If you'll recall, last time we storied some more about how we blunder our bequests, accidentally, unknowingly and unwillingly disinheriting, or a least diminishing, our loved ones' inheritances. Ready for even more?
How about W and B, a lovely couple, who met their affable neighbor-couple, A and N, at the community New Year's Eve party? At some point, between the line dancing and the door prizes, they got to talking about passing their assets on to their children.
A boasted about his clever idea to avoid death and gift taxes. They had gifted their spectacularly successful real estate investment shares to their children, newly building incomes and assets of their own, in installments over several years' time.
Sorry to pop your bubble, A and N. First, what death tax? Dying incurs no tax. We die tax-free. You must have been talking about estate, gift and inheritance taxes on bequeathing, giving, and inheriting.
Second, about those taxes: Which New Year's? 1965, when the federal lifetime joint marital personal exemption was only $400,000? Welcome to the 21st century, folks -- now it's $10,900,000, unified estate and gift, and rising. And the annual joint marital gifting exclusion is up, to $ 28,000. South Carolina and most other states abolished their estate taxes decades ago and their inheritance taxes (there never was a federal one) even before that. So, unless you're uncommonly rich, you've accomplished nothing, A and N.
Oh, yes you have accomplished something! You've successfully imposed the annual income tax burdens on the investment's earnings on the kids. By gifting instead of bequeathing, you've also deprived them of "Stepped Up Basis", the Internal Revenue Code's gift to them, so when they eventually sell their shares they'll be taxed on the proceeds in excess of the price that you paid for them when you bought them, instead of on only the excess above the appreciated value on your date of death.
What a door prize A and N are!
Know a family in which a member dislikes another member? For this, and many other reasons, testators (that's people creating wills) choose to treat them unequally, or to disinherit them. G's personal representative (that's the 21st-century word meaning "executor") and trustee abhorred G's favoring of son E over daughter J, and pressured E to acquiesce to an equal distribution instead, under threat of denial of his entire inheritance.
How could this happen? Of course, PR/T grossly violated his fiduciary duty "to stand in G's shoes", and would have been dismissed if E or J had petitioned the probate court. But the whole ugly mess might have been prevented if G's documents were worded precisely, if G had chosen and prepared a fiduciary who would assiduously implement his mandates, and if G had supplemented the documents with a letter of instruction or an ethical will explaining his wishes.
Remember "OMG! Mom's getting married again!", about eight column segments ago? We empathized with Mom's daughters, understandably concerned that Mom's emotions of the moment were overwhelming her sound-judgment reasoning ability about opening her self and her wealth to Fiancee's insistence on co-mingling assets. Our behavioral scientists remind us -- yes, you and me, too -- that emotions are around nine times as powerful as analytical reasoning is in our decision-making processes. Affection, ego-gratification, lust, fear, joy, grief, greed, compassion, faith, and so on, are the motivators in selling, buying, advertising, -- and, of course, mating. Doesn't that explain why, over time, so many decisions prove to have been unfortunate?
Will Mom's motivators allow her to consider the realities that co-mingling forfeits control, and exposes assets to the other owner's liabilities, vulnerabilities, and whims? And that partnering grants legal powers over us to our partners?
Of course! The more we can circumvent emotions and emphasize thorough, incisive factual reasoning into our financial and legal plans, the better they'll be for both us and our beneficiaries. But, it's not so easy, right?
Now, as promised: H, the world-class bequest bungler. On military deployment overseas, H met O and married her to enable her to emigrate to the US and achieve citizenship.
Love? Compatibility? A lifetime of patched-together co-existence? Social, religious, and life-style conflicts? Mutual respect? Contrived barriers even preventing physical intimacy? Emotional quirks? None of those, or the many other good-sense criteria, received more than superficial consideration. "We'll work it out as we go!"
No way! For some reason, apparently psychological imbalances, H insulated himself from O.
Orbiting entirely separately from O, H pursued his career successfully, as well as his ardent wish to have a son to carry forth his good name and to receive his growing wealth. He achieved both.
So, already you know a bunch of reasons that H needs a sophistically and professionally-crafted estate plan to accomplish his wishes and to recognize spousal and extra-marital parenting-partner rights. After many years of procrastination ("I'm healthy; I'll get to it in plenty of time") and dumb excuses ("I bowl three nights a week"), a gut pain hospitalized him, resulting in a mysterious outcome that he couldn't grasp, the diagnosis of aggressive, terminal cancer.
H's life insurance agent finally convinced him to do an estate plan. It featured a trust that mandated everything outright to his son, who by then was in high school, and "bulletproofed" his estate against both women's claims and the probate law's dictates.
Problem solved? Read on:
An estate plan is impaired, even crippled, if ownership, beneficiary and pay-on-death and at-death distribution of its assets aren't brought into synch with it. You guessed it; bowling and suffering pre-empted much of that vital follow-up work.
The result? The estate suffered severely from illiquidity, the cost of processing assets, and administering Son's inheritance through the remainder of his teen and school years and defending them against his mother's custodial claims and O's attempts to access it. The years that its flaws added to its administration translated to thousands of dollars in fiduciary and legal fees. Son finally received, but only a small fraction of the original estate.
You've already ID'd some of H's blunders and planning weaknesses:
▪ Emotions overruling reasoned thinking.
▪ Common involuntary psychological defense mechanisms distorting judgment.
▪ Omission of assets management provisions for a minor child.
▪ Allowing a failed marriage to endure without legally documented property arrangements.
▪ Failure to complete the estate plan by executing all the follow-up details.
Would you like to see even more estate-busters? Keep 'em coming!
Contact Gary Newman at email@example.com. Your ideas and comments are always welcome.