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Ten Tips for Creating an Effective Estate Plan

Whether your estate plan is simple or complicated, many details can undermine the effectiveness of your plan. But, there are also ways to ensure the effectiveness of your plan. Here are 10 steps to help remedy or avoid some common estate planning mistakes:

Consider using a will to transfer property to children instead of owning property jointly. Unlike a will, a transfer of an interest in your property is irrevocable, which may prevent you from changing the disposition if circumstances change before your death. Holding the title to your personal residence jointly can result in partial loss of the capital gain exclusion if it is sold before your death. Therefore, it’s often recommended that you use your will to make any property transfers that will occur upon your death.

Think before gifting property to your children. Parents often regret having made outright gifts to a child if the child subsequently divorces, and the ex-son- or daughter-in-law is awarded an interest in the gifted property by a court. Or, under other circumstances, the property may be taken pursuant to a legal judgment against the child. These problems can be avoided through proper use of trusts or a business entity, such as an LLC.

Ensure your assets pass according to your wishes upon your death. Many types of assets can pass to your heirs or others based upon beneficiary designations (e.g., life insurance, IRAs, brokerage accounts). The provisions of your will cannot change a beneficiary designation. Remember to account for items you’ve already designated when you create your will. Review your will, as well as all other beneficiary designations, when formulating your estate plan.

Know your estate’s true value for Federal estate tax purposes. Many people are unaware of the fact that life insurance proceeds are included in their taxable estates if they own the policy. This could increase their total estate value to more than the amount sheltered from estate tax by the estate tax exemption ($11.58 million in 2020).

Check recent changes in the law regarding state death taxes. Many states have “decoupled” their death tax from the Federal estate tax, which means your estate could be subject to death tax in a state, even if no Federal estate tax is due. However, with proper planning, this may be avoided. The laws of each state where you own property should be carefully reviewed to determine potential state death taxes and how to reduce them.

Review the portability provision of the estate tax exemption. Estate tax exemption may be transferred between spouses, so that if one spouse dies and does not use the full exemption amount, the remainder can be used by the surviving husband or wife, if he or she also dies. For estate planning purposes, this means that husbands and wives do not have to split assets between them, or be concerned about who holds the title on various assets. Yet, this does not eliminate the need for planning.

Maximize income tax basis “step-up” benefits at death. Consider holding low-basis/high-value assets to be given at your death, since the basis for capital gain computation purposes will be increased to fair market value at death. If the asset is given away, the basis remains at the property’s original cost.

Specify your desired funeral arrangements. A pre-arranged funeral may relieve family members from additional stress upon your death. You can also prepare for the costs of a funeral.

Plan for a potential disability. Consider establishing advance directives, powers of attorney, and designated trustees, since costly and time-consuming court proceedings may be required in order to appoint a guardian or conservator to act on your behalf if you become incapacitated.

Review and update your estate plan regularly. Changes in the law and in your personal situation make it important to periodically review and update your estate plan so that it continues to reflect your wishes.

Early and thorough estate planning can help you reach your financial goals and help ensure that your wishes will ultimately be implemented. Be sure to consult with your tax, legal, and financial professionals.

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