Top 5 Estate Planning Mistakes

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I recently read a report that suggested that only about 20 percent of the population has a formal estate plan. After reviewing the points below, please take a minute to consider whether it's time for you to create or update your estate plan.

Here are five estate planning mistakes that people make that can be avoided.

1. Dying without a will or trust - If you die without a will or trust, the state in which you reside and the IRS will simply make one for you.  Of course, they have no interest in avoiding or reducing estate taxes, minimizing estate administration costs or protecting your family and legacy. The distribution of your assets will just be turned over to the Probate Court. The probate process is needlessly time consuming, frustrating and expensive. It is also open to the public, meaning creditors, predators or anyone else will have complete access to all information about your estate. For the vast majority of people, the benefits far outweigh any initial costs.

2. Having an "I love you" will – An”I love you” will is one in which all the decedent's assets have been left to the spouse. On paper, it might seem to be a caring, thoughtful gesture, but the reality is quite different, because such a will simply passes the complex issues and problems associated with transferring and protecting wealth onto the spouse or other loved ones.  It creates more problems than it solves, particularly for future generations.

3. Giving property outright to your children - Here is another solution that might sound good at first, but ignores several important realities. For instance, what if the child in question is too immature to handle the responsibility of a large sum of money on his or her own? What if the child suffers a severe financial setback that puts the inheritance at risk to creditors?  What if the child marries a fortune-hunter, is addicted to drugs or alcohol, gets divorced or remarried? You may need to protect your children and heirs from their own poor decisions.  These assets are also gifted assets which carry potentially large IRS penalties if not handled properly.

4. Owning property jointly - There are two types of joint ownership, Joint Tenancy with Right of Survivorship (JTWROS) and Tenants in Common (TIC).  Problems with JTWROS include postponement of probate only until last tenancy, the loss of the double step-up in tax basis creating more to pay in capital gains taxes, and outright distribution.  With TIC, you also lose the double step-up in tax basis where it's available, and your property is subject to the estate plan of each tenant as well as probate for each tenant.

5. Not having a trust - A trust is the single most effective estate planning tool available. There are many different types of trusts.  Among the better known and more commonly used are revocable trusts, irrevocable trusts and testamentary trusts. A Trust protects your privacy, and will help you leave what you want, to whom you want, in the way you want at the lowest possible cost overall.  The additional advantage is that you avoid Probate altogether, which means that the settlement of the living trust will be done swiftly, without court or attorney's involvement, in contrast to having only an "I love you" Will.

Planning Matters: Even estates of rich and famous crash and burn

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If you are like most people, you have done no estate planning. If that is the case, you are in good (bad) company.

You would think lawyers -- trained legal professionals -- would have completed their own estate plan. Alas, lawyers are no different than anybody else and often fail to plan. One of the most famous and respected lawyers of all time, Abraham Lincoln, died without a will. I also have known a number of attorneys who died without even having the simplest of wills.

More often problems arise when lawyers, who are not estate planning specialists, attempt to do their own estate plans. These lawyers often believe they are qualified to prepare estate plans for themselves and their clients. I regularly review wills and trusts, powers of attorney and other estate planning documents that are drafted by lawyers who are not estate planning specialists.

These plans usually have unintended results.

There are health care powers of attorney that do not to have living will provisions, mental health care powers, Health Insurance Portability and Accountability Act access and releases or signed patient advocate acceptances.

It is not uncommon for trusts to have faulty tax provisions. I have seen wills, which are death instruments; contain health care powers, which can only be used during a lifetime.

I often see financial powers of attorney that do not allow for the gifting of assets to the family instead of spending it all down on nursing home care. Unfortunately, many times I only see the estate planning documents after the maker's incapacity or death when there is little that can be done to remedy the situation.

What do Pablo Picasso, Howard Hughes and Sonny Bono all have in common? None of them had a will.

Often the rich and famous do no planning or poor planning. However, with estates whose amounts end in lots of zeros, the unintended consequences have much more of a financial impact.

The rich and famous make the same mistakes as everybody else, only worse. The failure to plan or failure to plan properly has resulted in many their estates to be eaten up administration expenses, taxes and litigation costs.

One of the more well-known estates that had unintended results is the estate of Elvis Presley, the King of Rock 'n' Roll. Considering his stature in the entertainment world, Elvis left a relatively modest $10.2 million estate.

However, the settlement costs of his estate totaled nearly $7.4 million leaving only about $2.8 million to his heirs. About 73% of his estate was eaten up by the settlement costs.

The super-rich also are not immune from doing poor planning. Conrad Hilton of the Hilton Hotel chain left an estate of nearly $200 million. More than half of that was consumed in settlement costs.

Author and filmmaker Michael Crichton, best known as the author of "Jurassic Park" and creator of the TV series "ER," died unexpectedly when his wife was pregnant. He had not provided for his unborn child in his estate plan. This resulted in substantial legal fees for his widow in her quest to obtain a share of his estate for their child.

Andy Warhol on the other hand, did proper estate planning. This resulted in only a fraction of his estate being eaten up in settlement costs. Although his estate settlement costs were nearly as much as Elvis' at a reported $6.9 million, because his estate was nearly $300 million, only 2.3% of his estate was consumed by the settlement costs.

Because it looks like many celebrities' estate settlement costs have left their legacy as "not so rich and famous," don't take your cue from them.

Do proper planning with a legal specialist in estate planning. You wouldn't go to an oncologist to treat your diabetes any more than you should have a divorce or criminal lawyer prepare your estate plan.

The estate planning professional who prepares your estate plan should have a working knowledge of not only estate planning, but also federal and state tax laws and elder law. Without a working knowledge of all three of these areas, your estate plan could be missing some critical elements. So go forth and do proper estate planning today.

Matthew M. Wallace

Overview of New Jersey Estate Tax Laws

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Understanding How New Jersey Estate Taxes Affect an Estate
By Julie Garber, Guide

NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

In addition to a state inheritance tax, New Jersey also imposes a separate state estate tax which has been decoupled from the federal estate tax laws. Here is a summary of the current New Jersey estate tax laws.

When is a New Jersey Estate Tax Return Required to be Filed?

A New Jersey estate tax return, Form IT-Estate, must be filed if the decedent's gross estate plus adjusted taxable gifts exceeds $675,000. How is the New Jersey Estate Tax Calculated?

The New Jersey estate tax is either the maximum credit for state inheritance, estate, succession or legacy taxes allowable under the provisions of the Internal Revenue Code in effect on December 31, 2001 (this is called the "Form 706 Method"), or an amount determined pursuant to the Simplified Tax System prescribed by the Director, Division of Taxation (this is called the "Simplified Form Method").

The Form 706 Method must be used if the taxpayer is required to file a federal estate tax return, IRS Form 706.

If the taxpayer isn't required to file IRS Form 706, then, in addition to the Form 706 Method, the Simplified Form Method may be used provided that it produces a tax liability similar to the Form 706 Method.

When is the New Jersey Estate Tax Return and Any Payment Required Due?

Form IT-Estate must be filed and any tax due must be paid within nine months of the decedent's death, or nine months plus 30 days if the Form 706 Method is used.

An extension of time to file Form IT-Estate may be requested, however, even if an extension is granted it won't delay the time for payment of any tax due.

The Form 706 Method requires that Form IT-Estate be prepared and filed along with a 2001 IRS Form 706. This is in addition to IRS Form 706 for the year of the decedent's death if one is required to be filed. Where is the New Jersey Estate Tax Return Filed?

Mail the New Jersey estate tax return, Form IT-Estate, and all other required forms to:

NJ Inheritance Tax and Estate Tax
P.O. Box 249
Trenton, New Jersey 08695-0249

What is the New Jersey Estate Tax Rate?

The tax rate is a progressive rate that maxes out at 16% for the amount above $10,040,000.

Are Transfers to a Surviving Spouse Taxable?

Outright transfers to a surviving spouse are not taxable.

For married couples who have used AB Trust planning to reduce their federal estate tax bill, a New Jersey estate tax may be due on the B Trust after the first spouse's death if there is a gap between the New Jersey estate tax exemption and the federal estate tax exemption at the time the federal estate tax comes back into effect. A married decedent's estate is authorized to make an election on Form IT-Estate to treat property as marital deduction qualified terminable interest property ("QTIP") for New Jersey purposes, but married New Jersey couples cannot defer payment of both New Jersey estate taxes and federal estate taxes until after the death of the surviving spouse using an ABC Trust scheme.

Are Transfers to a Surviving Domestic Partner Taxable?

Federal estate tax laws do not have a provision providing a deduction for property passing to a domestic partner. However, if a New Jersey decedent was a partner in a civil union and died on or after February 19, 2007, and was survived by his or her partner, then a marital deduction equal to that permitted to a surviving spouse under the provisions of the Internal Revenue Code in effect on December 31, 2001, is permitted for New Jersey estate tax purposes.

Does New Jersey Impose a Lien on the Deceased Person's Property?

For New Jersey decedents dying after December 31, 2001, the New Jersey estate tax remains a lien on all property of the decedent as of the date of death until paid. No property may be transferred without the written consent of the Director of the Division of Taxation.

Where Can I Find Additional Information About New Jersey Estate Taxes?

For more information about New Jersey estate taxes, refer to New Jersey Inheritance and Estate Tax General Information on the New Jersey Division of Taxation website.

What We Inherit From Parents and Attitudes It Creates

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"Happy families are all alike; every unhappy family is unhappy in its own way."  -Tolstoy, Anna Karenina

Have you read Jonathan Franzen's new novel, "Freedom"? It has the dubious distinction of being one of Oprah's Book Club selections and receiving a devastating review in The New Republic.

There being no such thing as bad publicity, the breadth of comment and reaction in many venues at many levels of criticism and approbation has it firmly ensconced on the New York Times best-seller list. The main plot, the train wreck of a marriage between Patty and Walter Berglund and all the collateral damage caused to other family members and friends, I will leave to your reading.

The Berglunds are liberals during the George W. Bush administration and raise a family, have affairs, destroy relationships and generally wreak havoc. As Ruth Franklin, writing for The New Republic says, Freedom is a "The Way We Live Now" novel in which, as in Trollope's novel of that title, the perfidy and moral vacuity of the age are laid bare. "Mistakes were made."

Near the end of the book, Patty Berglund's mother, Joyce, is trying to make an estate plan. She is a widow and owner of a family estate her husband inherited from his father.

Spoiler Alert: The story that follows about Patty's family is near the end of the book. You may want to wait and read the book. On the other hand, in truth, this particular vignette has precious little to do with the rest of the book; and you won't really be spoiling anything.

What is Joyce's problem? Her children and other family members are pressuring her. Her son Edgar, his wife and numerous children live in the estate, which has fallen into grave disrepair. They live there rent free, of course. This son has produced Joyce's only grandchildren. He threatens that he, his wife and the precious grandchildren will relocate to a settlement on the West Bank in Israel if he doesn't get his way.

Patty's two sisters, Abigail and Veronica, who were the favorites while Patty was growing up, have failed to become self-supporting and count themselves entitled to mother Joyce's support.

Patty hasn't been part of the family for years — since the first Thanksgiving after she married Walter. Now she is back in the picture trying to broker a deal. But of course, she and her children aren't in line for part of the inheritance — she has been the family black sheep for too long.

Also in the picture are Joyce's two brothers-in-law. Her husband received the family estate from his parents. The other two brothers were left other assets in the will but, regrettably, these declined in value and were worthless when they were inherited. Joyce feels they may have a moral claim on part of the family estate.

What is the inheritance here? False claims of entitlement, emotional blackmail, long-held grudges, greed, and jealousy. Who is the property owner? That would be Joyce. Does anyone care, does anyone even ask, what she wants? Joyce is paralyzed by the conflicting demands, so does nothing? This is always making a decision in itself. By doing nothing she is choosing to let New York's intestacy statute apply, dividing the estate equally among the four children. And who is to say that is not the best thing?

From generation to generation: what is the legacy for Patty and Walter's two children? That selfishness and cruelty continue down the family tree? That people are really "selfish and shortsighted and egotistical and needy." Will Walter make sure that his children get the lake cottage he inherited from his mother? Will one of the children demand that they get all of it — cutting off a sibling in juvenile rivalry?

And you, what will you do with your estate? Are you avoiding making decisions because you know the children will be "unhappy?" Are you planning your dispositions secretly, so the bomb will go off after the funeral when the will is read?

By Patti S. Spencer, Staff Writer

Read This Column Before You Die

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The fear of death follows from the fear of life. A man who lives fully is prepared to die at any time. - Mark Twain

It can be both comforting and horrifying to think that our time on earth is a nano-blink of an eye, a sliver of time that passes slowly when tax forms are being prepared and quickly when the sun is shining.

Death is something we all try not to think about, yet it is our ultimate goal, the ending of every book, if life were an autobiography. We mostly shrug it off because, after all, we can’t avoid it.

But we can make the most of the inevitable. How? By planning ahead, not only for the sake of our families, but for ourselves. We’ve written before about the importance of making financial goals, but life goals are also essential. And, as with financial goals, you can’t meet them if you don’t have them.

The ultimate plan

Whether you’re getting on in age, have a terminal illness or are young and healthy, no one knows what will happen tomorrow, so prepare today. But what should your ultimate plan entail?

Make a "bucket list." The co-author of the book, "100 Things to Do Before You Die," died in an accident when he was 47. According to his writing partner, he had completed about half of his "to do" list when he died. Because he had a list and was determined to achieve his goals, he did many things he never would have done otherwise.

However, his co-author also noted that he traveled alone, so he could move through his list quicker. Sadly, the author missed an important point - it really isn’t about the list. Your list should be a guide to living life to the fullest. If you’re going through a list just to cross something off, why bother?

Whether you’re planning to go skydiving and want to visit the seven wonders of the world, like Jack Nicholson and Morgan Freeman did in "The Bucket List," or you have more modest goals, like learning a foreign language or cooking a gourmet meal, keep in mind that it’s important to savor the moment - and shouldn’t you be savoring the moment with a loved one or friend?

When you make out your bucket list, be certain that everything on it is something you can accomplish. Although you never know until you try, dating Angelina Jolie or winning an Olympic gold medal are about as realistic for most of us as winning the lottery. While it is important to believe in yourself, you need to know your limitations.

It’s also important to give your list some thought. Many of us don’t really know what we want. Sitting and planning out your life - and beyond - is not something you should do one day during your lunch break. Take your time and really think about what you want to do. Then develop a plan for achieving everything on your list.

Update your financial goals. Ideally, you could plan for retirement first and then plan for the next phase when you’re retired. But, since no one knows when the next phase will begin, you need to plan for it now.

What do you want to happen after you’re gone? Is there a charity you would like to help? Do you want to fund your grandchildren’s college education? Think beyond your retirement and write out your goals.

Plan your estate

Estate planning is not just for the very wealthy. It’s true that current law allows an exemption of assets worth up to $5 million from federal estate taxes, but in Massachusetts any estate with a value greater than $1 million is subject to estate taxes.

If you reside in Massachusetts and your estate exceeds $1 million in value, including the value of your home, your investment portfolio, your life insurance benefits and other assets, it will be subject to state taxation at a rate of up to 16 percent.

However, because Massachusetts has no gift tax, gifts can be made during your lifetime to reduce your taxable estate. It’s been said that death and taxes are the only certainties, but with careful planning, sometimes one of the two can be avoided.

Of course, there’s more to estate planning that reducing taxes. It’s also important to have a will, which determines how your property will be divided after your death. Without this essential legal document, your property may not be divided according to your intentions. Most likely, it will also become tied up in Probate Court and it may take years before your survivors have access to your assets.

Make certain you seek the assistance of an attorney with experience making out wills. Having a will that is not legally valid can be worse than having no will at all because it may be disputed. Also, be certain to update your will periodically.

Keep in mind that retirement accounts and life insurance policies are not covered by your will, as you designate beneficiaries when you sign a contract for these assets. Make certain that you have designated individuals you truly want to be your beneficiaries and you have not unintentionally excluded anyone, such as a child born after you initially designated your beneficiaries. Plan your legacy assets. Most people consider their financial assets in planning their estate. You also have accumulated many other assets during your lifetime. Some of the best assets are the memories of special events or family gatherings. Many of these are recorded photographically and able to be passed on to heirs.

However, the asset value of the wisdom garnered, the valuable experiences received, the life lessons learned, the appreciation of others that have helped you along the way are all assets available for sharing.

Similar to a will that administers your financial assets, you can prepare a separate letter, memoranda or formal ethical will to pass on to your family and others.

Get organized

Your death will likely be difficult on your family. You can ease the burden by planning your funeral and letting your wishes be known. Do you have a cemetery plot? Have you picked out a casket? Is there a charity to which you would like contributions sent?

If you take care of every detail, your children and your spouse won’t have to. Clean out your attic and your closet and get rid of unwanted items. Give away anything you won’t use. Go through your photos and organize them. Determine if you need to change their medium to an electronic format.

People often tell me that they do not want to be a burden to their children. It can be painful for your family to have to deal with these issues; dealing with them yourself will make it easier on them.

Also, be certain to choose an executor for your will. Talk to your executor and make certain that he or she has a true understanding of your wishes and will carry them out to the last detail. Many times writing a letter of instruction to your executor or trustee is helpful for those matters not easily handled by the formal document.

You may not care what happens after you die, but keep in mind that your decisions today will have an eternal impact and could affect how you are remembered.

Seek balance

Death and taxes may be inevitable, but the more time you spend preparing for either, the better the outcome is likely to be. If you were to die tomorrow, that would be tragic. The tragedy would be compounded, though, if your family had to deal with matters without knowing your wishes. Regardless, in the process of planning for the future, don’t forget to live for today. Carrying out your bucket list is more important - and more fun - than preparing it.

Ask yourself what you are doing today that you would change. Is your career fulfilling? Do you have a secret ambition, like writing a book or taking a special trip? Act on your passions and interests today, before it is too late. Plan for the future, but enjoy life today. Carpe diem!

Darrell J. Canby