Five Common Estate Planning Mistakes

This week I am proud to present a guest editorial from my friend and colleague, Kevin Yurkus, of Fairway Capital. Kevin’s firm specializes in innovative solutions tailored to high net worth senior citizens. From estate planning to life settlements, Fairway Capital is definitely a company that I recommend.

If you want to find out more about Kevin and Fairway Capital, I invite you to go to my free audio special report. To hear my discussion with Kevin, just click here.

And now, here’s Kevin!

Five Common Estate Planning Mistakes that Rich People Make — and How to Avoid Them

by Kevin Yurkus, president, Fairway Capital

You may not consider yourself to be rich, but if you have an estate in excess of $2 million, you certainly need an estate plan. Here are five common mistakes that are made in relation to estate plans, along with simple solutions to avoid them.

Mistake #1: Not having an estate plan.

It’s a fact — most people do not have estate plans. They have living trusts and wills — but these are not estate plans. Unfortunately, most people believe that their estate planning process is completed merely with a living trust and a will, but nothing could be farther from the truth for wealthy individuals. A living trust helps rid your estate of probate but it doesn’t solve your estate planning needs. Likewise, a will may help in expressing your post-mortem desires but it is not an estate plan.

Not having an estate plan is a crucial mistake. For example, John Wayne didn’t have an estate plan; he had a will. Yet 25 years after his death, his estate is not yet settled. Once again, remember that trusts and wills are not estate plans.

Some people recognize this mistake and take the necessary step of going to an attorney and having an estate plan developed. However, it is only too common that they then fail to actually implement the plans, such as putting their assets in a trust or follow-up on other aspects of the plan.

The solution is straightforward: Find a competent estate planning professional, get an estate plan and implement it.

Mistake #2: Not maintaining your estate plan.

Let’s assume that you’ve had the foresight to develop an estate plan. But when did you last review it to determine whether you needed to make any revisions?

People may have completed estate plans when real estate values were less, when stock or other investment portfolios were dramatically different, or when family members were different. For example, divorced in-laws still may be in the estate plan. Is that what you really desire now?

It is important to recognize that changes in the value of your estate need to be regularly evaluated. For example, stock portfolios may have changed dramatically — what if your estate plan was built, in part, based on stock values prior to the tech-bust? Such assets may have been designated for one heir, but now those assets are dramatically less in value than some other assets, such as real estate. Many parents want to assure equity in division of assets, but unknowingly they set the stage for an inequitable division of assets because of the directives of the estate plan. Your plan needs to be reviewed regularly for such updates.

Also, the laws may have changed in many areas of the tax code. Estate plans need to be reviewed for such potential ramifications. If anyone thinks that estate taxes will be eliminated, it is foolish planning. There is a "sunset provision"in the tax code that is scheduled to disappear after 2010. It will be tax suicide for the government to not have some type of implementation of estate taxes. As individuals continue to accumulate wealth, you can be sure that the government will continue finding ways to tap into it.

On another note, like anything else, change happens — we get older, and we may have different values or philosophies. This means that we might decide to distribute our estate differently than we originally had planned.

The solution here is to make a point of evaluating your estate plan once a year. If you do this on a regular basis, you may be surprised at how frequently minor, or even major, aspects of your estate plan need to be updated.

Mistake #3: Not involving your adult children in your estate plan.

Failing to involve your adult children in your estate plans is a huge mistake because ultimately it is your children who will be writing the check to Uncle Sam. Since people don’t like to talk about their mortality, or because they want to avoid sticky subjects such as inequitable division of assets, they totally avoid the discussion with their heirs.

It is very common for parents to pass away and leave the children scrambling around to determine what the estate’s assets are, what their value is and what to do with them. For example, children may find something in a safe deposit box and not know what to with it. Or they find a trust deed for a piece of raw land that no one seems to know about. This happens all the time and it is a big mistake.

The solution is to communicate with your kids. Tell your children what you have done and how to implement your estate plan. Discuss the value of your assets. Your children will find out eventually, so why not take the time now to tell them something that will help them?

Mistake #4: Not understanding the asset mix in an estate.

It is common for someone to think, "I’ve got plenty of money in my estate, let the kids handle the estate taxes."This is a mistake because people often do not have the amount of liquid assets that might be necessary to pay estate taxes in the best manner.

When we die, the government requires that within nine months of the second death (i.e., the remaining spouse) the estate must be settled. In many cases, estate taxes must be paid. You are then asking your children/heirs to write a check to the government. The mistake that people make is that they have assets that are very illiquid, which cannot easily be converted to cash in a short period of time. I call this scenario "liquidity confusion"because people are confused about the liquidity of the assets in their estate.

In California, for example, real estate assets may make up a large majority of an estate. However, real estate is an illiquid asset. The credit crunch that we are experiencing today, which is part of the reason why real estate values currently are suppressed, shows why being forced to sell a real estate asset at a given time is not a healthy aspect of settling an estate. Only having nine months to convert such assets to cash can be very difficult and even cause a significant reduction in that asset’s value. Real estate is not a viable liquid tool to settle an estate to pay any required taxes.

Other examples include businesses, private placements, private stock investments and personal loans, which all are highly illiquid assets that add to net worth but are difficult to convert to cash without a potentially significant loss in value and/or difficulties in converting the asset to cash within the required nine-month time frame. Do you want your kids to be forced to sell your business to pay the estate tax?

It is very important to understand how you can achieve liquidity in enough of your estate to pay any necessary taxes. The solution is to understand the assets in your estate and what portion truly is liquid.

Mistake #5: The estate tax is a voluntary tax — we choose to pay or not to pay it.

Too many people believe that the estate tax is inevitable. However, the truth is that it is truly a voluntary tax. An individual can choose to use different estate-planning techniques to limit estate tax liability — or he/she can fail to do so and thereby "donate"a sizable portion of a life’s work to the government.

It is truly incredible what a well-designed estate plan can accomplish in terms of estate-tax minimization. For example, Joe Kennedy had an estate in excess of $600 million. Ordinarily that would equate to around $300 million in estate tax liability. However, his heirs paid less than $200,000 because he chose to deal with the problem of estate taxes.

The solution is to employ the help of estate planners. Numerous estate-planning scenarios can be developed to limit the estate tax. Each situation is different, so seek professional advice.

About the author:

Kevin Yurkus is the president of Fairway Capital, a leading life insurance and financial services firm based in Newport Beach, Calif., serving clients nationally and internationally. Fairway Capital specializes in innovative solutions, tailored to high net worth senior citizens, ranging from estate planning to life settlements. Contact Kevin at 800.338.1035 or see the firm’s Web site.

Thanks Kevin.

Once again, if you want to hear my audio special report featuring Kevin Yurkus, just click here.