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The Five Most Common Mistakes Made in an Estate Plan by Scott Montgomery

Posted on July 27, 2012

By Scott Montgomery, CLU, ChFC

Physicians and medical professionals with complicated financial lives often make a valiant attempt to get things in order in an effort to protect their families. Unfortunately, good intentions are not enough and people make the same common mistakes.

Many of these issues arise because they do not take a holistic approach to their situation. Their insurance specialist has one agenda, their lawyer has another and no one is taking a big-picture view of the entire situation.

Here are five of the most common mistakes in estate planning.

1. Trust funding, or building the house and not putting in any furniture Many people believe that their work is done because they have a trust. What they really mean is that their attorney drafted a revocable trust and handed over instructions for funding it.  People get busy and forget to retitle their corporation stock book, the property deeds, LLC documents and brokerage accounts that should be funding the trust.In the end the estate goes through probate and the client does not receive many of the benefits of the trust. He or she has also wasted time and money.

2. Life insurance ownership and beneficiary designations The proceeds of an insurance policy are income-tax free. However, proceeds left to a surviving spouse or children may eventually be subject to estate tax in estates larger than the exemption.

In many cases we find that an insurance agent was eager to get the policy in place and did not coordinate the ownership and beneficiary designation with the buyer’s attorney. This typically results in proceeds subject to estate tax. Additionally, many insurance proceeds left to spouses or children are lost in divorce settlements or lawsuits.

This is especially important for individuals involved in a families business where creditors may have claims on assets and insurance proceeds. A properly drafted insurance trust and an insurance agent who is willing to work with your attorney can avoid this situation.

3. Retirement asset beneficiary designations The most common issue is a failure to name a contingent beneficiary. If the owner and primary beneficiary pass away concurrently without a named contingent beneficiary, the proceeds end up passing back to the estate of the owner. In many cases, beneficiaries are forced to remove the assets from the plan within five years of death and pay all of the income tax. With a contingent beneficiary, distributions can be stretched over the recipient’s life, which postpones income taxes on the deferred amount.

The ideal contingent beneficiary can be a properly drafted revocable trust.  An improperly drafted trust will cause immediate taxation.

4. Thinking only of the next generation The greatest family fortunes were built over several generations.  Physicians with lucrative practices may be looking at legacy protection for more than one generation. Unfortunately too many trusts dump their assets out to beneficiaries at young ages, typically 25, 30 or 35. As a result, these assets become subject to beneficiaries’ creditors, divorce proceedings and possible mismanagement and estate tax.

The law allows a grantor to leave assets in trust for up to 360 years. This is a significant amount of time and will most likely be subject to modification later this year if Congress gets its act together. Rather than pay out, a better option is to leave assets in trust and allow the heirs to become trustees of their portion.

Assuming the income and principal are subject to an ascertainable standard, such as health, education and maintenance, the proceeds remain out of the beneficiaries’ estates. If the documents are written correctly, the proceeds can also avoid attachment by creditors.

5. Annual Reviews No plan is permanent and tax laws are ever changing. For example, an historic $5 million estate tax exemption expires at the end of this year and is unlikely to return.  This exemption has only been in place for two years.

Family situations change, as does investment performance. Have a team of advisors and find one that will serve as your personal CFO or quarterback. Once a good plan is in place, keeping it on track can become the biggest challenge. It takes and individual with time, an attention to detail and a global knowledge of your objectives, family and tax laws.

With a little time, energy and a trusted advisor, physicians can avoid many common  mistakes. People start the estate planning process with good intentions but often trip on the details. Find an experienced planner who takes time to understand your goals. Only then can you put a plan into place that will carry out your wishes and protect your heirs.


About the Author:

Scott Montgomery is a director and financial planner with Provenance Wealth Advisors. PWA provides a comprehensive approach to income, estate, financial and investment planning. For more information, call (954) 712-8888 or e-mail

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