Impediments to a well-planned estate, Pt. 2

By Connie Fontaine

The American College


Overlooked provisions

Although it sounds simplistic, one reason why some estate distributions get contested is that certain important provisions may be overlooked or just plain forgotten in the estate plan, will or trust. These provisions include, for instance:
  • Guardianship arrangements for minor children, elder family members or someone who is disabled

  • Simultaneous death provisions

  • Provisions for the residue of the estate, a tax apportionment clause

  • Terms concerning contingent beneficiaries
The issue of guardians should be addressed by an estate owner with the minor children or special-needs family members affected. Frequently, a guardian is named for the minor's personal care while another or others supervise and invest the minor's property. Usually guardians are named in the wills of parents and individuals having the responsibility of other family members. Guardianship arrangements should be discussed with potential guardians and consented to prior to naming them in the will.

The possibility of simultaneous deaths should also be considered in an estate plan. Individuals should devise backup asset arrangements in case spouses and/or beneficiaries die in a common disaster.

A residuary clause is an important will provision. Even though an estate owner believes all property is provided for and is arranged to pass according to his or her wishes, a residuary clause provides for the transfer of unexpected, unknown or forgotten assets, as well as assets acquired in the future, after the will is executed. The residuary estate terms typically delineate how the decedent wants the bulk of his or her estate to pass or may cover the distribution terms of property not otherwise mentioned in the will or the decedent's other documents, such as trusts.

Tax apportionment issues are sometimes neglected in an estate plan. Planners should make certain that clients carefully consider tax payment options and the sources from which tax payments are to be made. In other words, a determination should be made concerning which assets and beneficiaries bear the burden of death taxes.

For example, if an individual directs under his or her will that all estate taxes are to be paid from the residuary estate, he or she should recognize that the residuary beneficiaries may not receive what the testator originally intended. Generally, most state statutes direct the payment of taxes to be equitably apportioned. Equitable apportionment means that each bequest bears the tax it generates. For instance, if a beneficiary receives 15 percent of the taxable estate, the beneficiary may be responsible for 15 percent of the death taxes. State law, however, yields to a specific direction in a will or trust doc¬ument regarding the apportionment of taxes. A carefully drafted tax appor¬tionment clause is tailored to meet the estate owner's intentions.

An estate owner should have provisions in place for contingent beneficiaries in case the primary beneficiaries are no longer living at the time of the estate owner's death, incapacity or in case the primary beneficiaries disclaim assets passing to them.

Improper tax planning

Another cause of a poorly planned estate involves improper tax planning. The potential estate and gift tax relief that federal estate and gift tax laws provide may make many individuals believe they no longer need a carefully planned estate. The truth is, however, that only by utilizing tax laws to maximum advantage, through professional advice, can property owners carry out their post-death intentions and prevent the unnecessary erosion of their estates due to taxes. For example, the unlimited marital deduction, which allows an individual to pass an entire estate free of federal gift and estate taxes to a spouse, appears to offer relief from taxation. In reality, an "over-use" of the unlimited marital deduction may be enormously expensive at the death of the second spouse. Unnecessary costs can result since property may pass unprotected by the marital deduction at the surviving spouse's death (assuming the surviving spouse does not remarry). Thus, the taxes on two combined estates may be greater than if the unlimited marital deduction had not been overqualified in the estate of the first spouse to die. In short, the need for estate planning has never depended, and does not now depend, solely on whether there is a federal estate tax payable in a particular estate.

While there are important tax planning options that can be utilized in estate planning, tax relief should not be the primary objective of estate planning. The best estate plan is one that accurately reflects the client's wishes, needs and objectives in a manner that reduces the potential tax liability to the lowest level consistent with the client's aims. This means that various tax options must be balanced against rigidity, loss of control over assets, tax liability and so on; they must also be explained to clients so they can understand both the limitations and the benefits of these options and choose those that reflect their desires and intentions. An estate plan that reduces the estate tax liability to zero is a poor plan if the cost is the perversion of the client's wishes.

Additional impediments to a well-planned estate will appear in the next estate planning column.

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