The Most Common Estate Planning Mistakes

Estate administration is the process of managing the estate when a loved one has passed. For the inexperienced executor, there are pitfalls to be avoided, warns the article “Top 5 Probate and Estate Administration Mistakes” from Long Island Press.

The biggest mistake is creating an estate plan from generic documents on the internet. Wills must meet many technical legal requirements to be valid. All wills are admitted to probate and the court scrutinizes wills carefully to be certain the wishes of the person who died (the testator) have been followed. A will created without the guidance of a skilled estate planning attorney is more likely to be found invalid and more easily challenged.

Neglecting to deal with Medicaid liens before distributing an inheritance can create huge financial problems for family members. Medicaid is required by law to attempt to clawback assets to recover the cost of care. Some states are more aggressive than others. Medicaid may attach a lien to any real estate owned by the Medicaid recipient and collect it at the time of their death.

The value of asset protection planning, including the use of a Medicaid Asset Protection Trust (MAPT), in a timely manner, cannot be understated.

Leaving heirs and beneficiaries in the dark about the estate plan and distribution wishes often creates a sense of something bad being planned. Surprise revelations about the estate are only good in movies. In real life, this can lead to litigation and family fights. Litigation can take the form of a will contest, a trust contest, a contested accounting, or an action to remove the executor.

Talk with the family about your plans, so there is less tension created over the future of your estate.

Taxes can undermine your wishes, if your estate plan does not include tax planning. There are numerous methods used to minimize tax liabilities. However, they must be put into place in advance.

The executor has to file a final income tax return on behalf of the decedent for the year of death and also file an estate tax return. The executor is also responsible to obtain an estate tax identification number (EIN) from the IRS and open an estate bank account used to pay taxes and debts.

Will your executor, spouse or heirs be able to locate your critical information? If your legal, financial and online information is not organized, your executor may spend a long time digging through old paperwork, most of which is likely to be out of date and irrelevant. Spare your executor the time and emotional impact of wasted hours reviewing old records. No one needs your checking accounts from the 1970s!

Information on everything from assets, tax returns, funeral and burial arrangements, life insurance policies, Social Security and Medicaid or Medicare cards, deed for home and title for your cars, should all be organized to help your family find the information they need.

While you are alive, your family will need access to documents like your Power of Attorney, Health Care Power of Attorney, and Advance Health Care Directives.

By planning and making an effort in advance to manage your affairs, you enhance your legacy. Leaving a mess behind will be remembered, perhaps more so than organized documents.

Reference: Long Island Press (May 4, 2022) “Top 5 Probate and Estate Administration Mistakes”

What Taxes Have to Be Paid When Someone Dies?

The last thing families want to think about after a loved one has passed are taxes, but they must be dealt with, deadlines must be met and challenges along the way need to be addressed. The article “Elder Care: Death and taxes, Part 1: Tax guidance for administering a loved one’s estate” from The Sentinel offers a useful overview, and recommends speaking with an estate planning attorney to be sure all tasks are completed in a timely manner.

Final income tax returns must be filed after a person passes. This is the tax return on income received during their last year of life, up to the date of death. When a final return is filed, this alerts federal and state taxing authorities to close out the decedent’s tax accounts. If a final return is not filed, these agencies will expect to receive annual tax payments and may audit the deceased. Even if the person didn’t have enough income to need to pay taxes, a final return still needs to be filed so tax accounts are closed out. The surviving spouse or executor typically files the final tax return. If there is a surviving spouse, the final income tax return is the last joint return.

Any tax liabilities should be paid by the estate, not by the executor. If a refund is due, the IRS will only release it to the personal representative of the estate. An estate planning attorney will know the required IRS form, which is to be sent with an original of the order appointing the person to represent the estate.

Depending on the decedent’s state of residence, heirs may have to pay an Inheritance Tax Return. This is usually based on the relationship of the heirs. The estate planning attorney will know who needs to pay this tax, how much needs to be paid and how it is done.

Income received by the estate after the decedent’s death may be taxable. This may be minimal, depending upon how much income the estate has earned after the date of death. In complex cases, there may be significant income and complex tax filings may be required.

If a Fiduciary Return needs to be filed, there will be strict filing deadline, often based on the date when the executor applied for the EIN, or the tax identification number for the estate.

The estate’s executor needs to know of any trusts that exist, even though they pass outside of probate. Currently existing trusts need to be administered. If there is a trust provision in the will, a new trust may need to be started after the date of death. Depending on how they are structured, trust income and distributions need to be reported to the IRS. The estate planning attorney will be able to help with making sure this is managed correctly, as long as they have access to the information.

The decedent’s tax returns may have a lot of information, but probably don’t include trust information. If the person had a Grantor Trust, you’ll need an experienced estate planning attorney to help. During the Grantor’s lifetime, the trust income is reported on the Grantor’s 1040 personal income tax return, as if there was no trust. However, when the Grantor dies, the tax treatment of the trust changes. The Trustee is now required to file Fiduciary Returns for the trust each year it exists and generates income.

An experienced estate planning attorney can analyze the trust and understand reporting and taxes that need to be paid, avoiding any unnecessary additional stress on the family.

Reference: The Sentinel (Dec. 3, 2021) “Elder Care: Death and taxes, Part 1: Tax guidance for administering a loved one’s estate”