Patricia Annino
Estate planning for the 99%

Here are some common estate planning mistakes that most clients make—and how to avoid them.

October 14, 2014
by Patricia M. Annino, J.D.

The relatively recent increase in the federal estate tax exemption (to $5 million, indexed for inflation) means that many more people are under the mistaken impression that they do not have to plan their estates. It is important to remember that no matter the client’s net worth, a goal of estate planning is to be sure that the proper documents are in place and that the plan is coordinated. With that in mind, let’s look at a few common mistakes and their remedies.

1. Outdated or unsigned estate planning documents

I can’t count the number of times people have walked into my office with documents they thought they had signed but actually never did. Or they walked into my office with documents that are several years old. The typical reasons for their behavior include an inability to face death or a denial about the possibility of their own demise; the Scarlett O’Hara rationale—“I’ll think about that tomorrow”; lack of desire to pay an attorney to review or revise documents; or an inability to make a decision on a fiduciary choice such as who will serve as the guardian of minor children, or as an executor or trustee.

The CPA is the gatekeeper of all financial information and, for the most part, is meeting with or speaking to the client at least once a year. It is wise when discussing tax returns to lead the discussion to financial planning topics, including estate planning. (The AICPA PFP Section provides free resources to help CPAs add financial planning to their current practice.) A coordinated financial approach serves the interests of the client and the adviser.

2. Lack of complete beneficiary designation forms

Twenty-five years ago, most clients owned the bulk of their assets in their individual names. At death, those assets passed through the terms of a will to the named beneficiaries. 

Times have changed. For many clients, a significant amount of their net worth is not held in their individual names and does not pass under the terms of a will but rather by contract to the heirs.  Assets that pass by contract—and therefore by designation of beneficiaries—include life insurance, annuities, and retirement planning assets.

Many clients fill the form out with a primary designated beneficiary when they open an account or start employment and then never revisit that form. It is important to review it when there is a life change—marriage, divorce, death of a spouse or loved one, or the birth or adoption of children—and when there is a change in how the client wants the assets disposed of. For example, if a client wants to donate assets to a qualified charity, the best way to make that transfer may not be through a will or trust, but rather through the designation of a beneficiary of the tax-deferred asset. That’s because a qualified charity can receive those funds free of any income, gift, or estate tax.

3. Lack of understanding that a transfer for insufficient consideration is a gift

It never ceases to amaze me how many clients believe that “selling” real estate to a child for consideration of $1 is a sale and not a gift. The lack of understanding that the transfer was a taxable gift can wreak havoc on the plan and on the composition of the taxable estate.

We now live in a transparent world. It is very easy for estate tax examiners to access a registry of deeds website and track the history of land transfers. Today, it is routine for an examiner to do just that. Recently, I was involved with an audit in which the examiner, through a national database, delivered to our office a very thick package of all the parcels of real estate throughout the country that the client had owned during his lifetime. The package included deeds to him and deeds from him. The examiner sent a summary letter asking for the details of each transfer: What was the fair market value? What was the consideration for the transfer? Were the parties related? What happened to the proceeds?

The lack of comprehension—that a transfer for less than consideration is a gift, or at least a gift sale, and that it has consequences for the estate tax—also has ramifications for the preparer of the return. It is therefore prudent when preparing gift and estate tax returns to make a thorough inquiry as to each piece of real estate the client purchased, sold, or transferred.

With the significantly increased federal exemptions, it is also important to understand the tax consequences of a gift transfer. As a reminder, if an asset is gifted for $1 and removed from the client’s taxable estate, the donee inherits the donor’s income tax basis in the property. If instead the property is transferred to the donee beneficiary at death through the estate plan, then it is fully included in the decedent’s estate and the heir receives the full, stepped-up income tax basis in the property, even if there is no federal estate tax due. The state estate tax consequences should also be fully explored when deciding whether it is advisable to make a gift during life or at death.

4. Not understanding the consequences of jointly owned bank accounts

Many people add another person’s name to a joint bank or investment account for a reason that may sound good at the time. For example, an elderly parent may add a child’s name to those accounts as a matter of convenience. Siblings who co-own a vacation home may also open a joint bank account. There are several types of joint accounts.

If an account is held jointly with a right of survivorship, then at the death of one owner, the other owner receives the account. An account that is joint only for convenience may not be intended to pass to the surviving joint owner, but rather be added to the assets that pass through the probate estate. Whether a joint account is one of survivorship or is instead a matter of convenience can be determined by looking at several factors. These include, for example, how the signature card was completed when the account was opened, whose Social Security number the account is taxed to, whether the other owner used the funds for his or her own purpose or only for the use of the person who primarily established the account.

Joint ownership may have unintended consequences. Consider an example in which a parent adds a daughter to investment accounts and bank accounts. Even if the daughter does not consider those funds to be hers, the daughter’s creditors or a divorce court may view that differently. In addition, holding the funds may affect the financial aid eligibility of the daughter’s children. Or the daughter may predecease the parent after the parent’s incapacity, which can lead to the account being inaccessible for bill payment. Owning joint accounts is something that should be thought through and thoroughly discussed. Alternatives, such as formal trusts, should be considered as part of the discussion.

PFP Section members, including PFS credential holders, can reference resources to communicate with their clients on each of these issues in Forefield Advisor at aicpa.org/PFP. The AICPA PFP Section provides information, tools, advocacy, and guidance to CPAs who specialize in providing tax, retirement, estate, risk management, and investment advice to individuals and their closely held entities. All members of the AICPA are eligible to join the PFP Section. CPAs who want to demonstrate their expertise in this subject matter may apply to become a PFS credential holder.

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Patricia M. Annino, J.D., LL.M., is a nationally recognized authority on estate planning and taxation who chairs the Estate Planning practice at Prince Lobel Tye LLP in Boston.