How to Reduce Asset Wastage In Your Estate Planning

Estate Planning is much more than tax planning, as I’ve said in past visits. One function of estate planning is to reduce the ‘leakage’ caused by costs and other expenses. There are steps you can take now to reduce the wasting of assets. Here’s my list of the key steps.

Estate Planning Step #1

Write it yourself.

A lawyer should draft the will to be sure all the legal requirements are met. Yet, you should first take a stab at writing the plan in your own words. That gets you thinking about the key issues and gives the attorney something clear to work with. It also can save a lot of time and get to important issues early. Update your document as the planning process continues.

Estate Planning Step #2

Compute estate tax liability.

More people are subject to estate taxes than realize it, despite the reduction in the 2001 tax law. Estimate your taxes early to determine how important tax reduction should be to your plan.

If you are not in one of the 30 states with no death tax, be sure to compute the state inheritance or estate tax. Until the 2001 tax law, state death taxes “piggybacked” onto the federal estate tax. The state tax was a credit against the federal tax. The estate’s total tax was not changed, only the amount that went to the federal government changed. The 2001 law changed the credit so that in most cases the estate separately bears the burden of state levies.

Estate Planning Step #3

Estimate cash flow.

Taxes require cash, and so do other expenses. Debts must be repaid. Lawyer’s fees and other expenses will be incurred. The expenses of running and maintaining the estate’s property must be paid, and the survivors have their regular living expenses to pay.

Too often, a property-rich estate doesn’t have enough ready cash to meet all these expenses. In those cases, valuable assets often are sold quickly and at prices well below their true value. That shrinks the value of the estate.

In addition, many wills bequeath fixed amounts of cash to a number of different individuals. Unfortunately, when added they take up almost all the cash of the estate before any expenses or taxes are paid.

You need to estimate how much cash will be in the estate and where it will go. If the estate won’t have enough cash, reconsider the plan. You can sell some assets now, provide that some people will get property instead of cash, buy life insurance, or give the executor instructions on how to sell property without losing money. Many estate planners advise limiting specific cash bequests to only a few special cases.

Estate Planning Step #4

Designate a power of attorney.

Someone needs to manage an estate if the owner becomes incapable. Too often, an estate declines in value because that person was not designated in advance with a power of attorney. Someone must go to court to get a representative appointed. The court might not appoint the person you would have. Then another delay occurs while the representative’s authority is established with various financial institutions.

Estate Planning Step #5

Establish your domicile.

Cashapped states look more and more to estates to fill their coffers. A state will tax the estate of anyone who was ‘domiciled’ there at the time of death. Domicile is a technical legal term. In most states it means the place in which you intended to live indefinitely.

That creates problems for those who split the year between two or more states and also for people who largely moved to a new state but did not sever all their ties with the original state of domicile. In some cases, two (or more) states each will claim the deceased was domiciled within its borders, and each will assess full taxes on the estate.

Don’t leave your heirs in this position. Decide which state you want to be your domicile and find out how to legally establish that domicile. Then document those steps. States generally look at voter registration, vehicle registration, and driver’s license addresses. They also will look at where you spend over half the year and a host of over factors. (See the checklist on the web site for a detailed list.)

Unfortunately, a few states essentially require you to sever all ties. Some will claim you were domiciled there if you retain a property such as your old residence, even if you rent it to others or rarely visit. If you split time between two or more states, be sure to establish a domicile and document it.

Estate Planning Step #6

Prevent hard feelings and will contests.

Too many people know that others expect something other than what is in the will, but they let those perceptions continue, primarily to avoid conflicts. Unfortunately, that makes things worse. The disappointed person gets angry at everyone else. At best, that person becomes estranged from the rest of the family. A worse possibility is that everyone in the family turns on each other. Sometimes someone takes legal action to overturn the will. Then, the family not only is split apart but the estate ends up going to lawyers.

You don’t need to distribute the will to everyone, and you probably shouldn’t. But you should give everyone involved a good outline of what it says so that there won’t be major surprises. If anyone has reason to be angry, let him or her be angry at you now. Then, you’ll have an opportunity to explain, let the person get used to it, and perhaps heal the rift.

Finally, consider including an in terrorem clause in the will. This clause provides that anyone who unsuccessfully contests the will does not receive any inheritance. For this to work, you must leave each person an amount of property that is meaningful to him or her. That way there is a real penalty for contesting the will.

Estate Planning Step #7

Don’t encourage heirs to fight.

Many wills do this by stating that, after a few specific bequests, the rest of the estate will be divided equally among the heirs. The heirs or the executor are left to decide exactly how the division is to be made. This encourages the heirs to argue over the value of different personal effects and who will get them. It is better to either specifically divide the property or set up a system for dividing it. (Several ideas for dividing property are in the Estate Watch section of the web site Archives.) You also could have the executor decide on the division, if the executor is not a family member. Some people direct the executor to sell everything and divide the cash proceeds.