Common Estate Planning Mistakes People Make

“Mortality never prevented the majority of human beings from behaving as though death were no more than an unfounded rumor” – Aldous Huxley

A Rocket Lawyer survey in 2014 indicated that 64% of Americans did not have a will. If you’re one of them, then this is a must-read.

The most common way to transfer assets to your heirs is also the messiest: to have a will that is so out-of-date that it doesn’t even relate to your property or estate anymore, to have your records scattered all over the place, to have social media, banking and email accounts whose passwords only you can find—and basically to leave a big mess for others to clean up. I’ve reviewed over a hundred wills and estate plans in my lifetime, and it never ceases to amaze me how out-of-date or incomplete some of them are.

Is there a better way?

Recently, a group of estate planning experts were asked for their advice on a better process to handle the transfer of assets at your death, and to articulate common mistakes. A list of mistakes, including a few that I identified during my reviews, are covered below:

Not regularly reviewing documents. What might have been a solid plan 5 to 15 years ago may not relate to your estate today. The experts recommended a full review every three to five years, to ensure that trustees, executors, guardians, beneficiaries and healthcare agents are all up-to-date. You might also consider creating a master document which lists all your social media and online accounts and passwords, so that your heirs can access them and close them down. Be sure your documents specifically authorize and instruct your executor to access and shut them down after your death.

Not leaving personal property disposition instructions, keys and passwords for your executor. Untold numbers of safes and safety deposit boxes have to either be drilled open or forced open by court order because no one else held the key or numeric combination. If you have a home or office safe, or a safety deposit box at a bank, make sure that your executor and/or trustee knows where the key(s) are, or what the combination is (and what bank location the safe deposit box is in). Even better, and to facilitate distribution, leave a signed inventory of the valuables left in there and who is to inherit them. Having a schedule of valuable property or heirlooms and who is designated to inherit them is invaluable to your executor after you’re gone. Don’t wait until after the will is executed to do this. Do it before you sign the will and make yourself a to-do to update the list at least once a year. Will your executor know where to find and be able to access all of your original estate planning documents?

Using a will instead of a revocable trust. This relates mostly to people who want to protect their privacy or pass their wealth to under-age children. When assets pass to heirs via a will, the transfer creates a public record that anybody can access and read. A revocable trust can be titled in your name, and you can control the assets as you would with outright ownership, but the assets simply pass to your designated successor upon death.

Establishing a longer term trust for a small amount of assets. If the trust distributes assets over multiple years, be sure the value of the trust assets justify the cost and burden of fiduciary administration. Creating a trust holding $50,000 worth of assets to distribute $10,000 to each of five beneficiaries over five years makes little financial sense.

Failure to require mandatory and timely annual income distributions. Not distributing income annually to the beneficiaries can subject the trust to a 35% maximum tax rate on all income over $12,500 (currently), a much steeper income tax schedule than that of any individual beneficiary. With an inexperienced trustee, he/she may not know that not distributing the income from the trust annually will likely result in much higher taxation. By specifically REQUIRING annual income distributions in the trust, an ignorant trustee has no choice, and can thereby avoid high trust tax rates, and the beneficiaries pay their own (likely lower) tax rates on their distributions.

Not carefully vetting the trustee. The role of the trustee is both a powerful and time consuming one: make sure the person is qualified, willing and able to devote the time to properly understand and execute the trust instructions. Be sure to ask your candidate if they’re willing to serve before naming them in your trust. Family members who may also be beneficiaries frequently become a source of conflict or present a conflict of interest, so you may want to try and appoint a trusted non-relative instead if at all possible, or designate a corporate trustee. Also, provide in the trust document for reasonable compensation, expense reimbursement and indemnification of the trustee.

Failing to fund the revocable trust. You’ve set up the trust, but now you and your team of professionals have to transfer title to your properties out of your name and into the trust, with you as the initial trustee. If you forget to do this, then the entire purpose of the trust is wasted. Be sure to specify at least two successor trustees.

Having assets titled in a way that conflicts with the will or trust. You should always pay close attention to account beneficiary designations, because they—not your will or trust—determine who will receive your life insurance proceeds, IRA distributions and employer retirement plan assets. Meanwhile, assets (like a home) owned in joint tenancy with rights of survivorship will pass directly to the surviving joint tenant, no matter what the will or trust happens to say. Review beneficiary designations at least once a year. Does that old employer 401(k) beneficiary still list your former spouse as the beneficiary?

Not using the annual gift exemption. Each person can gift $14,000 a year tax-free to heirs without affecting the value of their $5.49 million lifetime estate/gift tax exemption. That means a husband and wife with four children could theoretically gift the kids $112,000 a year tax-free. Over time, that can reduce the size of a large estate potentially below the gift/estate exemption threshold, and in states where there is an estate or inheritance tax, it can help as well.

Not understanding the generation-skipping transfer tax. A husband and wife can each leave estate values of $5.49 million to any combination of individuals. But if there’s anything left over, there’s a 40% federal estate tax on those additional assets left to heirs in the next generation (the children), and an additional 40% on assets left to the generation after that (the grandchildren). Better to transfer $5.49 million out of the estate before death (tax-free, since this fills up the lifetime gift exemption) into a dynastic trust for the benefit of the grandchildren. You can also transfer that annual $14,000 to grandchildren. If your estate is that large, it is imperative that you seek the assistance of an estate planning attorney unless you favor leaving half or more of your assets to your federal and state governments.

Not taking action because of the possibility of estate tax repeal. Yes, the Republican leadership in Congress includes, on its wish list, the total repeal of those estate taxes (the estate tax is based on the value of the estate on the date of death). But what if there’s no action, or a compromise scuttles the estate tax provisions at the last minute? Federal wealth transfer taxes have been enacted and repealed three times in U.S. history, so there’s no reason to imagine that even if there is a repeal, the repeal will last forever. Meanwhile, dynastic trusts and other estate planning tactics provide tangible benefits even without the tax savings, including protecting assets from lawsuits and claims. And while the estate tax may be going away, the tax on estate and trust income is not, and may become a focus of the IRS as replacements for lost revenue are sought out.

Thinking that having just a will is enough. A health care directive (to allow your designee to speak on your behalf regarding health care decisions when you can’t) and a durable power of attorney (to perform duties on your behalf when you’re possibly incapacitated) are essential for every adult to have, in addition to a will.

Leaving too much, too soon, to younger heirs. Nothing can harm emerging adult values quite like realizing, as they start their productive careers, that they actually never need to work a day in their lives. The alternative? Create a trust controlled by a trusted individual (again, preferably not a family member or beneficiary) or a corporate trust company until the beneficiaries reach a more mature stage of their lives, perhaps 30-35 years old.

There are so many other estate planning provisions that may be unique to you, your family and your business. A fee paid to a legal professional who specializes in estate planning is a final act of love to your loved ones to help them understand your dying intentions, and minimize the hassles inherent in estate administration and disposition.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Third Quarter 2017 YDFS Market Review

“No light, no phone, no motor car, not a single luxury, like Robinson Caruso, it’s primitive as can be…”-Theme from Gillian’s Island TV Show

And in a similar manner, no tax reform, no health care reform, not a single hurricane or threat from North Korea could derail the stock market gains in the 3rd quarter.

The last few years of a bull market are always a bit of a mystery to professional investors; the market rises faster than it did in the early, cautious years when nobody believed there WAS a bull market, even though there appear to be fewer fundamental or economic reasons for it. The current bull market churns on, even if nobody can explain it, and people who bail out in anticipation of a downturn do so at the risk of missing out on an untold number of months or years of (still somewhat inexplicable) gains.

A breakdown shows that just about everything gained at least modestly in value these last three months. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 4.59% for the most recent quarter, finishing the first three fourths of the year up 13.72%. The comparable Russell 3000 index is up 13.91% for the year so far.

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 4.50% in the third quarter, to stand at a 14.19% gain so far this year. The Russell 1000 large-cap index finished the first three quarters with a similar 14.17% gain, while the widely-quoted S&P 500 index of large company stocks gained 3.96% for the quarter and is up 12.53% in calendar 2017.

Meanwhile, the Russell Midcap Index has gained 11.74% so far this year.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a 5.39% gain over the third three months of the year, to stand at a 9.55% return for 2017 so far. The comparable Russell 2000 Small-Cap Index is up 10.94% this year, while the technology-heavy Nasdaq Composite Index rose 5.79% for the quarter and is up 20.67% in the first three quarters of the year.

As nice as the returns have been domestically, international stocks this year have been even kinder to investment portfolios. The broad-based EAFE index of companies in developed foreign economies gained 4.81% in the recent quarter, and is now up 17.21% in dollar terms for the first nine months of calendar 2017. In aggregate, European stocks have gone up 19.87% so far this year, while EAFE’s Far East Index has gained 12.31%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 7.02% in the third quarter, giving these very small components of most investment portfolios a remarkable 25.45% gain for the year so far.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a meager 0.61% gain during the year’s third quarter, and is now up 2.44% for the year so far. The S&P GSCI index, which measures commodities returns, gained 7.22% for the quarter but is still down 3.76% for the year. By far the biggest component is the ever-unpredictable price of oil. Since the bottom on February 11, 2016, crude oil prices have actually risen by 50%, but the trajectory has been choppy and unpredictable.

In the bond markets, you know the story: coupon rates on 10-year Treasury bonds have risen incrementally from 2.30% at this point three months ago to a roaring 2.33%, while 30-year government bond yields have also risen incrementally, from 2.83% to 2.86%.

If you’re invested in a diversified portfolio, you should not expect that your gains will be as high as the quoted above returns. Your risk score, time horizon and monetary goals all directly affect how invested you are in any particular market, industry, sector or asset class. Risk management, a cornerstone of any sound financial and investment plan, means that your portfolio will return less (sometimes much less) than the overall markets. But a risk managed portfolio will also never suffer the full effects of a market downturn when it comes, whenever it comes. And therein lies the problem with risk management: no one knows when the downturn will hit.

As alluded to above, one might imagine that the uncertainties around government policy and fundamental economic issues (failed attempts to repeal the Affordable Care Act and a new promise to write a new tax code, for example) would spook investors, and if those weren’t scary enough, there’s the nuclear sabre rattling sound coming from North Korea. Hurricanes have disrupted economic activity in Houston and large swaths of Florida, while Puerto Rico lies in ruins. Yet the bull market sails on unperturbed.

How can this be? Because if you look past the headlines, the underlying fundamentals of our economy are still remarkably solid this deep into our long, slow economic expansion. Corporations reported a better-than-expected second quarter earnings season, with adjusted pretax profits reaching an annualized $2.12 trillion—which means that American business is still on sound footing. Unemployment continues to trend slowly downward and wages even more slowly upward. The economy as a whole grew at a 3.1% annualized rate in the second quarter, which is at least a percentage point higher than the recent averages and marks the fastest quarterly growth in two years. There is hope that the new tax package will prove as business-friendly as the Trump Administration is promising.

Economists tell us that the multiple whack of hurricane damage will slow down economic growth figures for the third quarter, although the building boom fueled by the destruction will mitigate that somewhat. There are no economic indicators that would signal a recession on the near horizon, and one of the potential panic triggers—a Federal Reserve Board decision to recklessly raise interest rates—seems unlikely given the Fed’s extremely cautious approach so far.

Meanwhile, as you can see from the accompanying chart, fourth quarters have historically been kind to investors—much kinder than third quarters. I’ll admit some concern that some of the 4th quarter returns, particularly the year-end “Santa Claus” rally, might have already been pulled forward.

Bull Markets

There are still potential speed-bumps down the road. The Trump Administration has threatened multiple trade wars with America’s major trading partners: the NAFTA members Canada and Mexico, and with China. Tight immigration rules could lead to limited labor supplies.

But it’s hard to be pessimistic when your portfolio seems to grow incrementally every quarter. The current 12-year stretch of economic growth below 3% a year is America’s longest on record. But if the U.S. charts a prudent economic course, it’s possible that the current expansion could at least set new records for longevity. This current expansion just turned 99 months old. The all-time record is 120 months, from 1991 to 2001. We may have to wait two more years for the next great buying opportunity in U.S. stocks.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Wilshire index data:
Russell index data:
S&P index data:–p-us-l–
Nasdaq index data:
International indices:
Commodities index data:
Treasury market rates:
Bond rates:
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Tax Reform or Accountant’s Re-employment Act?

For as long as I can remember, tax reduction and simplification have been on the table for congress and past presidents. So why not President Trump? File your next tax return on a postcard (not likely)? I might be a bit cynical, but the only result of the next tax act I see will be extending my employment as a tax planner and preparer for the foreseeable future.

I sincerely doubt I’ll see significant tax simplification in my lifetime, so my fellow CPA’s and Turbotax employees can probably breathe a sigh of relief-their jobs are likely safe for years to come.

You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after multiple failures to overhaul our health care system, but professional advisors are studying the newly-released nine-page proposal closely nonetheless. We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:

First, we would see the current seven tax brackets for individuals reduced to three — a 12% rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%. The proposal doesn’t include the income “cutoffs” for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples–currently $75,900), and joint filers would start paying 35% at $225,000 of income (currently $416,700).

The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal. But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.

The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17. (No actual figure was given.)

At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions. The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.

The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected. Anyone with enough money to be subject to the estate tax, has probably paid lawyers and accountants enough for planning to avoid paying a single dollar of it.

The plan would also limit the maximum tax rate for pass-through business entities like partnerships and limited liability companies (LLC’s) to 25%, which might allow high-income business owners to take their gains through the entity, rather than as personal (1040) income and avoid the highest personal tax brackets.

Finally, the tax plan would lower America’s maximum corporate (C-Corporation) tax rate from the current 35% to 20%. To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.

What are the implications of this bare-bones proposal? The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%. That, plus the elimination of the estate tax, in addition to the lowering of the corporate tax (potentially leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors. But the mysterious “surcharge” on wealthier taxpayers might taketh away what the rest of the plan giveth.

But many Americans with S corporations, LLCs or partnership entities (known as pass-through entities because their income is reported on the owners’ personal returns and therefore no company level tax is paid) would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40% currently. (No big surprise: The Trump organization is a pass-through entity.)

A huge unknown is which itemized deductions would be eliminated in return for the higher standard deduction. Would the plan eliminate the deduction for state and local property and income taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate? Note that on average, only about 35% of Americans itemize their deductions on Schedule A, most of them higher income taxpayers.

Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim state and local tax deductions. Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300. Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now. Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5 percent.

Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt. One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years. According to the Committee for a Responsible Federal Budget analysis, Republican economists have identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.

Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.

CA - 2017-9-30 - Tax Reform Proposal_2

These cost estimates have huge political implications for whether a tax bill will ever be passed. Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.

That means compromise. To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut (gee…thanks?). Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.

Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes. The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy. Would you bet on that sort of compromise?

We shall see, and I’ll keep you posted on tax developments. For now, put away that post card–you’re probably going to need an envelope and more postage.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post