Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 8 – Failure to Plan for Taxes


IRS 2There are several types of tax that may apply when a person dies. Failure to plan for these may result in higher taxes, imposition of penalties or interest, and lost opportunities. Some of these taxes are:

Federal & State Income Taxes. Death does not absolve the obligation to pay income taxes. The decedent’s final federal income tax return (and state, if applicable) must be completed and any taxed owing must be paid. (Of course, it’s also possible that a refund will be due!) The person responsible for filing this return is the executor named in the Will, but if there was no probate proceeding then the person named in the Will, the trustee, or someone inheriting property from the decedent can file the return. If the final tax return is not filed, or if taxes are due, the person responsible for filing may be personally liable and the heirs will have to pay the taxes from the inheritance they received.

Federal Estate Tax. The estate tax is essentially a tax on the privilege of giving your property away at your death. As of January 2013, the amount exempt from tax is $5 million, with an annual inflation adjustment. If the value of your “taxable estate” is less than the exemption amount, no tax is owed. If it’s higher, the maximum tax rate is 40%. (This is all good news! The exemption amount used to be as low as $675,000 and the maximum rate was once 55%!) These amounts are subject to the whims of Congress — changes in the estate law laws are revisited with every administration.

The “taxable estate” means any property owned at the time of death, any life insurance owned by the decedent, certain property over which the decedent had too much control (such as the ability to assign an estate to his estate) and any gifts given within three years of death. The exemption amount may be reduced by the making of lifetime gifts in excess of the annual gift exclusion (currently about $14,000 per person per year).

If you think you will have a taxable estate, there are planning methods available to help reduce those taxes. These include leaving assets to a spouse (which are deductible), charitable giving, gifting of appreciating assets during life, purchasing life insurance to cover the estate tax, and other options. If the proper steps are taken, it may also be possible for the surviving spouse to carry any unused portion of the deceased spouse’s exemption over to the surviving spouse’s estate when the second spouse dies. This could result in a higher total exemption on the death of the second spouse.

Inheritance Tax and State Death Taxes. California does not currently (January 2013) impose an inheritance tax or a state death tax. But some states do impose one or both taxes. If the heir lives in such a state, or if the decedent owned real property in such a state, then these additional taxes may be due.

Other Taxes. Generation Skipping Transfer (“GST”) tax, real estate taxes, and gift taxes may all be triggered as well. The GST is a federal tax similar to the estate tax, but applies when a person is giving assets to someone more than one generation younger. At present, GST has an exemption amount equal to the estate tax exemption. If gifts in excess of the annual gift exclusion were given during the decedent’s lifetime, and a federal gift tax return was not filed, it must be completed now and the gift taxes paid, together with possible penalties and interest. In California, transfer of real property — even by inheritance — can result in higher property taxes, unless an exemption applies and is timely claimed. This may be true in other states as well.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 9 – Failure to Inform


Failure to inform means failing to let others know important things about your wishes and finances that they will need to know if you die or become incapacitated.

Where is your Will? Do you have a trust? Do you have a healthcare directive? Where can your loved ones find these things? What are your assets? What are your debts? Do you have any assets hidden away somewhere? Who does your taxes? Do you have insurance your loved ones will need to know about, such as life, longterm care, health, homeowner or auto? What are your end of life wishes? Did you preplan your funeral or purchase a plot? Do you have a safe deposit box and where is the key?

An increasingly common area in which people fail to adequately inform their loved ones is in regard to the internet. The proliferation of using electronic billing statements, account records, automatic debit payments, subscriptions, email, facebook, websites and blogs all make for a lot of information that is not accessible to anyone unless they know about it and they have the necessary passwords.

You do not have to divulge private financial details or give out copies of your estate planning documents. Just make sure that someone knows where to find them and keep a current list of assets, debts, internet addresses, emails and passwords. Also be sure to discuss your medical care and end-of-life wishes with your loved ones. That’s always easier to address in moments of health and calm and hearing things directly from you can be reassuring.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 10 – Failure to Plan for Liquidity


Failure to Plan for Liquidity is a common error. Money Jar 1This mistake can occur regardless whether you’ve made a Will or estate plan, and even if you have a trust.

For example:

→  You want to keep your vacation home available for your kids and their families to continue using for family reunions or getaways.  Your trust provides that your vacation home will continue to be held in trust for their benefit, but you don’t leave any cash to pay for the taxes and maintenance.

→  You divide things equally between your two children by adding one of them to your cash bank accounts to make them joint accounts that will pass to the child upon your death.  You leave non-cash property of equal value to your other child (in a Will or trust).   The second child may need to sell part of that inheritance to pay for the upkeep, transportation, storage, or other expenses of the property inherited, or may need to pay the expenses of your estate or trust administration. In most cases, the one inheriting the cash account as a joint account holder will not be required to kick in toward these expenses. Even though you intended to keep things equal, the end result is that one child gets to keep more.

→  A cash crunch can also occur if you owe income taxes or estate tax. Property you might have intended that an heir keep might have to be sold to come up with the required payments.

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Favorite Estate Planning Quotes: #8


Tombstone 7Quotation No. 8: 

“The finest inheritance you can give to a child is to allow him to make his own way, completely on his own feet.”  ~ Isadora Duncan

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Favorite Estate Planning Quotes: #7


Tombstone 7Quotation No. 7: 

“Sometimes the poorest man leaves his children the richest inheritance.”  ~ Ruth E. Renkel

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5 Things People Forget in Their Estate Plan


Remember These 5 Important Things in Your Will or Trust.

Think you’ve thought of everything?  Consider these five things people commonly forget:

1. Digital Assets.

Keep a list with your Will that identifies accounts, bills, email addresses – everything you do online. If you only get paperless statements, your loved ones will not have access to that information if you become incapacitated or you pass away.

2. Insurance.

When you transfer property to your trust, be sure to contact your homeowner and property insurance company to add the trust as an additional insured. (Actually, it’s the trustee you add, not the trust itself, but they should know how to do it.) That way, if something happens to you, there’s no question that coverage continues.

3. Funeral & Burial Instructions.

The advisability of preplanning your funeral is the subject of a prior post and continues to be highly recommended. But even if you don’t formally preplan or prepay your final arrangements, you tombstone 8
should at least leave instructions with your Will. The instructions should tell your loved ones whether you wish to be cremated; what type of religious ceremony you want; where you wish to be buried; and how much you want spent on your final arrangements. Knowing this from you, rather than having to guess, can save a lot of argument and guilt for your loved ones.

4. Be Careful If You Refinance Your Property.

When you make a trust, your attorney will ensure that your real estate is retitled to the trust. If it’s not, you risk triggering court procedures if you become incapacitated or pass away. Getting it into your trust at the get go is usually not a problem. Where trouble arises is when folks refinance or take an equity loan on their property. Most banks do not want to loan if the property is in a trust. So in that big stack of closing documents, they include a deed to take the property back out of your trust. When the loan process is complete, you go on your way and never give a thought to the title until it’s too late. Banks won’t remind you to put the title back in your trust. If you only remember one thing, it should be to see your lawyer when you get a new loan on your property.

5. Family Heirlooms and Mementos.

The sentimental items are usually the cause of the most friction in a family after a loved one has passed away. Be sure you plan for these things. Leave a list telling everyone to whom certain items should pass (or better yet, write it into your Will or trust!) Don’t forget about items of low economic value if they have high emotional value. Photographs, holiday ornaments, handmade linens, genealogy information, favorite costume jewelry, religious keepsakes – the list could go on.

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20 Advantages to Having a Trust (Part F: Trust Protectors) 


Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part F: Trust Protectors.

19. An executor can’t change your Will, but a trust protector can change your trust according to your instructions.

Your trust can include provisions for a “trust protector.” This is someone to whom you give authority to monitor Trust Protector 4
your trust and make changes to the trust if justified. Reasons to modify the trust may include changes in the tax law, or changes in the circumstances of one or more of your beneficiaries. By giving the trust protector authority to modify your trust, you enable these changes to be made without requiring a lengthy and expensive court process. This power can apply both during your lifetime, and after your death.

A Will, on the other hand, cannot be modified after your death by the executor, nor can it be changed during your lifetime if you become incapacitated. Not even a power of attorney can be used to modify a Will.

20. A trust protector can remove the trustee.

A trust protector can be given the power to remove or replace the trustee or investment advisor. This provides a second layer of supervision over the trust because the trustee or investment advisor may lose their jobs if they are not adequately performing. Giving the trust protector this power also protects against vacancies in these positions by allowing the trust protector name successors. It allows for changes if circumstances warrant a different type of trustee or one more suited to the temperament of the beneficiaries. All of this can occur easily with a trust protector, avoiding lengthy and costly court proceedings.

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Favorite Estate Planning Quotes: #6


Tombstone 7Quotation No. 6: 

“He who inherits a hill must climb it.”  ~ Spanish Proverb

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20 Advantages to Having a Trust (Part E: Easier Planning Than Using a Will) 


Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part E: Trusts Are Easier to Use than Wills.

17. A Will is easier to challenge than a trust.

A trust only requires the signature(s) of the makers(s), called “trustor(s),” “grantor(s),” or “settlor(s).” It is advisable to have it notarized as well, but that is not required. A Will is much more formal. It must be signed in the presence of two witnesses. Both witnesses must also sign Trust 2
it, in the presence of each other and in the presence of the person making the Will, and the witnesses must attest to certain facts. The witnesses cannot be anyone named in the Will. The sufficiency of any of these formalities can be challenged in court — the more the requirements, the easier the challenge. For a trust, the only requirement is signature of the settlor. A notarized document fairly well takes care of that.

A trust is also more difficult to challenge on the grounds of lack of capacity or undue influence. To challenge a Will, one only need prove that the testator was incapacitated or being unduly influenced at the moment the Will was signed. A trust, on the other hand, is operative and being used by the settlor during life. A challenger needs to prove not only that the settlor was incapacitated or being unduly influenced at the time the trust was signed, but also during all times tha the settlor could have changed it thereafter. If the settlor is actively using the trust (especially if the settlor is also the trustee), and was competent at any time, then presumably he agreed with the terms of the trust, or he would have fixed it himself.

Finally, it is easier for a challenger to raise an objection in a probate proceeding because the action is already pending. Someone wanting to challenge a trust must affirmatively initiate an action. This means the challenger will have to fund more of the costs of the action “up front.” Stirring up a court action may also alienate family members to a greater degree than would raising an objection in an existing probate proceeding. This can pressure a challenger into waiving the challenge, or more readily settling the matter.

18. A trust more easily moves with you from state to state.

A Will’s validity will be decided under the law of the state where you signed it, but it’s meaning may be interpreted under the law of the state in which it is being probated. Thus, for example, if the state where you signed it automatically includes adopted persons within the meaning of “children,” but the state where you die does not include adopted persons unless you specifically mention them, the effect of your Will could change dramatically.

This problem does not exist with a trust. Both the validity and meaning of the trust will be interpreted under the law of the place where it was signed, or under the law of the state specified in the trust. Usually, the only thing that changes when you move to another state are the laws governing administration (what are the trustee’s automatic powers, what rights to accountings and information do the beneficiaries possess, etc.) The exception is when there are special requirements in the second state, which the state’s public policy mandates be implemented, but that issue does not often arise. (For this reason, though, it’s a good idea to have your trust reviewed by an attorney in the new state, just to be sure.)

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20 Advantages to Having a Trust (Part D: Better Tax Planning) 


Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part D: Trusts Offer Better Tax Planning.

15. A trust allows you to take advantage of marital exclusions from estate tax while still preserving your children’s inheritance.

California does not presently charge an estate tax, but the federal government does. As of January 2013, the tax IRS 2
applies to estates over $5 million (adjusted for inflation). If your spouse dies and his or her share of the marital estate does not exhaust the $5 million exemption, it is sometimes possible to carry forward the unused portion and add it to your own exemption when you die. Because of these changes in the amount and carry forward of the exemption, fewer estates will trigger an estate tax.

For those that do, however, the maximum tax rate is a whopping 40%! And even if you don’t expect your own estate to trigger a tax, keep in mind that tax reform is a popular area of congressional legislation. There is no guarantee that the current tax structure will remain in place. The previous maximum rate was 55% (!) and only a decade or so ago the exemption was less than $1 million. Because of these factors, tax planning is often a concern for folks planning their estates. Luckily, anything left to the surviving spouse passes free of estate tax. This is one of the easiest planning methods, but if you just leave everything to your spouse, without a trust, there are some definite drawbacks.

First, if you leave assets to the surviving spouse outside of a trust, he or she is free to do anything with those assets, including deciding to whom they shall pass upon the spouse’s death. This may be less than ideal if you have children from a prior marriage or you are concerned that children from this marriage not be accidentally disinherited if your spouse remarries. A trust can give you the best of both worlds. It can be structured to set aside assets in excess of the $5 million exemption and hold them for the benefit of the surviving spouse. The spouse receives all income from the assets, and so much of the principal as necessary for support. When the surviving spouse passes, anything left will be subject to estate tax, but only if the surviving spouse’s own estate exceeds the exemption amount. After any taxes are paid, the remaining assets from the trust pass to whomever the first spouse had designated — children, charity, relatives, etc. Nothing passes to a new spouse or the new spouse’s family.

Second, even if you have no concerns about the passage of your property after the second spouse dies, using a trust can prevent inadvertently “wasting” the exemption of the first spouse to die. This may be less of a concern now that spouses are allowed to carry forward the first spouse’s unused exemption, but it is still a worthy consideration. In order to carry forward the first spouse’s unused exemption, you must file an estate tax return on the first spouse’s death, which can be expensive. And when the second spouse dies, the IRS has another “shot” at auditing the estate tax return from the first spouse, as well as the second. Consider using a trust to segregate the assets qualifying for the estate tax exemption on the first spouse’s death. The surviving spouse can be given all income, and can be given use of the principal for support, but whatever he or she does not use can be sheltered from tax. If you don’t use a trust, there may be a significant tax hit when the second spouse dies.

16. A trust can help avoid repeated taxation on the death of a non-spouse beneficiary.

Suppose you leave an inheritance to your child. When that child dies, he leaves the inheritance to your grandchild. Unless qualified for an exemption, the inheritance was subject to estate tax when you died, and again subject to estate tax when your child died. Tax laws allow you to avoid this second tax for inheritances up to $1 million. A trust is the way to do it. The trust can be structured so that the inheritance is left in trust for the benefit of your child until his death, then passes to your grandchildren free of further tax. (This is the GST, or generation skipping transfer tax. Anything above the $1 million exemption will trigger a second tax if it passes to anyone two or more generations removed, such as direct gifts to grandchildren when the parent is still living.)

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