The estate-planning community is facing an unusual situation this year. The federal estate tax expired at the end of 2009, so in 2010 there is no tax so far, anyway. The majority of Americans won't notice the change because their estates are too small to be affected. But this is causing some degree of confusion for estate planners and their clients. Most people assumed Congress would enact legislation to reinstate the tax by the end of 2009. But they didn t. Many think Congress will restore the tax the exemption hit $3.5 million in 2009 this year and make it retroactive; if they don t, it will come back on its own in 2011 at $1 million.
We re now in this Alice in Wonderland world. We think we have no estate tax. It s hard to do planning for people now, says T. Jack Challis, an estate-planning attorney and chair of the wealth planning group at Polsinelli Shughart in St. Louis.
When drawing up documents, most planners base their calculations on whatever estate-tax exemption is at the time of the client s death. When there is no estate tax, it goes to zero. Now that document may have an unanticipated result because the calculation was based on an exemption which doesn t exist in 2010. Depending on how the will was written, assets could conceivably go entirely to one beneficiary or to another beneficiary. It would have never occurred to any of us that Congress would fail to act. We think they ll repair that, but we don t know how or when, Challis says.
Most estate planners draft documents with a tax formula provision based the estate tax exemption in place under tax law in the year of death. With no estate tax in 2010, the exemption amount is thought to be zero. "In a year of estate tax repeal, this formula may have unanticipated results because the calculation based on the exemption amount does not operate properly," Challis says. Depending on how the will or trust document is written, assets could conceivably go all to one beneficiary or another -- a result that may not have been intended by the property owner.
Russell Bishop, a certified financial planner and estate planner at Harvest Advisers, says the situation is a mess, and is advising his clients who drew up a will after 2001(the last major estate tax bill) to review them. But you probably shouldn t change them until there s more clarity from Congress about what will happen next, he says.
2. Estate planning isn t actually my thing.
What does it take to call oneself an estate planner? Not much, it turns out. Some estate planners are financial planners. Others are CPAs. Many are lawyers. But none of those titles guarantees an intricate knowledge of estate planning.
In most jurisdictions, the only people writing the actual documents are lawyers who are licensed to practice, says Challis. Whether it s at a small or large firm, you should stick with a lawyer who specializes in estates. The ultimate badge of competency: membership in ACTEC, the American College of Trust and Estate Counsel, an invitation-only national organization. (You can search ACTEC attorneys in your area at www.actec.org.)
3. I d love to be your executor it s a great way to make some extra money.
Who should execute your will once you re gone? It s a tricky question, especially for parents who don t want to favor one child over another but who also aren t crazy about the idea of entrusting the job to the son who just depleted his 401(k) for a new car. In your time of indecision, you may find your estate planner offering to take the job. A generous gesture? Not likely. Executors often pull in hefty fees. It guarantees future employment or retirement money, says Stephen McDaniel, former president of the National Association of Estate Planners and Councils and a certified estate planning specialist in Tennessee.
In some cases, McDaniel says, turning to an independent third party benefits the estate and family. But he notes that there s a real difference between an estate planner who is soliciting a job from a client with whom he has limited relationship and a planner who s been selected to execute a client s will after a long professional relationship with him.
4. You don t need a living trust.
Living trusts have been a favored estate planning tool, and it s easy to see why they allow your estate to transfer property and assets outside the clunky probate process, saving your heirs time and money. Overzealous planners love them too, since setting one up can boost their bill.
A particular client might wish to set up a living trust, but it s not always necessary, as some are led to believe, says Catherine Grevers Schmidt, an estate-planning attorney and partner at Patterson Belknap Webb & Tyler LLP in New York. (A living trust is a legal arrangement which allows another person to assist in managing your assets while you are still alive if you become unable to do so and distributing your assets after your death.)
Still, the prospect of a long probate can be enough of a deterrent to justify the cost of a living trust, that s becoming less the case. And in some states, like California and Massachusetts, setting up a living trust makes more sense because it helps avoid the onerous court oversight and high probate fees associated with administering an estate, says Schmidt.
Given the financial incentive for selling insurance, it s no wonder so many estate planners have managed to muscle their way into the insurance business as well. Despite the obvious conflict of interest planners who sell insurance have an incentive to recommend it it is a lot easier than it once was for planners to do both. That s because many states have rewritten their laws so that certified public accountants who pass a state exam and are sponsored by an insurance carrier can sell insurance products and collect a commission when doing estate planning.
It s a requirement that the financial incentive be disclosed, but apparently, many planners aren t complying with the rule. It s a big problem, says attorney Jay Adkisson, who runs Quatloos.com, a website that tracks financial scams. He says his site has received dozens of e-mails from people complaining that their CPA or attorney pitched life insurance but didn t mention a commission.
If someone says, I m going to help you with estate planning and a product is a central point in the presentation run, don t walk, advises John Olsen, an estate planner in St. Louis.
6. My customer service stinks.
The tax code gets a major revision about every other year, and people s lives change constantly. Yet some clients are lucky if they ever hear from their estate planner after the initial meeting. Part of the reason is that many estate planners started practicing years ago, when the idea of maintenance was a foreign concept: Back then people changed jobs less often, moved investments less frequently, and, frankly, amassed wealth less quickly. Estate planning like any other planning you do is not an event, it s a process, says Challis.
But don t take it for granted that your planner will hold your hand once your initial plan is in place. If something significant happens and you think it can affect your estate plan, tell your planner. A cautionary tale: Debra Schatzki, president of Weiser Capital Management, got a call from a client a few months ago whose husband died. After reviewing the documents, Schatzki realized the husband s trustee had passed away from illness. There was no provision for a successor trustee and her client had to go to court to appoint one. (A trustee is the person put in charge of overseeing the day-to-day management of property owned by a trust.)
What would have been simple if people did their housekeeping on a regular basis now is complicated, Schatzki says. Not to mention expensive if you have to go to court to appoint a new trustee. Some planners expect their clients to get in touch when something significant changes that might impact their estate. But good planners should circulate updates to their clients about changes in the tax laws, or other planning opportunities.
7. Your pushy sister is your problem.
Sure, estate planning is primarily about money, but it s also about family and their complicated relationships. So it might be a challenge to find a planner who knows something about both.
Planners can be so entrenched in tax matters that they can forget about how the estate plan will ultimately impact the family after a death. The match between client and attorney is important, and good planners need to be sensitive to family issues.
They can put together an estate plan that looks beautiful on paper, but it has to work in the real life of the client and the client s family, says Schmidt. An attorney may or may not have rapport with the client s adult children, but the attorney s job is to represent the client, not the client s children, she says.
You might not know it, but your planner may have relationships that could affect your estate. In fact, the field of estate planning has many opportunities for conflicts of interest, says Schmidt. It s common for lawyers to represent multiple family members or corporate fiduciaries acting on behalf of the family.
For instance, some people select an institutional or corporate fiduciary, such as a bank or independent trust company instead of an individual fiduciary because they don t want to choose among their children, siblings or other family members. In these situations, the bank will probably appoint an attorney to represent the estate. That attorney is considered the bank's attorney. So the estate has no truly unbiased legal representation.
In the planning stage, there s some concern that the attorney who s drafting the documents either gets himself or a particular bank that he has worked with appointed fiduciary of the estate. That can lead to the attorney representing the estate. There s nothing wrong with that relationship per se, says Bradley E.S. Fogel, a law professor at St. Louis University. But the estate pays both the fiduciary's commission and the attorney's fees. So there is potential for abuse because the client might not realize exactly what they re paying for.
9. Go ahead and sue me -- you won t win . . .
In some cases, the mistakes of an estate planner are caught early. In most situations, however, your planner s blunders won t surface until long after you re gone. And that can create big problems if your heirs want to sue for malpractice.
Generally speaking, beneficiaries have two main hurdles in estate executor malpractice suits. The first is statute of limitations. The death of the parent begins the statute clock running, oftentimes causing it to expire before problems come to light. (Statute of limitations rules vary by state.) The second hurdle is privity, a contract law that prohibits a third party (in this case, a beneficiary) from suing a party in the original contract (for example, an executor). It works like this: If a car dealer sells you a lemon, and you in turn sell it to your neighbor, the neighbor can t sue the dealer, because he s one step removed.
So what options does a beneficiary with a beef have, if any? If an estate planner who makes a mistake is also a lawyer with malpractice insurance, beneficiaries may have a shot at getting their due. If a lawyer says he s a specialist, he s held to a higher standard. Indeed, a majority of states have relaxed their privity law precedence.
10. . . . but things might be changing.
Texas, which has hung on to a strict interpretation of privity, has recently pried open the door to estate planner malpractice suits. In a landmark 2005 case, the state Supreme Court found in favor of a petition filed by Kristin Terk Belt and Kimberly Terk Murphy, joint executors of their father s estate, to take to trial law firm Oppenheimer, Blend, Harrison & Tate, of San Antonio, for legal malpractice. The law firm was supposed to advise the estate on asset management, which the daughters claimed the firm failed to do adequately by neglecting to protect the estate s assets with simple tax planning. What green-lighted their suit in the face of the state s strict privity interpretation was the fact that they were executors of their father s estate and bringing the case on behalf of their late parent who Texas does recognize as someone who can bring a suit.
A good attorney will suggest that beneficiaries who are suing for malpractice should file the suit both in their role as executor and their role as beneficiary. That way, they will be sure to have standing with the court, says Dominic J. Campisi, an estate planning and probate attorney at Evans, Latham & Campisi in San Francisco.