Avoid These 5 Estate Planning Mistakes
Polly Dobbs is an estate planning lawyer who, along with her team at Dobbs Legal Group, has worked with hundreds of farm families. Dobbs is not afraid to share the mistakes she’s seen clients make over the years, so you don’t have to make them too.
This week at the Legacy Project Conference she outlined five common estate planning mistakes you want to avoid.
- Do nothing because your net worth is under the current estate tax exemption. Because the estate tax exemption doubled through 2025 by the 2017 Tax Cuts and Jobs Act, Dobbs says some farmers don’t think estate planning is necessary. They’re wrong she says.
“We are in this window where the estate tax exemption is $11.4 million per person so that means a married couple can have $22.8 million of assets free from federal estate tax, and that's unheard of,” she says. “We are one year into this Tax Act that lasts through 2025, when it's set to expire and to be cut in half again.”
In 2026, the exemption will be back down in half, roughly in the neighborhood of $5.5 million per person, $11 million total.
“Keep in mind, we're having an election in 2020 and any law can change at any time,” she explains. “We don't have a guarantee that we're going to get through 2025.”
Regardless of the size of your estate, Dobbs says your family is a bigger risk to the future success of your farm than Uncle Sam ever is. “It’s family feuds. It's blended families, step moms and half siblings and the way different family trees are made up on farm and off farm,” she says. “It gets messy quickly, and that's what needs proper planning. Taxes don't drive this bus. Family goals, family relationships, and goals for the future are what need to come first and drive this bus.”
2. I want to treat all my kids exactly the same. Not necessary.
“As a parent, I get it,” Dobbs says. “You don't want to play favorites, everybody should get exactly the same but that just does not work in my world.”
Fair does not mean equal, Dobbs says. “No one is entitled to anything,” she adds. “There is no law that says you have to treat your kids exactly the same and that everybody's column has to be equal penny to penny at the end of the day when everything settles out.”
Change your mindset, she advises. Start thinking about who should own which assets. Who should control things and what the overall plan looks like.
“Your children are different, and it is okay to treat them differently.” Speaking of kids, Dobbs says your kids won’t just magically figure estate planning out when you die. It’s your responsibility to draw a road map, tell your kids what to do, and be responsible for your legacy, she adds.
3. I'm just going to title my property jointly with my kids and their spouses so it just automatically passes at death. Wrong.
While jointly owned property does avoid probate administration because it automatically passes to the survivor at death, Dobbs says that's not a good reason to structure joint ownership.
“We shouldn't let fear of probate drive us to do things like slap names on titles and create joint ownership,” she says. “It also creates a taxable gift when you just start adding names on property when consideration hasn't been given. That's a gift and we have to be careful about. Formalities are important.”
Don’t forget, you get to gift $11 million in your lifetime and upon death combined. The IRS keeps track.
“If you're married and you're worth less than $22 million, you feel like you can be a little careless and make gifts, but you don't want to go through an audit and have to defend them,” she explains. “It's just better to be formal about it.”
She also reminds farmers that once you start putting names on deeds it not only gets hazy and complicated really fast, but those assets are squarely in your child's divorce estate.
“If there's a future divorce, their name is on the deed and it's getting divided up by the divorce court judge, and you've lost control over it,” she says.
Think carefully about joint ownership, she cautions farmers. Even just with bank accounts.
“A sweet little old lady says I'll go into the bank to add my daughter to the account. She's going to help me pay my bills, and the bank teller gets it wrong and makes the daughter a joint owner instead of just an authorized signer,” she says. “That's the same as making your bank teller into your estate planning attorney. It's just not good.”
4. I'm just going to sell my last crop and have an equipment auction and retire happily. Not likely.
“There will be a huge income tax liability at that point because farmers never pay income taxes,” Dobbs says. “They sell this year's grain next year and they deduct next year's expenses this year. They buy real shiny equipment right there in December and then depreciate it all, but all that just creates a giant wave that you're riding that eventually is going to crash and you're going to have a crop to sell with not next year's expenses to wash against it and a whole bunch of depreciated equipment. It's going to be pretty nasty tax hit.”
Don’t end your career on a terrible tax note, she warns, adding that you don’t have to understand all of the tax techniques, you just have to ask for help.
“When it's time to retire, call somebody, get some advice. Don't think that the only thing to do is sell your grain, have an auction and take the tax hit, because there are things available that can help with that,” she says. “As long as there hasn't been a sale and a check, there's planning that can be done.”
5. I'm just going to copy my neighbor’s estate plan. Not smart.
“There is no cookie cutter approach to this kind of planning,” Dobbs says.
For example, lifetime gifting might be great for some families and a terrible idea for other families.
“We have to dig in and look at carry over basis that's affiliated with lifetime gifts versus a step up in basis when there are assets inherited after death,” she explains. “That can make a big difference if there's a future sale of the farm, even if the sale is only between siblings or cousins.”
Estate planning is very fact specific. The estate planning lawyer and the succession team really need to know all the information, all the dirty laundry and everything about the family and the relationships in addition to the assets to craft a plan.
“It's the family issues and the goals that should drive the planning, and you're not like your neighbor,” she says. “You can't just copy what your neighbor did and think it's going to fit.”