September 06, 2006
Do-It-Yourself Estate Planning
A major intergenerational transfer of wealth is underway, like nothing before seen in this country — or the world, for that matter. Estimates from the Federal Reserve Board have the richest 5% of U.S. households likely to pass along nearly 60% of the nation's wealth within the next 50 years. With that kind of money on the table, having a "do-it-yourself" estate plan — or even worse, none at all — can lead to potential big dollar mistakes.
A good estate plan allows for transfers of wealth to take place at minimum cost (including taxes) and insures that the wealth ends up in the hands of proper beneficiaries with a minimum of hassle.
The following are a number of areas where I often see mistakes made by do-it-yourself planners.
Taking advantage of current estate and gift tax laws. For instance, wills and trusts done before September 12, 1981 probably do not have language allowing a couple to take full advantage of the unlimited marital deduction. This may result in unnecessary estate taxation when the first of the two spouses dies.
Family additions, deaths and divorce. Multiple marriages, "his, hers and theirs" families, and having children are all common. So are failures to replace a past spouse's name, add new children and otherwise reflect changed realities in a will or trust.
Powers of attorney. As we Americans live longer, the risk increases that a court may order guardianship. This expensive and cumbersome process can be avoided with proper powers of attorney in place. A power of attorney for health care ensures that if you cannot make decisions yourself, a person of your choosing can decide what care is appropriate, who will provide it, where you will be treated and how it will be paid for. A PoA for financial management allows your "attorney in fact" to make decisions on property management and disposition, access your retirement accounts for living expenses, file your tax returns and make estate planning decisions, including gifts and formation of trusts.
Beneficiary designations. Improper designations of life insurance, annuity and retirement account beneficiaries can turn a simple situation into chaos. I often see instances where one spouse has had multiple jobs, with multiple 401(k)s or IRAs, and multiple marriages. If that spouse dies leaving old 401(k) plans or company-sponsored group term life insurance to an ex-spouse, no marital exclusion applies and the estate is taxed for the transfer. To add insult to injury, in most cases this reduces the current spouse's inheritance.
Another common error occurs when the estate is the beneficiary of a retirement plan, so that income taxes are immediately incurred that might have been deferred by naming an individual beneficiary.
Gifts to charity. If an estate has no tax liability, charitable gifts from it do not create tax deductions. But leaving money or property to an heir with the expressed wish that he or she pass it on to a named charity will probably allow the heir to take a tax deduction by making the donation.
Deathbed checks. A check can be a last-minute gift qualifying for the annual $11,000 exclusion — if the check clears the bank while the giver is alive. So wire transfers or certified checks should be used when possible.
For the above and similar reasons, I recommend seeking competent legal counsel and financial advice for drawing up wills, trusts and other estate documents.