Even sophisticated estate planning practitioners can find themselves dealing with seemingly routine matters that harbor subtle complexities. While many firms regularly handle basic estate planning, exposure to nuanced issues - from joint tenancy implications to the technical requirements of life insurance planning - may be sporadic. This irregular engagement with complex planning scenarios can lead to oversight of critical details that materially impact client outcomes.

This refresher serves as both a risk management tool and technical update, examining critical areas where even experienced practitioners can benefit from a systematic review. A total of three parts are planned. 

1. Complications Arising From Jointly Held Property

FUNDAMENTAL LIMITATIONS

The right of survivorship inherent in joint tenancy supersedes testamentary dispositions, frustrating estate plans and eliminating post-mortem control. Any joint tenant's unilateral ability to sever through partition or alienation creates asset protection vulnerabilities. See Riddle v. Harmon, 102 Cal.App.3d 524 (1980) (confirming right of unilateral severance through deed to self).

TAX IMPLICATIONS

Basis Step-Up Limitations: IRC § 1014(b)(9) provides only partial step-up in basis for jointly-held property, limited to the deceased owner's portion. This creates adverse tax consequences compared to alternatives like tenancy in common or revocable trusts. For married couples in community property states, transmutation to community property may preserve full step-up benefits under § 1014(b)(6).

Gift Tax Exposure: Creation of joint tenancy with non-spouse owners typically constitutes a completed gift under Treas. Reg. § 25.2511-1(h)(5), potentially triggering gift tax consequences absent qualification for annual exclusion under IRC § 2503(b) or lifetime exemption under § 2505. Gift tax implications become particularly complex with joint bank accounts under Treas. Reg. § 25.2511-1(h)(4).

Double Estate Taxation Risk: For non-spouse joint owners, IRC § 2040(a)'s "consideration furnished" rule requires inclusion of the entire value in the first joint tenant's gross estate except to the extent the survivor proves contribution from their own resources. See Treas. Reg. § 20.2040-1(a)(2). Without adequate contribution records, property faces double taxation:

• First inclusion at initial death under § 2040(a)
• Second inclusion of survivor's 100% interest at subsequent death under § 2033

This contrasts with § 2040(b) treatment of qualified joint interests between spouses, where only 50% is included regardless of contribution sourcing. Estate of Hatchett v. Commissioner, 58 T.C.M. 801 (1989) illustrates the evidentiary challenges in proving contribution.

CREDITOR EXPOSURE AND ASSET PROTECTION

Joint ownership exposes property to creditors of all co-owners. Most jurisdictions permit creditors to either force partition or directly attach the debtor's interest. See United States v. Craft, 535 U.S. 274 (2002) (federal tax lien could attach to entireties property).

MEDICAID PLANNING CONSTRAINTS

Joint ownership constitutes an available resource for Medicaid eligibility under 42 U.S.C. § 1396p(h)(1), potentially disqualifying applicants and complicating spend-down planning. Transfers of joint interests within the look-back period may trigger ineligibility periods under § 1396p(c).

FIDUCIARY ADMINISTRATION

Joint ownership complicates fiduciary administration during incapacity. While durable powers of attorney provide some relief, they typically cannot override a joint owner's property rights without express authorization, creating potential conflicts between agents and co-owners regarding property management.

MITIGATION STRATEGIES

Consider these alternatives to address the above limitations:

• Maintaining detailed contribution records for non-spouse joint interests
• Restructuring as tenancy in common
• Entity-based ownership through LLCs/partnerships
• Trust ownership with defined beneficial interests
• Strategic use of TOD designations
• For married couples in community property states, transmutation agreements

The selection of optimal title holding methods should account for jurisdiction-specific precedent on creditor rights, severance requirements, and interspousal property rights. 

2. Incorrect Life Insurance Strategies

ESTATE TAX INCLUSION AND THE OWNERSHIP TRAP

IRC § 2042 creates a broad inclusion rule for life insurance proceeds where the decedent retained any "incidents of ownership." These incidents extend beyond just policy ownership to include the power to change beneficiaries, surrender or cancel the policy, assign it, or borrow against its cash value. 

In Estate of Lumpkin v. Commissioner, 474 F.2d 1092 (5th Cir. 1973) the Fifth Circuit found incidents of ownership where the decedent merely possessed the power to cancel group life insurance coverage by terminating his employment, even though he never paid premiums and couldn't change beneficiaries.

The three-year contemplation of death rule under § 2035(a) further complicates planning by pulling back into the estate any policy transfers within three years of death, even where the decedent fully divested ownership rights. 

TRANSFER-FOR-VALUE ISSUES

Consider two business owners, Bob and Jim. When Bob sells his $1,000,000 life insurance policy to Jim for $100,000, he sets in motion significant income tax consequences under IRC § 101(a)(2). Upon Bob's death, rather than receiving the entire $1,000,000 tax-free under the general rule of § 101(a)(1), Jim faces taxable income on most of the proceeds. Under § 101(a)(2), he'll exclude only his economic investment - the $100,000 purchase price plus any premiums he paid after buying the policy. The remaining proceeds become taxable income.

The outcome changes dramatically with proper planning. If Bob and Jim first form a partnership, and then Bob transfers the policy either to Jim as his partner or to their partnership directly, § 101(a)(2)(B) preserves the entire death benefit's tax-free treatment. This simple restructuring falls within one of several statutory safe harbors. Similar protection exists for transfers to the insured, to a partnership where the insured is a partner, or to a corporation where the insured serves as an officer or shareholder. Treas. Reg. § 1.101-1(b)(1) further clarifies these exceptions.

This distinction drives critical planning decisions in business contexts. In buy-sell arrangements, existing policies should not transfer between unrelated parties. Instead, following Treas. Reg. § 1.101-1(b)(2), the focus should be on first establishing qualifying relationships - partnership or corporate structures - before any policy transfers occur. The timing matters; forming a partnership after transferring the policy comes too late.

Corporate restructuring requires similar care. Policy transfers occurring through mergers or reorganizations need review for potential transfer-for-value implications under § 101(a)(2). The existence of a business purpose does not automatically prevent application of the rule. Each policy transfer must either avoid valuable consideration or fit within a statutory exception.

Success requires careful documentation throughout: recording purchase prices and dates, tracking post-transfer premium payments, maintaining evidence of qualifying relationships, and confirming entity status when relevant. Without this record-keeping foundation, even properly structured transfers may face practical challenges in demonstrating compliance with § 101(a)(2)(B).

ILIT IMPLEMENTATION FAILURES

An ILIT's effectiveness can be compromised through several common structural flaws. Consider a business owner establishing an ILIT for his children. He designates his brother as trustee, with retained power to remove and replace the trustee at will. Despite the apparent separation, this retention of control triggers estate tax inclusion under § 2042 as an incident of ownership through the power to influence policy decisions.

Premium funding through annual gifts requires precise execution. When Crummey notices are sent without adequate withdrawal periods, or when notices are missed for some premium payments, the annual exclusion may be unavailable. The result: premium payments become taxable gifts utilizing the lifetime exemption unnecessarily.

The transfer-for-value rule discussed above presents significant risks in business contexts. When an ILIT acquires an existing policy from another trust or entity - perhaps as part of a buy-sell arrangement or corporate reorganization - the transaction may convert tax-free death benefits into taxable income to the beneficiaries. This outcome occurs even in seemingly routine business transactions.

Inadequate premium funding structures often undermine long-term sustainability. ILITs funded solely through annual gifts, without additional corpus or provisions for premium shortfalls, may fail their basic purpose when premium payments are interrupted or policy performance requires additional funding.

Effective implementation requires:

- Independent trustee structure with clearly defined powers

- Systematic Crummey notice procedures

- Analysis of policy acquisitions and business transactions

- Sufficient initial funding and contingency provisions

BUSINESS INSURANCE PITFALLS

CORPORATE-OWNED LIFE INSURANCE (COLI). IRC § 101(j) imposes specific requirements on employer-owned life insurance. Unless the corporation obtains written notice and consent from the insured employee before policy issuance, death benefits become taxable income. The notice must disclose:

• That the employer will own the policy
• The maximum face amount at issue
• That the employer will be beneficiary of death proceeds
• These requirements apply even to policies on key employees or owners.

CROSS-PURCHASE ARRANGEMENTS. In typical buy-sell funding, each business owner buys life insurance on other owners. This creates transfer-for-value risks when:

• Existing policies transfer between owners
• The number of owners changes (requiring policy transfers)
• Business structure changes (e.g., partnership to corporation) Unless transfers fit § 101(a)(2) exceptions, death benefits become partially taxable to the beneficiary.

SPLIT-DOLLAR. These arrangements, where employer and employee share policy costs and benefits, face complex characterization rules under Treas. Reg. § 1.61-22:

• Economic benefit regime: Employee taxed annually on current life insurance protection value
• Loan regime: Premium advances treated as loans to employee Improper structuring can trigger unexpected income tax to the employee or loss of interest deductions to the employer.

COMMUNITY PROPERTY COMPLEXITIES

Community property jurisdictions face additional complications through:

• Incidents of ownership attribution between spouses
• Premium payment sourcing affecting policy characterization
• Policy transfers potentially triggering basis adjustments under § 1014 See Estate of Madsen v. Commissioner, 659 F.2d 897 (9th Cir. 1981) (addressing community property insurance attribution).

BENEFICIARY DESIGNATION AND POLICY MANAGEMENT

Technical compliance aside, practical failures often emerge through:

• Outdated beneficiary designations post-divorce
• Misalignment with broader estate planning documents
• Inadequate trust provisions for minor beneficiaries
• Poor policy performance monitoring
• Carrier financial strength deterioration

REMEDIAL APPROACHES

Consider implementing:

1. Regular policy audits coordinated with estate plan reviews
2. ILIT restructuring with independent trustees and robust Crummey provisions
3. Business insurance compliance protocols
4. Transfer documentation satisfying § 101(a)(2) exceptions
5. Community property agreements clarifying ownership rights

3. Lack of Liquidity 

Estate planning practitioners need to address liquidity concerns early in the planning process. Experience shows that insufficient liquid assets during estate administration can undermine otherwise sound estate plans.

Current estate administration carries numerous time-sensitive financial obligations. These include federal and state death taxes, income taxes on pension distributions, probate costs, and administrative expenses. Family businesses present particular challenges, requiring immediate funds for payroll, inventory, and operational continuity.

Consider this situation: A client's estate consists primarily of a successful private business. Without adequate liquidity planning, the executor may face the difficult choice between selling business assets at a discount or borrowing at unfavorable terms to meet estate obligations. Proper planning can avoid this scenario.

Recommended steps:

1. Calculate anticipated estate settlement costs
2. Identify sources of liquid assets
3. Consider life insurance or other funding mechanisms where appropriate
4. Review and update liquidity plans periodically as circumstances change

Document these discussions with clients. Regular liquidity reviews help ensure estate plans remain viable and executors can fulfill their duties without resorting to forced asset sales.

4. Wrong Executor/Trustee 

Estate planners regularly encounter the reflexive response from clients: "Of course my eldest child should be the executor." This common but potentially problematic choice merits careful discussion with clients during the planning process.

The executor's role demands three fundamental capabilities: collecting assets, paying obligations, and distributing remaining assets to beneficiaries. However, this simplified list belies the complexity of modern estate administration. Today's executor must often navigate business valuations, tax elections, family dynamics, and time-sensitive financial decisions.

Consider discussing these key risk factors with clients:

Personal Financial Risk 
An executor serves with significant personal liability exposure. They may face claims from beneficiaries for investment losses, tax penalties from missed deadlines, or challenges over business continuation decisions. Many family members fail to appreciate this exposure until confronting their first crisis.

Time Commitment 
Estate administration is not a part-time endeavor. Corporate decisions, tax deadlines, and asset management demand prompt attention. A child with an active career or young family may lack the bandwidth for these responsibilities, yet feel unable to decline the role.

Business Acumen 
Where business interests form part of the estate, the executor must make immediate decisions affecting operations, employees, and asset values. Family members may lack the necessary experience while feeling emotionally constrained in seeking professional guidance.

Family Dynamics 
Even harmonious families can fracture under the stress of estate administration. An executor-sibling making discretionary decisions about parents' personal effects or business assets often faces strained relationships, regardless of their decisions' merit.

Practical Recommendations:

1. Consider professional executors for complex estates
2. If choosing family, select based on capability rather than birth order
3. Ensure selected executors understand their responsibilities before accepting
4. Document discussions about executor selection criteria
5. Build in appropriate compensation for the executor's time and risk

The goal is not to discourage family executors but to ensure clients understand the role's demands and select executors equipped to meet them.

5. Outdated Wills

Estate plans are not "set and forget" documents, yet practitioners regularly encounter wills that have remained untouched for decades. These outdated instruments can create substantial problems during administration, often undermining the testator's final wishes.

Consider these common scenarios: A will drafted in 2005 names a now-deceased executor but no alternates. A trust created in 1998 fails to account for significant changes in tax law. Beneficiary designations still name an ex-spouse. Each situation represents a failure to maintain estate planning documents as living instruments that reflect current circumstances.

Key areas requiring regular review:

1. Fiduciary appointments - executors, trustees, and guardians
2. Changes in asset composition or value
3. Business succession provisions
4. Family circumstances (births, deaths, marriages, divorces)
5. Tax law changes affecting distribution schemes

Practical implications arise when executors attempt to administer outdated documents. Courts may need to appoint administrators where named executors are deceased or incapacitated. Tax elections contemplated in older documents may no longer exist or may now carry adverse consequences. Family disputes often emerge when distribution schemes fail to reflect current relationships.

Best practices suggest:

• Calendar regular client review dates (ideally every 3-5 years)
• Document client decisions to maintain existing provisions
• Flag provisions that may require future updates
• Maintain clear records of any changes in circumstances that could affect the plan

The goal is to ensure that estate plans remain viable instruments that accomplish their intended purposes rather than creating additional administrative burdens.

6. Conclusion

In this first installment, we have examined four critical areas where estate plans commonly falter: joint property complications, life insurance strategy failures, liquidity shortfalls, and executor selection issues. Each represents a fundamental structural challenge that can undermine even well-intentioned estate plans.

Watch Parts 2 & 3 of this series. 

This article is Part 1 of our three-part series "Estate Planning Mistakes - 2025 Annual Refresher."