1. Not knowing what you are really worth. Take the time to write down every asset you own. Include all life insurance (individual or group) at its death benefit amount and all reasonably anticipated inheritances. Surprised? If the total value is (or may become) more than $2 Million, you might want to begin to think about using “bypass” trusts to save taxes.
2. Failing to plan for disability. How would your family be provided for if you couldn’t work for a long time or at all? How would you pay for nursing home care? If you are in business with one or more partners, how long would your salary continue? Could someone whom you trust take charge of your investments and pay your bills without the involvement of the Probate Court? You could provide for ongoing asset management with durable powers of attorney and revocable trusts. Well thought out health care decisions powers of attorney allow you to express your own, unique wishes. If you have business partners, a properly designed shareholders’ or partnership agreement should address both short and long term disability. You might want to consider disability income insurance and long term care insurance.
3. Improperly (or not) designating beneficiaries for retirement plans. Almost everyone has one or more IRAs or participates in a pension or profit sharing plan. Your beneficiaries may sometimes defer income taxes by “stretching out” the minimum required distributions from these plans over a long time. Beneficiary designations must be carefully prepared to preserve this preferential treatment. This is especially important if a trust is to be the beneficiary. If a trust is the beneficiary of a retirement plan, and there is even a remote possibility that assets of the trust could pass to someone older than the “real” beneficiary, such as your child, then the “stretch out” period could be drastically shortened. If you are changing IRA custodians (banks or brokers) you have to do new beneficiary designations. Do not rely on what the bank or broker tells you. You should review the new designations with a qualified professional, especially if the plan assets pass to a trust.
4. Creating a “family welfare system.” A client recently remarked, when I asked her why she called, that she didn’t want her grandchildren to be “trust fund babies.” Most of my clients created their own wealth. They want their children to appreciate the value of work. Simply leaving them money at specified ages can impair their becoming useful, productive citizens. You might want to consider “work incentives” in any trust you are creating for children or grandchildren. These can be as simple as tying distributions to earned income (not highly recommended) or requiring the trustee to consider whether the beneficiary is doing work for which he or she is qualified before distributing assets to him or her.
5. Not considering asset protection planning. The U.P.S. man falls on your driveway. Your child accidentally hits a classmate with a golf ball. You own investment properties and a worker falls off the roof of one of them. Your son-in-law has a “gambling problem.” Have you arranged to protect your assets from “creditors and predators?” Liability insurance, properly structuring employee benefit plans and sometimes using entities such as limited partnerships and limited liability companies can help protect your hard earned wealth. You can use trusts creatively so that, hopefully, only your children and grandchildren, not your sons or daughters in law, receive your assets.
6. Thinking that there is no tax on life insurance. Many people have said that they were told that there is no tax on life insurance. Like all other assets, life insurance is generally subject to Federal and state estate taxes. If you are contemplating acquiring life insurance or wish to remove existing insurance from your taxable estate, you should consider creating an irrevocable life insurance trust. Like all trusts, they must be planned and drafted with considerable care.
7. “Equality equals equity.” Mr. and Mrs. Multibux have four children. Their son, Melvin, has been virtually running the family business for twenty years. The other children, Mildred, Martha and Maurice have no interest in the business. The business is worth $2 Million. The family’s other assets are also worth $2 Million. Is it fair that each child receive one quarter of everything or might it be more equitable if Melvin received the business (or were able to buy it at a discount) with the other assets divided among all of the children or perhaps only among Mildred, Martha and Maurice? Every situation is different. In many, or perhaps most, situations, equality is equity. However, you should carefully think through your beneficiaries’ relationships with you, their “money personalities” and, in some cases, the degree to which they helped you to build your estate, before simply dividing everything equally among them.
8. Selecting the wrong persons as executors and trustees. All too often, clients select family members and friends to serve as executors and trustees. They don’t really consider what these jobs entail. You should choose these fiduciaries as if you were hiring employees. Think of an executor’s or trustee’s job. Both must maintain meticulous records.They have a duty to invest the estate or trust assets in a reasonable manner. In addition, a trustee may have to decide whether, when and to whom to make distributions. If you were hiring someone for these positions, would you hire your brother-in-law? Might you instead hire one of your professional advisors such as your C.P.A.?
9. Not having a business succession plan. Fewer than 50% of family businesses survive successfully into the second generation. Fewer than 20% make it into the third. They don’t plan to fail. They fail to plan. Do you have a well thought out plan that addresses both family and business concerns? Having a properly structured shareholders’ or partnership agreement is only the first step. Do your “designated successors” want to take over your business? How do you compensate them and, at the same time, be fair to other family members? Addressing these, and other, issues is vitally important in designing a succession plan that makes it more likely that your business will be among the fortunate ones.
10. The myth of “Living Trusts.” “Free Living Trust Seminars.” “Avoid Probate!” “Seating Limited, So Call Today!” — How many times have you seen these ads? They tell you that virtually everyone needs a “living trust” to avoid probate court fees that are as high as 4%. What they don’t tell you is that, in Connecticut, the statutory fee of the probate court is approximately one quarter of one percent. They also don’t tell you that assets of revocable “living” trusts, as well as life insurance and other assets, are included in the base for computing probate court fees. It doesn’t matter whether one uses the court or not. The fee is essentially an unavoidable tax. It may not be fair, but that’s the way it is. Although revocable trusts can be extremely useful estate planning tools, they are not for everyone. If you do go to one of the “seminars,” you should run, not walk, if you have the slightest impression that they are trying to “sell you something,” are trying to pressure you or are offering you discounts if you “act today.”