January 12, 2009

Still more ways you can mess up your estate plan—Part 9

By Robert P. Bergman
Special to the Times

The next installment in our continuing series of articles on “Ways You Can Mess Up Your Estate Plan”

21. If you have a living trust, be sure to fund it

Bob and Carol had a Living Trust, but neglected to re-title their assets as instructed by their attorney. The attorney even deeded their home to their trust, but they later sold it and purchased another home in joint tenancy and not in the name of the trust.

Bob died a few years ago, and on Carol’s death, all of their assets were subject to probate and were part of her taxable estate. By not titling their assets in the name of their trust, they defeated two of their planning goals: avoiding probate and reducing estate taxes.

Moral: If you have a living trust, be sure to fund it with your assets by changing record title or beneficiary designations as instructed by your attorney.

22. The disinherited child

Ken’s will left his estate to his two children. However, his will never mentioned Ken’s child by a prior marriage and whom Ken had not seen in years. Although you can disinherit your children by specific reference in your estate planning documents, because there was no reference to Ken’s first child in the will, that child may be entitled to a portion of Ken’s estate under California law.

Moreover, if the disinherited child contests the will, he may force the other children to settle for a significant portion of the estate to avoid tying up the estate in probate for potentially a year or more.

Some people will leave a disinherited child $1. That at least shows an acknowledgement of the child and an intention not to leave them anything substantial. I feel it is better to acknowledge a disinherited child’s existence, and then state “that for reasons personal to me, I have not left my son, Joseph, anything in this will.”

Better yet Ken could have used a Living Trust Estate Plan, rather than relying on a will to pass his assets. With a will, Ken’s executor is required to notify all heirs, including persons (such as Joseph) who would inherit property if there were no will. But with a Living Trust, there is no such requirement.

Accordingly, if you plan to disinherit a relative, you should consider using a Living Trust to make your estate plan more bullet proof.

23. Missing a disclaimer deadline

A disclaimer is a refusal to accept an inheritance. A qualified disclaimer is one that complies with the IRS requirements one of which requires that the disclaimer be made in writing within nine months of the decedent’s death.

So why would someone want to disclaim an inheritance? Let’s say a couple has a taxable estate and holds considerable property in joint tenancy. The wife dies. If the husband disclaims his wife’s half, her half will pass to the children, or, if the couple has a properly drafted Living Trust, to the Family Trust for the benefit of the surviving spouse.

If the disclaimer is made pursuant to IRS guidelines, the disclaimer is not treated as a taxable gift.

Example: Michael was in poor health when his wife died in 2007. Their combined estate was $3 million and was owned in joint tenancy. (They should have had a Living Trust, but didn’t.) If Michael files a qualified disclaimer within nine months of his wife’s death, his wife’s half of the property would pass to their children, and not be treated as a taxable gift by Michael. If Michael then dies in 2008, no estate taxes would be due.

But if Michael misses the deadline, his wife’s half of their assets will be includible in his taxable estate, and on his death, $1 million of the $3-millon estate would be subject to an estate tax of 45 percent, causing a tax bill of $450,000 for their children - all of which could have been avoided if Michael had made the qualified disclaimer.

Qualified disclaimers are an important planning tool in many estates. In fact, some estate plans are designed to anticipate the use of disclaimers for saving on estate taxes. Disclaimers are just one of the many reasons why it could be important to see an estate planning attorney shortly after someone dies.

If you missed one or more installments in this series, visit www.lawbob.com for the missing articles.


Robert P. Bergman is a San Jose estate planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for incapacity and the eventual transfer of their property to their heirs. Bob specializes in working with parents who have minor children. Bob gives a regular monthly seminar at the Jewish Community Center in Los Gatos entitled “Everything You Wanted To Know About Estate Planning, But Were Afraid to Ask!” Visit his Web site at www.lawbob.com where you can learn more, get on his mailing list, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics that Bob has written. You can also reach him by e-mail at rpb@lawbob.com or telephone at (408) 247-0444. All inquiries are confidential. This column is intended to provide general information about estate planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.