Why Estate Planning Details are Important

In this post we discuss two key issues that don’t draw much attention but are keys to the success or failure of your wealth transfer plans. They probably are not what you’d expect. Meeting a plan’s goals often does not hinge on the “headline issues” of trusts, family limited partnerships, and the like. The nitty gritty details are more important, such as stating who pays debts and taxes, ensuring the estate has enough cash, and choosing executors and trustees. I regularly remind my readers of the details requiring attention and provide recommendations.

Here are a couple of issues that don’t get much attention but deserve more of your time.

A recent court case shows what happens when details are overlooked.

A man owned a farm, sold it, and incurred capital gains taxes. He died before the year ended and before paying the taxes on the sale or filing his tax return for the year. His oldest son was named executor of the estate. It turned out a younger son was a joint owner with right of survivorship with his father of the farm and inherited the rights to the farm's checking account after it was sold. The checking account held the sale proceeds, minus mortgage repayments.

Because the farm and its checking account were held as joint owners with right of survivorship, the younger son automatically became sole owner of the farm business and its assets when the father died. The older son as executor oversaw the probate estate and had control of those assets. But the farm assets never were part of the probate estate, and the executor never had an interest in or control over the farm assets.

Yet, the estate and its executor are responsible for all taxes of the estate and the deceased. In this case, the executor was liable for the father's final income tax return and the taxes due under it. The IRS assessed the executor for the capital gains taxes from the sale of the farm. The executor went to court to challenge this, saying his brother should pay the taxes since he had the money.

The court said it had no choice but to rule for the IRS. The executor is responsible for paying the taxes on the deceased's final income tax return. The brother who served as executor could sue the other brother for the money, but he first had to pay the IRS the money.

Here we have a division within a family and an estate without cash to pay its bills, because the father either didn’t seek advice or received bad advice. The father did not pay estimated taxes that included capital gains taxes on the sale of the farm, and he did not ensure the estate had money to pay the taxes and other bills. He might not have been aware the farm would be included in the taxable estate though the executor had no rights to it.

Several key details were neglected that should be part of every estate plan. Estimate the cash flow for the estate. Be sure there are enough liquid assets to pay its obligations. The will should state who is responsible for paying taxes on the assets. Otherwise, one group of beneficiaries could pay taxes on assets received by another group of beneficiaries.

Otherwise, your estate could end up fighting with the IRS, and your family members fighting with each other. (U.S. v. Guyton, No. 3:07-cv-00273, D.C. Fla, May 7, 2009)


Giving Gifts — and a Lecture


Grandparents are filling only half their roles these days. They are providing financial help to their grandchildren. In fact, they increased their financial aid as the economy worsened. Unfortunately, they are providing financial aid without much advice.

About 63% of grandparents say they provided some form of financial assistance to their grandchildren over the last five years, according to a survey for the MetLife Mature Market Institute, an affiliated organization of MetLife Inc., the insurance company. The assistance over the five years averaged $8,661. The survey was of adults over age 45 who have grandchildren under age 25. About 40% of the gifts went toward "general financial support," while 26% was for educational expenses and 21% was to help grandchildren through major life events. Because of the declining economy, about 26% of grandparents said they increased support for grandchildren.

Despite the generosity with wealth, most grandparents are not generous with their advice and wisdom. About 68% of the grandparents said they provided no financial guidance to their grandchildren. Lower-income grandparents are more likely to give advice, with 83% of those earning $35,000 or less saying they warn their grandchildren to avoid large debts and to maintain financial security. Only 65% of those with incomes between $50,000 and $74,999 talked about finances with their grandchildren.

It is admirable that so many grandparents are willing to give now to help their grandchildren receive educations and establish a firm financial foundation. But it is a mistake to give money or other wealth without some guidance, or ensuring the grandchildren receive good advice elsewhere. Financial literacy is taught in very few schools. Most high school graduates lack basic financial skills such as balancing a checkbook and understanding a mortgage or other debt instrument. If the parents try to provide lessons, the grandchildren are likely to ignore them.

Grandparents are more likely to be listened to, and they can provide a lot of hard-earned wisdom. Grandparents can teach with authority principles such as avoiding debt, starting to save and invest early in life, living within one's income, working hard, and saving both for a rainy day and for specific goals.

Debt management is probably the lesson most grandchildren could benefit from. Their parents, like most of their generation, probably never learned the lessons of how to use credit wisely. Also, the credit picture is much more complicated than it used to be, with many different kinds of debt available but objective information about the credit hard to find. 

Grandparents should not give only wealth. They should give lectures and advice. Even a simple request that the grandchild read a basic book, such as The Richest Man in Babylon by George Clason, as a condition of receiving a gift can go a long way. The book is both entertaining and enlightening for most people, regardless of age. But the best advice would be direct from you.

Articles with helpful discussions on my members web site discuss compound returns, mutual funds for small investors, and financial lessons youngsters need to know. Share this and other advice with your grandchildren so they will remember it when key decisions have to be made. It also will make your financial gifts more valuable, making it more likely your wealth is well-used.


Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.

Posted 10-16-2009 10:24 AM by Bob Carlson