Welcome back! Today, I have a quick presentation for you on the five mistakes that you must avoid when doing your estate plan. Let’s jump right in.
Mistake #1: Not Avoiding Probate
Probate is a lengthy legal process that your estate has to go through when you pass away—unless you plan correctly to avoid it. On average, the probate process lasts between one to two years, but I’ve met people who have been stuck in probate for five years dealing with their parents’ estate. It’s also costly, typically ranging from 3% to 7% of the value of the estate. So, you could end up paying a significant amount just to access assets that someone has left you, or that you plan to leave for your own loved ones. Proper planning can help you avoid this headache, and it’s essential for everyone, regardless of wealth.
Mistake #2: Passing or Receiving an Inheritance Outside of an Irrevocable Trust
If you’re going to receive a large inheritance, you want it inside an irrevocable trust. Assets that stay within a trust are protected from creditors, lawsuits, divorcing spouses, and even bankruptcy. You can use the assets when you need them, but keeping them in the trust ensures they’re safeguarded. The same goes for passing an inheritance—make sure it’s done through an irrevocable trust to protect those assets for the next generation.
Mistake #3: Not Understanding the Flexibility of an Irrevocable Trust
Many people shy away from using irrevocable trusts because they believe it locks them in with no way out. But that’s not true. An effective irrevocable trust can have a lot of flexibility built in. You can change beneficiaries, trustees, and trust protectors. You can modify the administrative provisions, change the state laws governing the trust, and even amend or revoke it if needed. This flexibility is crucial for both asset protection and tax planning strategies.
Mistake #4: Not Receiving a Step-Up in Tax Basis
Most people don’t use their estate plan to receive a step-up in tax basis, which can reduce capital gains taxes significantly. When you’re passing assets in a trust, it’s essential to use the correct provisions to ensure a step-up in tax basis, so your beneficiaries don’t pay more in capital gains taxes than necessary.
Mistake #5: Not Reducing Your Annual Income and Tax Liability with Trust Planning
This is probably the biggest mistake right now in estate planning. Many people aren’t taking advantage of trust planning to reduce their annual income and tax liability. There’s an opportunity to use trust provisions in states that don’t have state income taxes. By setting up a trust in one of these states, you can avoid paying state income tax on taxable activities inside the trust. This is especially beneficial for people living in high-tax states like California or Minnesota. Whether you’re selling a business or dealing with an investment portfolio, using a trust in a state with no income tax can save you a lot.
In Summary: Make sure you’re avoiding these common mistakes when planning your estate. They can save you a lot of time, money, and hassle, and ensure that your assets are protected and your loved ones are well taken care of.
If you found this information helpful, give us a thumbs up and subscribe to our channel for more content like this!