How to overcome your estate planning blues: "it takes time, costs money, raises difficult family issues, and revolves around something most of us do not want to think about—death."

David Yeske

IT'S A HEART-WRENCHING STORY of the disastrous consequences of failing to do even basic estate planning: The client of a financial advisor had a $2,500,000 estate and two children from his first marriage. However, he owned everything in joint tenancy with his second wife and had named her as beneficiary of his financial accounts, despite repeated warnings that, should anything happen to him, everything would go to his second wife--and nothing to his kids! When he died unexpectedly at age 48--his estate plan still unrevised--his first wife was forced to sue just to get college tuition money for their two offspring.

Although most individuals don't have multimillion-dollar estates, the same principles apply whether an estate fills a modest apartment or a 50-room mansion. When you die, you want your worldly possessions to go to those people and charities you love, and that takes careful planning. If you fail to do so, or plan incorrectly, the courts may step in to determine the distribution of your property in accordance with that state's laws--a distribution that may not fit your or your heirs' wishes.

People procrastinate doing estate planning for many reasons, but one of the most common is that it deals so intimately with death. Who wants to draft a will and perhaps create trusts and implement other strategies when most of those strategies won't go into effect until the person no longer is around? Others simply delay because death feels a long way off and there's no urgency. One financial planner discovered that a new client had no will. He was open to drafting one, but didn't want to bother until after he and his wife returned from a three-week trip to Russia. The planner urged him to complete it before they left. He refused. The man died the day they returned from overseas, and probate took two years.

Another reason people put off estate planning is that they don't recognize its importance. Families often assume it is merely about saving estate taxes, and most figure their estate is either too small to be taxed or that recent tax laws have eliminated such fees. The fact is, estate taxes remain, and though Congress raised the amount of estate value that is exempt, many individuals are more vulnerable to these expenses than they realize.

Even if your estate is not large enough to be subject to taxation, estate planning provides other benefits. They include minimizing or avoiding the cost and delay of probate; providing for the care of dependent or disabled children; controlling assets before and after death; reducing the emotional and financial burden on heirs; limiting feuding among heirs over the estate; maximizing the amount available for charitable contributions; and ensuring the continuation of a family business.

Estate planning oftentimes dredges up prickly family conflicts. Parents may disagree about who should serve as guardians of their children if both parents die, or which personal possessions and financial assets are to be passed on to which heirs. Not surprisingly, second marriages are a major source of inheritance conflicts. Wealthy parents often worry about corrupting their children by simply passing on their wealth at death. They want their kids to earn their own way in life, or they may have one or more offspring they don't trust with money--perhaps an alcoholic, drug addict, or spendthrift. Estate planning sometimes involves divulging what your estate really is worth, and talking about money is taboo in many families.

Couples avoid the entire process because they hate working with attorneys, or they do not wish to spend the time, or they simply refuse to pay for it--an attitude that can be very costly in the long run. One couple had $15,000,000 in real estate they wanted to pass on to their children but they faced a potentially large estate tax bill. They refused to either borrow against the property or sell some of it in order to buy sufficient life insurance to cover the expected taxes. When the surviving spouse died, the real estate market was in a downturn mad the estate was forced to sell most of the property at fire-sale prices just to pay the taxes.

To overcome excuses for not planning your estate, ask yourself a few questions: Does it make a difference where my worldly possessions go after I die? Do I want to leave my spouse or other heirs financially secure? Do I care how much, if any, the Federal and, possibly state government receives from my estate? How will my heirs feel about me if I die without having drafted a will? Do I want to influence or control how nay heirs handle or view money? Do I want to share some of my assets with those I love while I'm still alive?

Perhaps the biggest motivation is to recognize and accept the inevitability of the passing on of your estate. Smart financial planners and attorneys are blunt about it: Everyone dies. It's only a matter of when and whether you leave behind a well-constructed plan or a costly mess. Moreover, planners and lawyers often bring an objective perspective to any emotional roadblocks you may have, as well as addressing the often intimidating financial and legal issues.

While there are certain key documents you will want to start working on as soon as possible, a major initial step should be to determine the size and shape of your inheritance. This takes the form of an inventory of your assets and liabilities. Assets include the value of your retirement accounts, home and other real estate, stocks, bonds, debts owed to you, the surrender value of annuities, the cash value of your life insurance, and the value of any businesses you may own. Remember to add the value of your personal property such as furnishings, automobiles, recreational vehicles, collectibles, jewelry, art, and antiques. On the liability side, include the mortgage on your home, automobile and student loans, credit-card debt, unpaid taxes, insurance premiums, charitable pledges, and outstanding bills. Subtract liabilities from assets--that figure is your net worth.

An estate inventory provides several benefits. First, it helps assess whether an estate may be subject to taxes. Second, it provides a benchmark to return to in future years to see if the value of an estate is growing. Third, it starts you thinking about how and to whom you eventually want to disburse your estate--do you want your favorite golf clubs to go to your nephew?--and whether a particular heir will be capable of managing inherited assets.

The size of your estate aside, you must have four key documents: a will, a durable power of attorney, a living will, and a medical power of attorney.

A will is a legal document that details where you want many of your estate's assets allocated after debts and taxes are paid. Without a will, state law will dictate what happens to the estate's property. A will also names who will oversee the execution of the will, and it may name who will care for your minor children should you die prematurely. Be advised that a will does not control the disbursement of all of your estate's assets, even if the language claims to. For example, if your will lists your wife to receive your entire estate, but your ex-wife still is listed as the primary beneficiary of your life insurance policy and retirement account, then your ex-wife likely would end up with those benefits.

Also, choose your executor wisely. The person will oversee not only financial matters, such as filing a final tax return and distributing assets to your designated heirs, but may need to deal with raw family emotions and conflicts. You may want to include with your will a letter of instruction. This is not a legal document, but it provides those tending to your estate valuable instructions on how you want things handled. For example, the letter might describe funeral arrangements, financial professionals to contact, and the location of important papers and financial accounts.

A durable power of attorney designates a representative, such as your spouse or adult child, to perform certain actions for you should you become ill, incapacitated, or otherwise unable to manage your affairs. Without a power of attorney, the court will need to approve needed financial transactions. A power of attorney can be as restrictive (bill paying only, for example) or as comprehensive (able to sell real estate, file tax returns) as you wish to make it.

Living wills

A living will is an individual's written declaration of what life-sustaining medical treatments he or she will allow or not allow in the event he or she becomes incapacitated. Though not always honored by medical institutions, a medical durable power of attorney authorizes a third party, such as a spouse or adult child, to make medical decisions on your behalf, ideally to carry out what you've expressed in your living will.

While you can save money by creating some of these legal documents on your own with software or standardized forms, most adults should have a competent estate planning attorney draft the documents. Otherwise, you risk legal complications, challenges, or overlooked details that could derail your intentions and create a headache for your heirs.

Whether you will need estate planning tools in addition to these four basic documents will depend largely on the size, complexity, and circumstances of your estate. For instance, as the story about the sudden death of the 48-year-old remarried father illustrates, a second marriage may require the careful renaming of beneficiaries on life insurance policies and retirement accounts, the retitling of assets, mad perhaps the use of trusts. Some of these tools are relatively inexpensive and easy to apply; others are more expensive and involved.

Research the titling of your assets. Most couples own property jointly, usually with rights of survivorship. Upon the death of the first spouse, the jointly owned properly passes directly to the surviving spouse. This is easy and avoids probate, but it's not always the best option. You might want property separately owned so that it passes to the children from a previous marriage, protects the surviving spouse from some of the other spouse's debts, or saves estate taxes.

Another simple strategy to avoid estate taxes is to gift assets while you're alive, thus taking advantage of the annual gift-tax exemption. You can give away each year to each person you choose up to $11,000 free of any gift tax. (The amount is indexed for inflation in $1,000 increments, so periodically the exempt amount increases.) If you gift jointly with your spouse, you can give away $22,000 a year to each person.

A more complex, and sometimes expensive, estate planning instrument is the trust. A trust is a legal vehicle for holding and managing property for the benefit of the creator of the trust or other beneficiaries. You probably have heard of the popular living trust, used mainly as a way to control assets while you're alive and to avoid probate. (It does not, despite popular belief, save estate taxes.) There are more than 50 types of trusts, suited for all types of needs. Many, such as the credit shelter trust, are used to help save estate taxes. Others are designed to control assets even after the person who created the trust has died. For example, a trust might not release assets until the beneficiary has reached a mature age or achieved a certain goal such as graduating from college. A trust might manage assets for someone who is incapacitated or not competent to handle investments.

Life insurance is another valuable estate planning tool. As with trusts, it can serve many purposes, including helping to pay for estate taxes, providing income to heirs or charities, or ensuring equalizing financial assets to heirs who won't run the family business.

Before you make final decisions on estate planning strategies, particularly those that are expensive and complicated to change, consider talking it over with those affected by your estate plan. This includes your heirs, the executor of your estate, any trustees of trusts (who themselves may be heirs), and professional financial advisors. Such discussions can help minimize potential misunderstandings or family feuds over the estate settlement.

An American Association of Retired Persons study found that one in five people over the age of 50 has experienced family conflict over inheritance issues. When people understand why you have decided who is to receive the vacation home or who will run the family business, and what you will do for those who won't inherit these properties, they may be more accepting of the estate plan. Feedback from heirs also may suggest plan modifications.

One planner recalls an 80-year-old woman who had an attorney draw up the documents to pass all her wealth on to her grandchildren, skipping over her five children. Although the woman claimed she had spoken about her plans with her children, the planner recommended that she talk to them again to probe their true feelings more deeply. After she did, she revised her plans, gifting to her grandchildren while she was alive and leaving her estate to her children.

Estate planning isn't fun, but it is essential, regardless of the size of your estate. The excuses we tell ourselves for not doing it are many and convincing. It takes time, costs money, raises difficult family issues, and revolves around something most of us do not want to think about--death.

Do the people you love a favor--leave them a well-planned, well-organized estate.

David Yeske is president of Yeske and Company, San Francisco, and chairman of the Financial Planning Association, Denver, Colo.

COPYRIGHT 2004 Society for the Advancement of Education
COPYRIGHT 2004 Gale Group