It may come as a surprise that even well-educated Virginians often fail to use good judgment when planning their estates. There are several common pitfalls in estate planning that everyone, regardless of financial situation, should try to avoid.
One common mistake is the failure to create a will. Without a will, assets are distributed in accordance with state law. This can result in unintended allocations. In general terms, a will provides the opportunity to decide who gets what and when a person's assets are distributed.
In addition, there has been a recent increase in the use of websites to create estate planning documents. However, these one-size fits-all documents often fail to take into account the unique facts and circumstances of their purchasers. What's more, because Virginia law contains several nuanced requirements, these computer-generated documents might end up being invalid.
Another common mistake is the failure to consider how life insurance proceeds can affect estate taxes. If an insured person owns their his or her insurance proceeds at death, the proceeds become part of the estate and are, therefore, taxable. However, an insured person can transfer the ownership of the life insurance proceeds before death through a trust, for example, thereby minimizing estate tax liability.
Yet another common pitfall is not taking advantage of the several available gift exclusions provided in the Tax Code. Giving gifts frequently can be an effective and fulfilling way to decrease future estate tax liability. This is especially true in 2012, given that the federal estate tax exemption for gifts is at its highest ever, up to $5,120,000 per person in a lifetime.
Although it is never too late to create an estate plan, it is important to start planning as soon as possible. An estate plan can benefit anyone because it provides the opportunity to plan healthcare wishes and create financial plans for a number of different situations.
Source: Forbes, "7 Major Errors In Estate Planning," Rob Clarfeld, April 25, 2012