Don’t Let Your Heirs Lose Out

Taxpayers have entered a new era in estate planning. Now that the federal estate tax is not triggered until assets top $5.34 million (or even higher, inflation-adjusted levels in future years), the vast majority of Americans no longer need to structure their estates to avoid the tax.

But estate planning is not just about avoiding taxes. It also is about distributing assets according to one’s wishes and taking care of surviving family members—and in these areas, people continue to make critical errors.

We asked top estate-planning attorney Herbert Nass what kinds of mistakes are common now…

Listing specific tangible assets in the will rather than in a side letter. If you spell out in your will which of your heirs should receive which of your possessions, you will have to amend the will whenever a major asset is sold or acquired…whenever you or your heirs change your minds about who should get what…and possibly whenever the values of certain assets change.

That antique armoire that was appropriate for your daughter when she lived in a big house down the road might no longer make sense for her after she moves to a condo 1,000 miles away.

Better: Write in your will that your executor should distribute your tangible assets according to your wishes, then provide a side letter to that executor laying out these wishes. You can easily update this letter later if necessary without paying an attorney to amend your will. But choose an executor you trust-he/she is not legally bound to follow the instructions in this letter.

Bequeathing real estate without taking into account the mortgages. If you leave real estate to an heir in your will, that heir likely will be responsible for paying off any mortgages or loans against the property. The debts of the deceased typically are paid by the estate, which usually is responsible for making mortgage payments during the probate process. However, secured debts such as mortgages generally pass to the person who inherits the property. This wrinkle can have unintended consequences.

Example: A widow with two children leaves her house to the daughter, who has been living with her, and a second piece of property to her son. The widow intended for these bequests to be of comparable value…which they would have been except that she took out a home-equity loan against the house after the will was drafted, leaving her daughter with $50,000 of debt.

Better: If you do not wish to leave mortgage debt to your heirs, you could include a bequest in your will stating that your heirs should receive cash (or liquid investments) equal to any mortgage debt remaining against the property they receive.

Bequeathing real estate without taking into account the tenants. Renting out an entire property that you own -or even renting out just a room in your home—brings income to you now, but it also could leave your heirs with a major headache after you pass away.

Your heirs might not have the time, temperament or home-maintenance skills to act as landlords themselves. Serving as a landlord is especially inconvenient for heirs who live far away. And the lease agreements and/or local housing laws might make it expensive or impossible for your heirs to remove the tenants from the property in a timely manner.

Selling the property with the tenant in place isn’t a great solution either. Most buyers don’t want to be landlords, so the property’s selling price is likely to be substantially reduced—if the property sells at all.

Heirs who inherit tenants sometimes end up paying those tenants tens of thousands of dollars to leave, and that can significantly reduce the value of the inheritance.

Better: If you have tenants, include language in their lease agreement that allows your heirs to terminate their leases and requires tenants to vacate within some reasonable period of time-perhaps 90 days-in the event of your death. Exception: Having tenants in place can be a good thing if the property is an apartment building that potential buyers will want to rent out anyway.

Accidentally disinheriting descendants not yet born when the will is drafted. It’s not uncommon for wills to list by name children or grandchildren who will inherit. Trouble is, if additional children or grandchildren are born after the will has been drafted—and you don’t update the will to include these children—the fact that they are not listed might mean that they don’t inherit a share of your estate. It even could lead to an expensive and acrimonious legal battle among your heirs.

Better: Rather than list your descendants by name, your will could state that the assets should be divided among your descendants per stirpes. That stipulation means the assets will be divided equally among them, but if any of your children dies before you, that heir’s share will be divided equally among his children.

One reason people like to list heirs by name is to avoid the possibility that someone will come forward claiming to be a child born out of wedlock in hopes of receiving a portion of the estate.

If this is a concern, you could specify that your assets should be “divided equally among children being from the marriage of [You] and [Your spouse]. I intentionally make no provision for any nonmarital children.”

Owning a bank safe-deposit box if you hope to avoid probate. People with relatively simple estates sometimes can avoid the costs and delays of the probate process through joint ownership of assets…by designating beneficiaries on accounts…and/or by titling assets to a revocable living trust.

Unfortunately, people who do this sometimes fail to account for their bank safe-deposit boxes. These boxes are sealed upon the death of their owners and usually cannot be opened without passing through an often lengthy, court-controlled probate process.

Despite the common misconception, creating a power of attorney that gives a spouse or heir the right to access a safe-deposit box will not solve the problem—your power of attorney ends upon your death.

Example: A New Yorker thought that he had spared his family the hassles of the probate process. But probate was required because he put some gold coins in a bank safe-deposit box, costing his family several thousand dollars.

Better: List your spouse or a trusted heir as co-owner of your safe-deposit box. A co-owner is allowed access to the box even after his fellow co-owner’s death. Or name a revocable living trust as the owner of the box, with you as trustee and your spouse or heir as successor trustee.

Beware State Estate Taxes, Too

Just because you are safe from the federal estate tax doesn’t necessarily mean that you are not vulnerable to costly state tax rules. More than a dozen states still have estate-tax exemptions far below today’s federal exemption levels—in some cases, it’s less than $1 million.

Examples: In New Jersey, the exemp­tion is just $675,000…in Rhode Island, just $921,655. (See “The New Inheritance Rules Are Tricky” in the April 15, 2013, issue of Bottom Line/Personal or go to

And in some cases, it can be very complicated figuring out what that tax would be.

In one of the most complex situations, on April 1, New York’s state estate-tax exemption climbed to $2.06 million. It’s scheduled to continue to climb in the coming years. But there’s a trap hidden in this apparent good news. If you exceed the exemption amount by more than 5%, it isn’t just the amount above the exemption level that will face state estate-tax rates as high as 16%—your entire estate could be taxed. Example: If your estate is worth $2.17 million, all $2.17 million is taxable in New York State.

Other states including Rhode Island and Connecticut have had similar estate-tax “cliffs” in the recent past, though they no longer do, and additional states could, in theory, enact them in the future.

But even without a cliff, a state estate tax can take a big bite out of an estate.

Three ways to reduce the size of your estate…

Leave additional assets to a spouse. Money left to a spouse is not included in the taxable amount.

Give away assets while still alive. You can give gifts of up to $14,000 per recipient per year without tax ­ramifications. Recipients don’t have to be related to you. And you can give to people of any age.

Make donations to charitable organizations in your will.

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