Ignoring Estate Planning Can Be Costly

The early and unexpected death of the actor James Gandolfini triggered another high profile estate planning disaster. Gandolfini, who starred in the acclaimed HBO series The Sopranos from 1999 to 2007, died at age 51 after suffering a heart attack while vacationing in Rome.

Reportedly, federal and state tax collectors will get more than $30 million of his estimated $70 million estate. Although the estate planning necessary to protect heirs minimize estate taxes is relatively easy, many people procrastinate because it’s not pleasant to think about their own death. How simple are the solutions?

One of the most effective ways to protect estate assets is through the establishment of various trusts. Under current U.S. estate and gift tax law, an individual is permitted to transfer $5.25 million into an irrevocable trust free of gift tax; married couples may put in $10.5 million. Of course, there are many stories of trusts being established, but never properly funded. In fact, in another Hollywood example, Michael Jackson’s failure to fully fund a trust led to numerous family fights in probate court.

Married couples also can consider a marital trust. When one spouse passes, estate assets are placed in the marital trust. The surviving spouse is provided for by the income the trust generates, but does not have access to assets intended for children or other heirs. This is can be especially useful when planning for children from different marriages.

Another option is a revocable living trust. Because this document does not get filed in any court, it’s a good option for those who wish to keep their estate plans and ultimate distribution of assets private.

As financial advisors, we often model what will happen to a client’s estate after they die, illustrating how much goes to family and friends or charities and how much goes to taxes. Seeing the model helps clients’ decision-making process. And, re-visiting the estate plan as tax laws change is necessary to ensure that the plan continues to reflect their wishes.

While procrastination likely is the most common estate planning mistake, I have another caution. All the planning can be for naught if you don’t choose the right executor. Another celebrity, Jerry Garcia of the Grateful Dead did it all by the book, planning early and in great detail. However, his choice of his third wife as his executor to carry out his wishes caused problems between his ex-wives and children. Problems arose when Garcia’s ex-wife turned executor cut off alimony payments to another of Garcia’s former wives, contending that the obligation ended with Garcia’s death. It’s a painful truth, but when there is money at stake, it doesn’t take much to turn family members into enemies. So, choose your executor carefully. You want someone who is honest, intelligent, and capable of dealing with family members and attorneys.

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