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Most people understand the importance of having an estate plan. They’ve either seen a smooth transition of assets because of proper planning or they’ve seen the headache and sometimes nightmare that comes along with the lack of planning or incomplete planning. While there are dozens of reasons to have an estate plan in place, the topics discussed below are three common mistakes we’ve witnessed over the years, and one specifically for residents of Massachusetts.

Not Knowing the Massachusetts Estate Tax Threshold

18 states and the District of Columbia impose an estate tax or have an inheritance tax.  This means if you die with assets valued over your state’s threshold, you will likely owe taxes.  Each state sets its own threshold with policy for how it will increase over the years.  Massachusetts has a $1 million-dollar threshold.  For residents of Massachusetts, if your estate is worth more than $1 million, money must be paid to the state first, before any assets are distributed to your heirs or organizations.

Some states will only tax the money above their threshold.  In Massachusetts, if the value of your estate is above $1 million, the estate tax applies to the entire value of your estate, on a graduated scale, not just the amount over the threshold.  To put that in perspective, the average home price in MA for 2018 was $385,000.  As residents of MA know, that number can be much higher depending on the town you reside in.  Let’s assume you have been diligent in saving and have investable assets of $1.5 million.  In simple terms, you have an estate valued at $1.88 million.  In some states, if the threshold was $1 million, you would owe state estate taxes on $885,000.  But, you’re a resident of Massachusetts, so your entire estate, $1.88 million is up for grabs.

Often times, with proper planning and coordination between your estate attorney, tax professional, and financial planner, taxation on the entire estate can be reduced or eliminated altogether.

Not Realizing Your Life Insurance Death Benefit is Part of Your Estate

Most people know their estate includes their home, their investable assets, bank accounts, along with the other tangible and intangible possessions you’ve collected throughout your life.  What most people don’t often consider is their life insurance death benefit also being a part of their estate. 

This includes insurance that you’ve bought through a financial advisor, insurance salesperson and even group life insurance through your employer.  We usually see individuals having group life insurance benefits through their employer and a policy they own individually outside of their employer. 

Side note: Individuals own life insurance outside of their employer for many reasons but the most common is to have portability.  Your group life insurance generally terminates once you leave the employer, whether through a job change or retirement.  If your next employer doesn’t offer group life insurance, or you’ve retired and coverage stops, owning your own policy ensures you maintain coverage. 

Adding to the example above, let’s assume you have $250,000 in group life insurance from your employer and you individually own a $1,000,000 policy.  Your estate went from $1.88 million to $3.13 million with the addition of your life insurance.  Your MA estate tax just went from tens of thousands to hundreds of thousands of dollars.

Adding a Child/Heir to the Deed of a Home to Avoid Probate

While you have the best intentions to avoid probate and to easily pass the property to your heirs, this practice can prove to be a costly mistake.  I’ll use an example to illustrate why;

Let’s assume you purchased your home for $250,000 (your basis) and it’s now worth $600,000.  If you sold your property today, you would have a realized gain of $350,000.  If you were to die, your heirs would receive a step-up basis on the property.  They would own your home with a basis of $600,000, meaning if they sold the home, they would only pay taxes on the gains above $600,000.  If you added your child to the deed before your death, they do not get the full step-up in basis and will end up paying a far greater value in capital gains tax.

You can read more about the ramifications of adding an heir to the deed of your home in an earlier post I wrote titled, Why You Shouldn’t Add Your Heirs to Your Deed.

How to Avoid Common Estate Planning Mistakes

The three mistakes above are just three of the many reasons to surround yourself with a knowledgeable team of professionals that can help you navigate through your financial, estate, and tax planning needs.  Having the professionals in place is one thing, but ensuring there is communication between all parties is what’s most important.  Just like it wouldn’t make sense to have a hostess, waiter, and cook not communicate, it doesn’t make sense to have a financial advisor, estate planning attorney, and tax professional that don’t communicate. 

Part of our process is reaching out to our client’s tax professional(s) and estate planning attorney(s) at least once annually to ensure all parties involved are on the same page.  What we’ve found is once an estate plan is created, the conversation with the attorney commonly stops.  We ensure any major life changes that could affect your estate plan are disseminated to your attorney and the plan can be adjusted if needed.  The same goes for your tax professional.  With the rise in technology and not needing to meet with the tax professional to have your taxes processed, planning strategies and key information can be missed.  We quarterback the conversations so you don’t need to. By doing so, it keeps the key parties informed with all of the up to date, pertinent information they may need.