Sidestepping estate planning mistakes

Doug Horn

In previous articles I have touched on making estate distributions easy. However, easy does not always mean fair. In conversations with most of my clients, their intent is often to split their estate equally among their children. Thus, the documents are often brief with simple instructions to divide the estate equally between their children.

It would be wonderful if it were this easy. There are many potholes which can create disparities in the distributions to the heirs. These disparities can lead to bickering or hurt feelings among the children when one or more of the children unintentionally receive a significantly greater share than the others. Other traps could lead to additional and unanticipated taxes, penalties, and interest due the state or IRS.

There is not enough space to list all of the potential traps that could create unexpected results or liabilities. But, some of the common problems include the following. Individuals who own real estate and would like to avoid gift or estate taxes when transferring the real estate to their children often create taxes, penalties and interest because of improper transfers or failing to realize the consequences of the transfer. On many occasions, this type of transfer is a gift, and while federal gift taxes may be avoided due to available exclusion amount, Tennessee gift tax may still be due. When the deed is recorded, a paper trail is created and thus the lack of a filed gift tax return may be discovered. While transferring property is seemingly easy, when the transfer runs afoul of state or federal law any potential savings will likely be lost in the long run.

Problems can arise when specific gifts are made to each child. If the estate documents do not permit the executor to resolve disparities in value when the intent is equal distributions, time may cause assets of similar value at one point to become unequal at the time of the actual transfer. We have all seen the impact of time on the value of real estate or investment portfolios. Another potential problem with specific gifts is the tax treatment and other costs associated with the gift. When each asset is split equally, each beneficiary shares equally or similarly in the tax treatment or costs associated with each asset. But, when one heir receives the IRA and another a CD of similar value, as an example, the heir receiving the IRA may lose a significant portion to income taxes as they use the asset, and the heir receiving the CD may have little or no loss in value due to income taxes.

Another issue often overlooked in many estate planning documents is the assistance given to a child prior to death. While everyone may handle this differently, many treat assistance while living as an early distribution of their estate and thus the early “gifts” should be considered. While sounding easy, if the documents do not address these gifts or a schedule of the gifts made, taking these amounts into consideration may not be possible. This could result in one beneficiary receiving significantly more than the others depending upon the amount of assistance provided. If the intention is to ignore this kind of assistance, then no harm has been done. But, if the intension is to consider assistance provided prior to death, then the executor should be given the authority to do so and the history of any such assistance.

Lastly, inadvertently excluding assets from the estate planning documents because of the type of registration used can also create unintended results. The default registration for most banks and investment advisors is “joint tenancy with rights of survivorship.” When this registration is used, the estate planning documents are ignored for this particular account, and the surviving tenant(s) become the new owner(s). This can create issues when one child is used for convenience on accounts and the joint tenancy registration is used.

I have primarily discussed circumstances when the intent is to provide equal shares to each child. However, I am not suggesting equal transfers are best as there are many reasons why it may be appropriate or best that final transfers are something other than equal. By avoiding the traps, there is a greater chance the actual intended distributions will be achieved.

For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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