The ten most common estate planning mistakes

This is the list, in the order a tax preparer runs into them. Most are not about money at all; they are about a title, a beneficiary form or a document that nobody read alongside the others.

1. Joint titles that quietly override the will

   A parent adds a child to a bank account “so you can pay my bills,” or to the house deed “to avoid probate.” Three things follow. At death the account and the house go to that child alone, by survivorship, whatever the will says; the other children get what the will divides, which may be little. If the child is on the deed, half the house was a gift during life — it keeps the parent’s decades-old basis instead of stepping up, and a Form 709 was probably due. And the executor may find the estate has nothing left to pay the funeral, the last medical bills and the taxes. Between spouses the issue is different: everything jointly held passes to the survivor without using the first spouse’s exemption, which matters only if the estate never files for portability. The fix for the parent-and-child case in Colorado is almost always a beneficiary deed on the house and payable-on-death designations on the accounts: they avoid probate just as well, keep the full step-up, and leave the will in charge.

2. Life insurance owned by the wrong person

   Life insurance paid to a named beneficiary is free of income tax. It is not free of estate tax if the insured owned the policy — a $2 million policy is $2 million in the taxable estate, and can carry a family that was nowhere near the exemption toward it. The cure, for people who need it, is for someone else to own the policy from the start: the beneficiary, or an irrevocable life insurance trust that owns the policy, receives the proceeds, and holds or pays them out under the insured’s instructions. A policy transferred within three years of death is pulled back into the estate anyway. The more common mistakes are smaller: a beneficiary who died years ago and was never replaced; no contingent beneficiary, so the proceeds fall into the probate estate; a minor named directly, so a court has to appoint a conservator; and a policy sold rather than given, which costs the proceeds their income-tax-free status under the transfer-for-value rule.

3. No will, or a will from another life

   Without a will, Colorado’s intestacy statute decides — spouse, then children, then parents and siblings — and a court decides who raises a minor child. A will written when the children were small and the first spouse was alive can be nearly as bad. Review it when a child is born or adopted; when anyone named in it marries, divorces or dies; after a major tax law change; and when wealth changes a lot. Alongside it, the two documents that matter while you are alive: a durable power of attorney for finances and a medical power of attorney, so no one has to go to court to manage your affairs if you cannot. See wills and probate.

4. No cash to pay the bills

   An estate has expenses on a clock: the funeral, the last medical bills, a year or two of property taxes and insurance while the house sells, the attorney, the accountant, the final income tax, and — for the few — the estate tax, due nine months after death. Families routinely underestimate the total, and an estate that is mostly a house, a business or an IRA has nothing liquid to pay it with. The IRA can be cashed, at the heir’s tax rates. The house can be sold under pressure. The business often cannot. A modest life insurance policy, or simply a cash reserve the executor can reach, is the usual answer.

5. The wrong executor

   People name the oldest child because it is expected, or a friend because it feels like an honor. It is a job: gather everything, pay everyone, distribute the rest, keep records, file returns, meet deadlines, carry personal liability, usually for no pay. The right person is organized, available, likely to outlive you, on speaking terms with the beneficiaries, and willing. Name a successor. An heir as executor is normal, but it is a conflict of interest when the heirs disagree; a bank or a professional fiduciary is worth the fee for a difficult estate or a difficult family. Tell the executor in advance, and tell the family who it is.

6. Everything to the spouse

   “I leave everything to my wife” is the most common will in America, and for most couples it is fine. Two things to know. First, the unlimited marital deduction means no estate tax at the first death, but it also means the first spouse’s $15 million exemption goes unused unless the estate files a Form 706 to carry it over (portability). No tax is due and the filing is simple, and under a special IRS procedure it can be done up to five years after death; it should be done whenever the combined estate could conceivably reach the exemption twenty years on. The older alternative, a bypass trust that holds the first spouse’s exemption amount for the children while supporting the survivor, is still used by couples who want the children’s inheritance protected from a remarriage. Second, the non-tax problem: if one spouse handled all the money, the other inherits a portfolio, a rental or a business at the worst possible moment with no experience running it. A trust with a co-trustee, or a relationship with an advisor established beforehand, addresses that.

7. The right asset to the wrong person, in the wrong way, at the wrong time

   A large inheritance outright to a nineteen-year-old. An IRA left to a trust that was never written to receive one. The family business split equally among a child who runs it and two who do not. A disabled child left money outright, which costs him his benefits. Each is solved with a trust that holds the asset and pays it out on terms — at ages, for purposes, or for life — and by matching each asset to the heir who should have it. The same mistake in miniature is the beneficiary form with no contingent beneficiary, so the asset ends up in probate when the primary beneficiary has died first.

   Three more versions of the same mistake, all fixable only in advance. S corporation stock left to a trust: a trust can hold S corporation shares for only two years after the death; after that the beneficiary or trustee must make a QSST or ESBT election or the S election terminates for everyone. The house left in a bypass trust: if the surviving spouse keeps living in a home the trust owns, a later sale by the trust gets no $250,000 home-sale exclusion — a trust cannot “live” anywhere. Trustee powers that tax the wrong person: a trustee who can distribute to himself is taxed on the trust’s income whether or not he does; a beneficiary who lets an annual withdrawal right lapse becomes the income-tax owner of a growing slice of the trust. All three are drafting choices.

8. The unfunded trust

   A couple pays an attorney for a revocable living trust, signs it, and puts it in the drawer. The house stays in their names; the accounts stay in their names. At death nothing is in the trust, so everything goes through the probate the trust was bought to avoid, caught by the pour-over will. We see this often enough to check for it on every estate. If you have a trust, the deed and the account registrations should say the trust’s name — and the retirement accounts should name the right beneficiaries, which is usually a person and not the trust. The business owner’s version of this mistake is the missing buy-sell agreement: the surviving owners have no obligation to buy and no cash to buy with, and the heirs own a share of something they cannot sell.

9. No records

   The executor’s first weeks are spent looking: for the will, the deeds, the statements, the policies, the passwords, the key to the safe deposit box, the name of the accountant. Every hour costs the estate money. Keep an up-to-date list — where the documents are, every account and advisor, the digital logins — where the executor can find it, and not only in a safe deposit box the executor cannot open. For the preparer, the records that matter most are basis records: what was paid for the house and the stock, and the date-of-death values of everything inherited, which set the heirs’ basis for life. An estate large enough to file a Form 706 must also give each heir a Form 8971 Schedule A stating those values.

10. No plan at all

    Each of the nine above is usually a symptom of this one. The will, the titles, the beneficiary forms, the insurance and the trust were each set up at a different time by a different person for a different reason, and nobody has read them together. An estate plan is the act of reading them together — with the attorney who drafts, the tax preparer who knows the basis and the income side, and the insurance and investment people — and then reviewing them every few years. It is not a wealthy person’s exercise. The families with the most trouble are usually the ones with a house, an IRA and three children.