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Patricia Annino
Patricia Annino
Four Common Estate Planning Mistakes
And how to avoid them.

November 17, 2011
by Patricia Annino, JD, LLM

Estate planning is a tricky topic to discuss because it involves facing death. People who have worked hard their entire lives to protect their families and their wealth often put off the discussion until “one day,” leaving that final step either undone or in a mess. Despite their good intentions it is easy to make mistakes even when they do create an estate plan.

Here are four common estate planning mistakes:

1. Outdated or Unsigned Estate Planning Documents

Countless times people have walked into my office with documents they thought they had signed but actually never did. Or they have walked into my office with documents that are 10, 20, 30 or more years old. Typical reasons for their behavior include: inability to face death; denial about the possibility of their own demise; the Scarlett O’Hara defense — “I will worry about it tomorrow”; lack of desire to pay an attorney to review and/or revise documents; inability to make a decision on a fiduciary choice such as who will serve as guardian of minor children, executor or trustee.

How do we motivate that client to walk in sooner? The CPA is the gatekeeper of all financial information and, for the most part, is meeting with or speaking to the client at least once a year. It is wise when discussing tax returns to lead the discussion to financial planning and then to estate planning. A coordinated financial approach serves the client and the adviser well.

2. Lack of Coordination between the Estate Planning Documents, Titling of Assets and Apportionment of Estate Taxes

Twenty-five years ago, most clients owned the bulk of their assets in individual names. At death, those assets passed through the terms of the will to their named beneficiaries. Virtually all wills contained a standard clause that mandated that any debts, administration expenses and estate taxes be paid from the residue of the estate. The residue of the estate is the common pool of assets that are not specifically bequeathed and pass as a basket to the beneficiaries.

Alas, the times have changed. For many clients a significant amount of the net worth is not held in individual names and do not pass under the terms of the will but rather by contract to the heirs. Assets that pass by contract — and therefore by designation of beneficiary — include life insurance, annuities and retirement planning assets. If the client names certain individuals as beneficiaries of those assets, leaves a will that specifies that the residue of the estate (anything that is titled in their name at death and not specifically bequeathed to others) will pass to someone else; and they will direct that the estate taxes are to be paid from the residue, then the inadvertent consequence of this plan may be to in effect disinherit the residuary beneficiary since that is the source of the funds that must be used to pay the debts, administration expenses and estate taxes.

Instead, the client could have apportioned the expenses and/or estate taxes among the recipients of the assets so that whenever an asset is designated to a beneficiary, that asset bears its proportionate share of the taxes. Understanding the consequences of how apportionment vs. residue plays out becomes even more complicated when the client has made taxable gifts during their lifetime. When that happens, the valuation of that gift is taken into account in determining the taxable estate, but the asset could be long gone. When significant gifts have been made, it is particularly important to ascertain the donor’s intent as to who should bear the burden of the taxes and to make sure that the language of the estate planning documents backs up that intent.

3. Lack of Understanding That a Transfer of $1 Is a Gift

It never ceases to amaze me how many clients believe that “selling” real estate to a child for consideration of $1 is a sale and not a gift. The lack of understanding that the transfer was a taxable gift can wreak havoc on the plan and on the composition of the taxable estate.

We now live in a transparent world. It is very easy for any estate-tax examiner to access the Registry of Deeds website and find out about the history of land transfers. Today, it is routine for examiners to do so. Recently, I was involved in an audit in which the examiner, through a national database, delivered a very thick package of all of the parcels of real estate the client had owned during his lifetime throughout the country to our office. The package included deeds to him and deeds from him. The examiner sent a summary letter asking for the details of each transfer — what was the fair market value, what was the consideration for the transfer, whether the parties were related and what happened to the proceeds. The lack of comprehension — that a transfer for less than consideration is a gift or at least a gift sale and that it has consequences to the estate tax — also has ramifications to the preparer of the return. It is therefore prudent when preparing gift/estate tax returns to make a thorough inquiry about each piece of real estate the client purchased, sold or transferred.

4. Life Is a Movie, Not a Snapshot

Planning is a process that should never end. It should begin when there are assets and/or young children and should evolve and become more complicated as life progresses. There are different issues that a client faces as they pass through the stages of life — single, married, divorced, widowed or remarried. In each of these phases, the focus should be on what is meaningful in that phase. For this to work, it is important that the client remain engaged in a discussion with the advisers about planning and that the planning not be so complicated that it stuns the client into paralysis.

It should also not be so complex or expensive that the client finishes this phase and is reluctant to move to the next one.

Conclusion

For most of us, the crystal ball of planning does not go more than five years. Families change, health changes, tax law changes and the law changes. The goal is to get the client on the path and to keep him or her there through all of the phases of life. Helping the client through each phase and encouraging the planning as part of the ongoing relationship between the CPA and the client is a very valuable service to the client and their family.

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Patricia M. Annino, JD, LLM, is chair of the Estate Planning Practice Group at Prince Lobel Tye LLP. She is a Fellow of the American College of Trust and Estates Counsel.

* The AICPA’s PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. PFP Section members, including PFS credential holders will benefit from additional resources on this topic in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter, apply to become a PFS Credential holder.