many life changes will affect how your estate is to be administered. These include marriage, divorce, having children, grandchildren, retirement, changes in your business, and increases in your wealth. However, many people will make a will or trust and won’t update it after they have created it. When a person’s estate planning documents are out of date, the distribution of their estate may not reflect their current intentions. This can create tax consequences that could have been avoided. An individual can help ensure that each of the documents they have concerning their estate is consistent with their financial and personal goals by reviewing these documents every few years or after any significant life change.
Overlooking Beneficiary Designations
Not all assets will pass through your will. Most of your assets will be transferred directly to a beneficiary based on the appropriate forms for the asset, such as a retirement account, life insurance policy, or some types of investment accounts. The most common mistake people make is to assume that what is in their will will supersede what is on the beneficiary form for the asset. Most of the time, this assumption is incorrect. If a beneficiary form has not been updated, and is going to an ex-spouse, deceased relative, or a person who was not the decedent’s intention, this could create tax consequences to the heirs, especially if the asset is a retirement account.
Not Taking Advantage of Lifetime Gifting Strategies
Individuals often wait too long to provide heirs with their estate when they die, thus giving up many chances to reduce the taxable amount of their estate before they die. Well-thought-out gifting can gradually establish the gifting of property to family members and possibly minimize the estate tax. Gifts can be cash, investments, payment of educational expenses, or contributions for medical expenses. Implementing a gifting strategy can create efficiencies in the transfer process and provide the donor with the ability to see how the gift impacts the recipient during their lifetime. Seeking assistance from a tax/financial advisor can assist in determining the gifting strategy that is the best fit.
Ignoring the Benefits of Trusts
Many families believe that it is only the wealthy who can use trusts, but nearly all families can benefit significantly from the asset protection and tax advantages obtained from a Multiple or Combination Trust. Certain types of trusts transfer property to reduce estate tax, protect property from creditors, assist in providing for minors, and provide for charitable gifting; a trust also allows the donor to dictate the means by which property will be distributed. In addition, some estates may have to go through the long probate process and have less flexibility in managing tax obligations if there is no trust in place. Establishing the appropriate type of trust requires appropriate planning and guidance, but it can be one of the most effective means of preserving wealth and benefitting beneficiaries in the future.
Key Takeaway
Estate tax planning has many reasons for being vital aside from just minimizing the amount of taxes you pay; these include safeguarding your family, maintaining your legacy, and ensuring your final wishes will be followed. Even those with ample financial experience may have stumbled by forgetting to include who will receive an inheritance in a will, failing to keep their tax return updated, overlooking existing trust possibilities, delaying making any gifts, or putting off seeking assistance from an expert. Most of these common errors can be avoided by using proper planning techniques and doing annual reviews.
