Avoid These Estate Planning Traps

Doing nothing. Almost everyone needs to do some estate planning. Most people need a will or living trust to ensure that assets are distributed according to their wishes. Those with minor children need to name guardians and provide for their support.

Relying on the marital deduction. Leaving all of your assets to your spouse will prevent him or her from paying estate taxes on your death, but will forego the use of your lifetime gift and estate tax exclusion, which can provide significant estate tax savings to your heirs.

Not implementing a lifetime gifting program. A lifetime gifting program can be an effective means to distribute assets to your heirs. See our article "The Advantages of Lifetime Gifts" for more details.

Failing to skip a generation on a tax-free basis. Leaving assets to children who already have a sizable estate means that the assets will be taxed again when they leave the assets to your grandchildren. Transferring directly to your grandchildren may be a better strategy, although you can only transfer $1 million ($1.5 million in 2004-2005) before triggering an additional estate tax called the generation-skipping transfer tax.

Forgetting that some assets bypass your will. Jointly-held property will transfer directly to the surviving co-owner, while assets with named beneficiaries will transfer directly to the beneficiaries. If you don't take these factors into consideration, some of your heirs may end up with a higher percentage of your estate than you intended.

Not updating beneficiaries. Beneficiaries can be named for many assets and should be reviewed after major changes such as marriage, divorce, death, or the birth of a child.

Owning an insurance policy on your own life. This will cause the life insurance proceeds to be included in your estate, subjecting them to estate taxes. See our article "Reducing Estate Taxes with Insurance Trusts" for more details.

Not providing for the payment of estate taxes. Many large estates are cash poor and heirs have a difficult time paying estate taxes, forcing them to sell assets at below market value. You should make provisions for the payment of estate taxes, possibly through the use of life insurance.

NOTE: This information is designed to provide a general overview with regard to the subject matter covered and is not state-specific. The authors, publisher and host are not providing legal, accounting or any other advice which purports to be specific to your situation. The contents of this website are believed to be completely reliable. Nevertheless, some material may be affected by changes in the laws or interpretations of such changes since the material was entered on the website. If legal advice or other expert guidance is required, the services of a competent professional in the field of law, accounting, insurance or investments should be sought.

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