Estate planning mistakes are tragic because they often go undiscovered until it's too late — the person has died or suffered a major incapacitation. Fortunately, with care and regular review, you can avoid many of the most common pitfalls.

Lack of Planning — Communicating Too Little Too Late

Start planning and start communicating now. It's never too early or too late to start implementing your estate plan and talking to affected family members about it. A basic estate plan takes about two months to implement from the time you start thinking about it to the time you first meet with your attorney to the document signatures. This isn't a heavy time burden and there isn't any reason why you can't fit it easily into your schedule.

You may have special instructions you would like your family to know, things that don't need to be in the will — which technically becomes public information as part of the probate process — but should be understood. Write a letter with these details and let your children or executor know where the letter is. Making it a separate document doesn't make it as enforceable as the will but for wishes such as, “Please give my daughter my wedding ring,” a letter can be easily changed and updated.

Tax Basis Planning

As mentioned in Chapter 11, many people forget to keep track of what they paid for an investment — their tax basis. This can cause particular problems in an estate plan. Remember that if you give assets while you are alive, the receiver also receives your tax basis. If they inherit that same asset, they get what is called a stepped-up basis to the value of the asset when you died.

This is an important consideration. If your parents are elderly and are planning on gifting assets to you now, you might consider whether they have a large enough estate to be taxable for estate tax, and the difference between your tax bracket and theirs, and then decide whether it's better for them to hold a particular asset until death or to gift it to you now. This might seem a tacky discussion to have with them, but it's important not to pay taxes needlessly, when guidance from an advisor familiar with the situation could help keep the money in the family and out of Uncle Sam's pocket.

IRA Withdrawals and Your 401(k)

There are special tax rules that relate to inherited retirement accounts. Basically, if the inheritor is a spouse, he will be able to transfer the account to his own name and continue as if it was initially his account. If the inheritor is an entity other than a spouse — such as a child, a trust, or the deceased's estate — then the payout options are more restrictive. In many cases, if the inheritor or beneficiary is a person (not a trust or the estate) he will have the option of taking distributions from the account over a long period of time — usually at least five years, or if the estate plan was completed correctly, over his lifetime. The longer the distribution period, the greater the income tax savings because the beneficiary won't generate a tax obligation until money is withdrawn from the account.

Putting Kids' Names on Assets

Well-intentioned families often try to simplify estate planning by putting adult children's names on assets such as bank accounts and the family home. Don't use this strategy unless you've been advised by an estate or elder law attorney. Remember that the asset is exposed to the creditors of the named owners and that could subject the asset to liabilities that weren't intended, including bill collectors or lawsuit beneficiaries. Additionally, the act of putting the adult child's name on the house could have damaging gift tax ramifications.

A life estate is an interest in a home for a person's lifetime without being a full ownership. This strategy is often used to give a second spouse continued residence while the children from the first marriage own the home. But beware: Strategies like this can create a conflict of interest between two parties. In this case, the children may have no incentive to maintain the home for their stepparent's benefit.