Mistake Number 1

Dying Without a Valid Will or Revocable Trust

One of the worst estate planning mistakes is not having a plan. An estate plan typically involves a will and/or a revocable living trust to provide for the distribution of your assets. A person who dies without a will dies “intestate”. If you die without a will, the State of Louisiana has one for you; however, the intestacy laws may not distribute your estate as you may have intended. By failing to prepare a valid will or revocable living trust, all control over the distribution of your estate is lost.

By dying intestate you agree to the following:

1. Your spouse will not receive any portion of your separate property.
2. You do not wish to take advantage of any estate tax saving provisions. In essence, you wish to pay as much estate taxes as possible!
3. You will allow the court to select your executor.
4. Your spouse will not be able to sell the family home or other non-consumable property without the consent of your children.
5. If you are the surviving parent you will allow the court to select your minor children’s guardian.
6. You will allow you minor children’s surviving parent to control your children’s assets.

Mistake Number 2

Failing to Update Your Will or Trust

After a will or trust has been properly drafted, it should not be filed away and forgotten. As a rule of thumb, wills and trusts should be reviewed and, if necessary, updated every five years. Of course, changes in Louisiana law, federal and state tax laws, size and composition of the estate, family dynamics, and financial situation require an immediate review of an existing estate planning documents.

A will or a trust that was properly drafted in the state of residence will be valid in other states. Upon changing residence to another state existing estate planning documents should be reviewed, and it may be advisable to execute a new will in accordance with the laws of the new state. Residents who move to Louisiana and have a will or trust drafted in another state should have their documents reviewed. Our unique usufruct, naked ownership, and community property laws may cause unintended results with an out of state estate plan.

Mistake Number 3

Failing to Plan for an Extended Long-Term Care Need

Protecting assets from the devastating effects of long-term care expenses is one of the most important wealth preservation and wealth transfer issues facing retirees and seniors. With increasing life expectancies and the rising cost of care, estate and retirement plans are easily derailed by an unplanned long-term care need. Advance planning with long-term care insurance, hybrid annuities/life insurance, and pre-planning for Medicaid and VA benefits can help keep retirement and estate plans intact. See the Info Center for more information about planning for Long-Term Care in Louisiana.

Mistake Number 4

Utilizing Usufruct and Naked Ownership without Understanding the Ramifications

Usufruct and naked ownership are unique to Louisiana law. Many Louisiana residents incorporate usufruct and naked ownership into their estate plans without a thorough understanding of the associated rights and obligations. Unintended results can be a consequence of blindly incorporating usufruct and naked ownership provisions in a will. See the Usufruct and Naked Ownership section of the Estate Planning Info Center for more information.

Mistake Number 5

Not Protecting Life Insurance Proceeds From Estate Taxes

The death benefit from a life insurance policy is generally not subject to income taxation; however, the death benefit is generally subject to federal estate taxation. Life insurance on the life of a decedent will be included in the decedent’s gross estate if (1) the death benefit is payable to or for the benefit of his or her estate; (2) if the decedent had incidents of ownership at the time of death; or (3) if the policy was transferred from the decedent’s estate within three years of death. Incidents of ownership include the ability to change beneficiaries, borrow against the policy, assign the policy, or terminate the policy. Paying premiums; however, is not considered an incident of ownership.

In many estates that are subject to estate taxes, removing life insurance from the estate is one of the most effective methods of reducing or eliminating estate taxes. The main benefit of transferring life insurance out of the insured’s estate is to remove a large asset of the gross estate (the death benefit) for a low or no gift tax cost (the cash value is subject to gift tax). Rather than paying gift taxes at the time of the transfer, part of the life insurance policy owner’s federal estate tax exemption may be used.

Although gift taxes may be due on the transfer, the gift tax value is generally much lower than the estate taxes on the death benefit. The gift tax value is the interpolated internal reserve (approximately the cash value) of a permanent policy. This amount is generally small in comparison to the death benefit which will be included in the estate if the life insurance is not removed from the estate. A complete transfer of ownership will remove all “incidents of ownership” from the donor’s estate. Incidents of ownership include:

• Power to change the beneficiary;
• Power to surrender or cancel the policy;
• Power to assign the policy or revoke an assignment;
• Power to pledge the policy for a loan or to obtain a loan against the cash value.

Removing life insurance from the estate is usually accomplished by transferring the policy to the children or to a trust for the children’s benefit. Transferring life insurance to the children has the advantage of simplicity; however, upon transfer the children own the policy and they may remove all of the cash value or terminate the policy against the insured’s wishes. The insured may not be willing to give up this amount of control. In addition, the children may not be of a responsible age to properly manage a large sum of cash proceeds from the policy upon the insured’s death. The other option is to transfer the life insurance to a trust.

Irrevocable Life Insurance Trusts

Transfers in trust provide more control and safeguards against mismanagement of the insurance policy. Consider drafting the trust with “Crummey” withdrawal rights to have the transfers to the insurance trust treated as a present interest and qualify for the annual exclusion. Gifts of life insurance or assets to pay for premiums are considered gifts of future interests.

When purchasing insurance to be held in trust, have the trustee purchase the policy rather than the insured purchasing and then transferring the policy to the trust. This will avoid inclusion of the death benefit in the estate under the three year rule. Existing life insurance policies that are transferred into the trust or to the children within three years of death are included in the decedent’s estate.

Use extreme caution when transferring a life insurance policy “for value” meaning for money or other valuable consideration. Although there are exceptions that apply, life insurance proceeds lose their income tax-free status if the policy is transferred for value. This may cause a huge income tax liability; therefore, all transfers of life insurance require close scrutiny.

Contact Estate Planning attorney John E. Sirois in Houma at 985-580-2520 if you have questions about protecting life insurance from estate taxes or other estate planning questions. Click here to download John’s Estate Planning Checklist to begin planning your estate. You may also e-mail him for a consultation.

Mistake Number 6

Failing to Name Primary and Contingent Beneficiaries

Perhaps the most important election anyone can make is the designation of primary and contingent beneficiaries of their retirement plans. The failure to designate appropriate beneficiaries will result in accelerating the rate at which the money must be distributed from the IRA or qualified retirement plan. Thus, the primary benefit, the tax-deferred growth offered by these tax-advantaged vehicles can be lost.

For example, many individuals designate their estate as their IRA beneficiary or fail to designate an IRA beneficiary, which will result in their estate becoming their IRA beneficiary by default. The new laws regulating the required minimum distributions make it clear that when the IRA beneficiary, either by designation or by default, is the estate, the deceased is considered to have had no designated beneficiary. Therefore, if an individual dies before the date they are to begin taking the required minimum distributions, their account must be distributed in full by the end of the fifth calendar year after the date of their death. Alternatively, if they die after the date they were to begin taking required minimum distributions, the account may be distributed over the participant’s remaining life expectancy as of the date of their death. This results in greater tax-deferral.

An unintentional distribution of estate assets may occur by failing to keep beneficiary designations up to date according to your current situation. Circumstances change over time and all too often beneficiary designations reflect prior intentions. The beneficiary designations on these assets must be kept up to date and in “harmony” with the property dispositions in your will. Your will cannot overrule a beneficiary designation as these assets are not governed by your will.

To illustrate the importance of keeping beneficiary designations up to date assume Thibodaux is in his early 40s and is divorced with two children. He is killed in an automobile accident. He has a life insurance policy as part of his benefits package through his employer with a death benefit of $500,000. Thibodaux’s beneficiary on the life insurance policy was his ex-wife from whom he was divorces two years before his death. Unfortunately, Thibodaux never took the time to update his beneficiary designation on his life insurance policy to name his children (or ideally a trust for their benefit) as his beneficiary. Even though Thibodaux’s will left everything to his children, the life insurance policy is not governed by the will. His ex-wife will receive the entire death benefit. In addition, when a beneficiary designation “defaults” to the estate, the otherwise non-probate asset will pass through probate and is governed by the will or the intestacy laws.

Mistake Number 7

Failing to Properly Fund Your Living Trust

Some individuals wish to bypass probate by creating a living trust. To effectively bypass probate, however, the trust must be properly funded. All assets (except beneficiary designated assets) must be re-titled into the name of the trust. Assets left outside of the trust will go through probate, and the goal of bypassing probate will not be accomplished. Remember that assets acquired after the creation of the living trust must be purchased by the trust or be re-titled into the name of the trust.

Mistake Number 8

Not Planning for Incapacity

Without proper planning, if you become incapacitated and are unable to manage your affairs, a judge will have to name a curator in an interdiction proceeding. An interdiction proceeding is not private and can be more expensive than other alternatives. Furthermore, the incapacitated individual does not control who will become the curator during the interdiction. Of significant importance to many individuals is to maintain control of their affairs. Unfortunately, an interdiction proceeding removes all control and choices out of the incapacitated person’s hands.

One option that allows you to maintain control over your affairs is to establish a general power of attorney and a power of attorney for healthcare decisions. Revocable trusts provide an additional option for managing your affairs if you become incapacitated.

Mistake Number 9

Failing to Place Certain Assets in Trust

If minor children, grandchildren or others with special needs require assistance with management of inherited assets, it is advisable to place these assets in trust for their benefit. Placing inherited assets which are large in value in trust is a good idea regardless of the heir’s age if the heir lacks maturity and/or experience to prudently manage a large sum of money.

For example, consider the consequences of an 18 year old receiving a $500,000 life insurance payment or retirement plan outright. By placing these assets in trust for the benefit of the child, the trustee can disperse income and principal to the child to provide a standard of living the child is accustomed. The trustee can be given authority to disperse principal for education, maintenance, emergencies or other needs of the child. The flexible language available to the creator of the trust (the settlor) can be used to draft a trust to manage the assets in trust many years after the settlor is deceased.

Another situation where the use of a trust is warranted is when a minor child or grandchild inherits assets, and there is concern over misuse and misappropriation of the trust assets by the child’s parent or legal guardian. In many situations, the last person a parent wants to oversee, often unchecked, the assets left to a minor child is the ex-spouse parent of the minor. A trust gives you control over who will act as trustee over these assets subject to the provisions you provide in the trust document.

Special language should be incorporated into the trust document to make the trust a spendthrift trust to help protect the child from creditors.

The planning possibilities with trusts include, but are not limited to:

1. Managing assets in the event of incapacity
2. Protecting beneficiaries from creditors
3. Protecting beneficiaries from their own mismanagement of assets
4. Reducing estate taxes
5. Avoiding probate
6. Preserving assets for a disabled beneficiary
7. Providing for the care of pets
8. Preservation of assets for the benefit of children and grandchildren for college, down payment on a home, or other purposes
9. Leaving an IRA to a specialized IRA Trust to prolong tax-deferral and asset protection

Mistake Number 10

Failing to Provide a Letter of Instruction

A letter of instruction will help the executor and/or family members gather the necessary information to distribute the decedent’s assets and wrap up their final affairs. The letter of instruction should be left where it can be easily located by the executor or the family. Although the information for a letter of instruction is unique to each individual, it should include the following information:

1. Location of the original will
2. Burial instructions (ideally a notarized statement)
3. Credentials to access digital assets
4. Location of real estate, mineral interests, financial assets, life insurance policies, other assets, creditor information
5. Name and contact information of the decedent’s attorney, financial planner, insurance agent, and CPA/accountant

Contact attorney John E. Sirois in Kenner at 985-580-2520 if you have questions about planning your estate. Click on the Estate Planning Checklist to begin planning your estate. You may also e-mail him for a consultation.