Rather than getting a formal estate plan, individuals often try to on their own to divide assets among their beneficiaries. People usually do so with the best of intentions, but their decisions can end up costing their beneficiaries a fortune. Let’s review some of the most common, and costly, mistakes these DYI estate planners make:

Give Someone the Family Home: While there are differences between states, the general rule is that when someone inherits a home, they also must pay any estate tax that might apply. In many situations, a gift where the parent retains the right to live in theou house during their lifetime, can be either helpful or detrimental to the estate tax and income tax issues that apply to the person making the gift and the recipient.

Gifts in Excess of $15,000 a Year in 2021 and $16,000 a Year in 2022: People often think that the way to get around estate taxes is just to give away money while they’re still alive. However, if a person gives someone a gift of more than $15,000 a year, any amount above that goes against their lifetime gift tax—thus reducing the amount of money they can inherit without paying the estate tax.  There are many ways to use the exclusion to your benefit and many gifts, such as payment of tuition directly to a child or grandchild’s college, are not counted against the annual exclusion amount.

Leaving Property to a Minor Child: Children cannot directly inherit property. Instead, a court will give the child’s assets to their guardian. A self-interested guardian could mismanage or even steal the child’s inheritance. And even if the guardian is trustworthy, then the law usually requires that the inheritance be turned over to the child when they reach 18 years old—but, particularly if it’s a large grant—they may not be responsible enough to handle the assets on their own.

Allocating Property Based on Cash Value: Families often split assets based on the cash value—e.g., one person gets the house, another gets the life insurance, and the last gets the IRA and stock. But even if these items all seem to have equal value on their face, beneficiaries can still end up with very different inheritances, because each of those assets has a completely different tax liability. The house may be hit with the capital gains; IRAs distributions are taxable, while the life insurance proceeds are not usually taxable. Therefore, the type of asset matters as much as the cash value at the time of the bequest.

In each of the above cases, the gift could end up becoming a financial burden that a beneficiary can’t afford to accept.

A well-drawn estate plan is better than a well-intentioned one, any day.

Rod Atherton, JD
Email Rod Atherton
(314) 454-9100

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