Top Tax Errors in Estate Planning


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With proper estate planning, you can prevent unnecessary estate taxes. Here are some major errors, and how to avoid them:

  1. Gifting to an individual to pay for medical or education costs. Instead of gifting to the individual, give the payment directly to the university or medical provider. Such gifts do not count towards your annual or lifetime gift exclusion amount, and the amount of the gift can be unlimited. (And frankly, you can be sure the payments were used for intended purpose)
  2. Gifting to qualify for Medicaid. Medicaid has a 5 year lookback for transfers at less than fair market value. Any gifts during that 5 year period will disqualify you from Medicaid to the extent of the value of the transfer. This type of gifting can be done, but requires serious planning.
  3. IRAs and 401(k) beneficiary designations. One major error here is failure to review the beneficiary designation as situations change, which could cause significant income tax consequences for the beneficiary. Gifting such assets during life may cause a 10% premature distribution penalty tax. Proper planning ensures your beneficiaries can take advantage of the tax benefits also.
  4. Gifting the "wrong" assets. Gifting $13,000 per person, per year, can be a great way to transfer assets and avoid unnecessary estate taxes. However, be careful what property you gift. If property has appreciated significantly, you can avoid some of the taxable gain on the sale by waiting to transfer the property at death and taking advantage of the step-up in basis to fair market value. This saves income taxes for the beneficiary who later sells.
  5. DIY or Online Estate Plans. Internet sites give you the documents, but true estate planning and tax planning requires a plan and a process. Also, the nuanced requirements (like witnesses, signatures) vary from state to state ant typically are not addressed in the online forms. Most importantly, you won't find out until its too late that the documents didn't work as you intended (or worst case, weren't valid).

Estate Planning, when properly done, can reduce estate taxes on your death, and can minimize certain tax consequences to your beneficiaries. Make sure to avoid the pitfalls.

The Davis Brown Law Firm Trust and Estate Department has created estate planning forms to give clients a better understanding of the estate planning process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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