Estate Planning – Avoid Conflicts Between Your Documents

If you think the tax code is difficult to deal with when you are alive, you should see what happens when you die. The “death tax” is, ironically, zero percent in 2010, but it bumps up to a whopping 55 percent in 2011 and that doesn’t take into account state taxes. Most people try to deal with these tax issues by pursuing estate planning, but you have to get it right to avoid problems.

Estate planning is the act of positioning your estate in a manner that will minimize or eliminate the taxes you owe on it. Common tools used in an estate tax plan include irrevocable life insurance trusts, A-B trusts, succession plans, buy-sell agreements, wills and so on. When combined in the right way, these instruments can be used to put together a plan that results in the vast majority of your estate going to your family instead of the government. For most people, that is the goal.

Sadly, many estate plans fall apart before they are activated. This leads to conflicting developments that not only don’t avoid major taxes, but may invite them. There are two primary reasons this disaster happens.

The first is very simple. Life is not static. Things change over time. An estate plan is based upon things as they are at the time it is created. If you did your estate plan 10 years ago, you life has undoubtedly changed fairly dramatically. The plan probably no longer fits your needs and chaos can occur when you pass on. Updating an estate plan every few years is vital if you want to get your moneys worth.

The second problem is known as the incremental change. This occurs when you change one aspect of the estate plan without making sure it is in harmony with the rest of the plan. A classic example is a family business. Let’s say you put a succession plan in place to pass the business to your second son. Five years later, the son indicates he doesn’t want it and is going in a different direction. That’s okay because now your daughter wants to run it. Well, if you don’t change all the documents making up the succession plan, the business will be left to the wrong heir. Can’t they just transfer it? Yes, but not without some horrendous tax payments coming do.

Nobody likes to think about dying, so estate plans tend to gather dust in a drawer somewhere. Don’t make this mistake. Update your plan every few years or if some major event happens in your life. Fail to do so and you may very well end up leaving the vast majority of your estate to the government.

By: Tom Ajava

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Thomas Ajava writes about financial planning for UFCAmerica.com where you can learn more about critical financial planning issues such as elder estate planning.