Peacock Tales
Volume 19, Number 4 · October 2009Estate and Business Planning Mistakes
Mistakes that can be avoided with careful estate planning
This is the first in a series of two articles regarding estate and business planning mistakes that can be avoided with careful estate planning. The first six topics are discussed below and the remaining six will be discussed in our next issue of Peacock Tales.
1. Forgetting to name successor agents, executors and trustees in estate documents. It is important to name one or more successor agents for your power of attorney and living will, successor trustee or trustees for your lifetime (inter vivos) trust or testamentary trust, and a substitute executor or executors in your last will and testament. Naming successors allows for continued viability of the granted powers, even after the death or incapacity of the primary agent, trustee, or executor. Naming successors also prevents the courts from becoming involved to designate a successor.
2. Failing to update beneficiary designations. If a beneficiary on an insurance policy or other asset dies before you do, or you no longer wish to gift to that beneficiary, it is important to update your beneficiary designations. Failing to do so could result in the funds reverting to your estate or being distributed to someone you no longer intended to have as a beneficiary.
3. Transferring funds into joint bank accounts or in-trust-for accounts without considering the ramifications to heirs. Whoever you name as the joint owner on a bank account or recipient of an in-trust-for (ITF) account will receive all the funds from those accounts when you die. As a result, naming a child or other individual on your joint or ITF accounts can alter your estate planning intentions. If your wishes are to divide your property equally among all your children or other heirs at the time of your death, the child or heir who is named on your joint or ITF accounts will receive all the funds from those accounts plus an equal portion of your remaining estate if that is how you have structured your last will and testament. Because of this, your remaining heirs will receive less than the heir you named on your joint or ITF accounts.
Although it is the general rule that all jointly owned accounts pass to the surviving joint owner regardless of the intentions in a decedent's will, a recent Pennsylvania case has ruled that any joint accounts created after an individual signs his or her last will and testament will not automatically pass to the surviving joint owner on the account, but will be treated as funds in the estate available to all heirs. This is important to consider if you truly wish for a particular heir to receive the funds from a joint or ITF account even though you have already executed your will.
4. Married couples not taking advantage of the estate tax exemption amounts that are available to them. When assets pass from one person to another, significant taxes can be assessed under current federal estate tax laws. By gearing plans to current law and building in sufficient flexibility, you may be able to reduce the tax bill at death. One way to do this is for married couples to take advantage of each spouse's federal estate tax exemption and use the unified credit to shelter part of the first decedent spouse's estate.
5. Neglecting to properly structure a business venture to protect personal assets from business creditors. A business owner distance him or herself personally from business risks by forming the proper business entity under which to operate the business. Additional business entities can also be created for each valuable component of the business, such as separate lines of business, equipment and real estate. It is also extremely important to keep personal assets and accounting separate from business assets and accounting so that, at death, the business owner's estate and company are not commingled resulting in needless and complex estate administration issues.
6. For businesses owned by more than one individual, neglecting to have an owners' agreement and a binding buy-sell arrangement. A buy-sell agreement is one of the more important documents a multi-owner business entity can have. A buy-sell agreement is an agreement between owners of a business to purchase and sell interests of the business at a price set in the agreement on the occurrence of certain future events such as death, disability, an outside offer to purchase an owner's interest, termination of employment, divorce, or bankruptcy. Buy-sell agreements can be used to structure an orderly transition of ownership and management of a business, protect the business from internal conflicts, and restrict the future ownership of business interests. Business owners can also use buy-sell agreements to address estate planning and business planning concerns by establishing estate value as well as improve estate liquidity by assuring a market for the business interest.