Do-It-Yourself Estate Planning

Prehistoric man, and this guy,  had to be do-it-yourself'ers by necessity (decent read at the link, does not advocate stealing from neighbors if you adopt the hermit lifestyle, even if it is innocuous and out of necessity.)

It started with fixing your own toilet, now you can do your own divorce, straighten your own teeth,  and thanks to the internet, you can do just about anything and cut out expensive professionals. Us expensive professionals now have to try and combat that in a variety of ways. I prefer honesty.

Fact No. 1: You Don't Need A Lawyer To Make A Will

All you need are a pen and paper, and in Texas, as long as you use some magic words (like who you want stuff to go to, and signing your name) it is legit.   The American Bar Association even will tell you how and what to do. Now, life will be easier for you if you do a fancy, witnessed and self-proved printed will, but lets keep it to the basics. You don't need a lawyer to make a will. That said, your family or loved ones will pay a lawyer more on the back end for your cheapness up front, but what do you care, you saved a couple bucks.

Fact No. 2: You Don't Need A Will

Who cares? You will be dead anyway. Problem with this is if you want certain stuff to go to certain people, then you don't have any say. Have kids you don't like or wanted to disinherit? Have a mistress you wanted to leave your Montana estate to? Out of luck. Also, unless you have no debt and only a homestead to leave (no back accounts, other assets less that $50k), your estate will have to pay an attorney ad litem, usually a fee of $400 or more, which is likely more or about the same you would have spent on a will from an attorney.

My go to saying is, "I COULD change my own oil...but I'd rather pay someone to do it right."

For any project, be it a leaky toilet or your estate planning, run the cost/benefit analysis of time, money, and headache and make the decision that is best for you. Whenever I do that, I figure out I am better off calling a plumber and going to the Jiffy Lube.

The dead hand: Controlling heirs through conditional bequests

When an inheritance or gift is based on a condition, this process is often referred to as the "dead hand."  The issue has been around for a long time:
 "What I am saying is that as long as the heir is a child, he is no different from a slave, although he owns the whole estate. 2 He is subject to guardians and trustees until the time set by his father."-Galations 4:1-2 NIV
It kind of makes sense, as it is often in a will, and you end up cursing the person for requiring you to: wait until age 30, not do drugs, keep gainful employment, OR be married by 6:05 PM on your 30th birthday. 

This is exactly the predicament Chris O'Donnell found himself in for 1999's critically acclaimed film, The Bachelor
After botching his proposal to girlfriend Anne (played by Texas' own Renee Zellweger, when she still looked like Renee Zellweger), O'Donnell has 24 hours to scour his past and find a bride or risk losing a $100 million inheritance. What can go wrong?

I actually saw this and it wasn't THAT bad, but it highlights a common concern that many people have: what will my heirs do with my money/stuff/business?

Some people don't care, they are dead. Others want to make sure that things are done right, which means their definition of right. Lets take a look at some sample restrictions, and see which will hold up legally. 


1. I leave my land to St. Bob of Cleveland Church, as long as the location is used as a church. 

This one is usually fine. If there have been instances where requirements that a bequest is based on practicing a certain religion are declared void, as are just about anything that would go against public policy. 

2. I leave my estate to my sons, as long as they marry within 7 years of my death Jewish girls  whose parents are both Jewish. 

Restraints on marriage, as in to not get married at all or marry someone of a particular race are often held to be invalid. However, courts have termed religious restrictions or certain time limits to be "partial" restrictions, and generally upheld. This exact scenario in the example was upheld in the case of Shapira v. Union National Bank. 

3. I leave my estate to my grandkids, in trust, with distributions totally at the discretion of Trustee, provided they do not do drugs and have gainful employment. 

This is a very common one, and as not doing drugs and having a job are not against public policy, they are upheld. But what about in a state that allows recreational marijuana? Be careful how your documents are drafted. 


Placing restrictions on gifts is nothing new. Sometimes it works, sometimes it doesn't. The success is usually based upon good family communication and structuring the restriction in a way that is in line with good public policy. 

Some say the golden rule is "he who has the gold, makes the rules." In the case of the dead hand, this is generally true. 

Spooky IRA Deadlines

You can't fight time. Don't try. 
We've talked before about the tax ramifications of halloween candy, but today I want to let you know if something much spookier: the October 31 deadline of notifying your inherited IRA custodian if a trust is a beneficiary. 

Don't lock the doors just yet, there is still time.

Per IRS publication 590:

Trust as beneficiary.   A trust cannot be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death (or after the death of the owner’s surviving spouse described in Death of surviving spouse prior to date distributions begin , earlier) if all of the following are true:
  1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death.
  3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument.
  4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.
  The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death.

This can be a big deal if you miss it, as the lifetime stretch out is lost and you are defaulted into the 5 year rule to take out all the IRA proceeds. Don't mess this one up, send in your paperwork and call your IRA custodian to make sure you are in compliance.

The basics on inherited IRA's are you usually want to defer any payments for as long as possible, to let the tax-favorable account grow. If you miss the deadlines, you get punished. Here are more dates to remember:
Here are key dates you should keep in mind to make sure you meet the IRS deadlines that apply to the options you choose.
  • December 31 of the original account owner's year of death. If the account owner died on or after his or her required beginning date,  the RMD for the year must be satisfied if it was not taken in full during the account owner's lifetime.
  • December 31 of the year following the original account owner's year of death. If you are taking RMD based on the life-expectancy method, distributions must begin by this date. If you are one of multiple beneficiaries, all beneficiaries must have established separate inherited IRA accounts by this date in order to calculate distributions based upon each beneficiary's own life expectancy.
  • September 30 of the year following the original account owner's year of death. Important for determining the beneficiary whose life expectancy may be used to calculate RMD (the designated beneficiary). If you're one of multiple beneficiaries of varying ages, all beneficiaries must use the life expectancy factor of the oldest beneficiary who has not taken a lump-sum distribution or disclaimed his or her entire interest prior to this date. However, if all of the beneficiaries have established separate IRA accounts by December 31 of the year following the account owner's death, then all beneficiaries may be able to use their own life expectancy factors to calculate their RMD. Check with your tax advisor to see if you are eligible for this benefit.
  • October 31 of the year following the account owner's year of death. Important if you are the trustee of a trust named as IRA beneficiary. The IRS mandates that trustees provide Vanguard with a copy of the trust document or a summary list of the trust's beneficiaries and conditions by this date. If this requirement is not met, or if the trust failed to meet certain other IRS requirements, it's not considered a qualifying trust eligible for more favorable RMD calculations, usually based on the life-expectancy of the oldest trust beneficiary.
    • (thanks vanguard for the good summary)

Remember, missing an important date can cost you or your clients big. Stay safe out there, and have a happy halloween.

How to prevent the messy estate: the fight over pots and pans

More and more, I have clients who come to me and simply ask for "help." The scenario usually is
something like this:


Older (parent/relative) passes away. You and another (sibling/family member) are the sole beneficiaries of their estate. You live two states away, and the other person lives close by. After the funeral, you go by the house to check on things. Its ransacked, anything of value is gone, and the other beneficiary won't answer their phone. What to do?


This is a big problem in modest estates, where the bulk of the value is in tangible personal property. Is there any recourse? Sure, you can try and sue for the return of the diamond necklace, grandpa's cowboy boots, or the coin collection, but it will be very, very difficult for you to prove who took what, and even with a victory in court, good luck collecting.

The best course of action is to keep communication lines open. If you are someone who wants certain items to go to certain people, write that down. I commonly encourage estate planning clients to include with their wills and important papers a list or binder of certain tangible personal property they want to go to certain individuals. I don't put this list in the actual will because people change their mind too often, and items can be lost, sold, etc., which causes problems if it is in the will. If you suspect this might happen to you, your best bet is to try and maintain a close relationship with your family and develop trust.  Just because you are named as someones beneficiary, doesn't mean property is yours for the taking. This can be a difficult lesson to learn, if you are the person who feels entitled or the person who ends up with nothing after someone else cleaned out all your inheritance.


While the above referenced scenario is more common in modest estates, some of the fiercest estate fights I have seen have been in estates of great wealth, but heirs fight over sentimental items like china or a belt buckle. We want to remember our lost loved ones, but the best way to prevent these disputes in through planning. If you foresee your heirs having a dispute, give it away now, or put someone else in charge. If you foresee a dispute down the line with other beneficiaries, start talking now.

At the end of the day, remember its just stuff. Stuff can be replaced. Family and relationships are much more difficult to mend. 

Estate tax Repeal Musings

Relevant in 2011, but still funny
Every couple years when the election cycles roll around, someone brings up the estate tax again. It is usually when we are not at war, arguing about when a fetus is viable, if universal healthcare is a good idea, or if we ought to bail out the banks, so I guess this means times are relatively good.

That said, we have the highest estate tax exemption in history (minus the times of repeal). It only affects a fraction of the wealthy, and there are many things you can do to plan around it. Foundations, charities, various trusts and other vehicles allow you to minimize the tax, or just pay a little bit. Even so, there is a current bill that allegedly has majority support in the house sponsored by a proud Texan, Rep. Kevin Brady from a district north of Houston. My beloved, departing, congressman also co-signed the bill, but I can't be mad at him (full disclosure, he employed myself, my brother, and numerous friends whenever we needed internships or jobs).

H.R. 2429 would serve to repeal the estate/death tax, the generation skipping tax, but it interestingly enough keeps the gift tax intact. So, die with all the money you want but if you try to give away more than $5 million, we are going to punish you for it. Make sense? Will it pass? Likely the House, doubtful in the Senate. Let's examine the arguments for and against repeal of the tax.

Arguments Against Death Tax:

  1. Punishes Small Business without liquid assets to pay the tax, namely farms. 
  2. Double tax on income and assets that have already been taxed
  3. Doesn't produce that much income
  4. How can you be taxed for dying?
Here is a good propaganda video, decide for yourself if the information is accurate: 


The oldest argument against the estate tax is that it imposes an undue burden on the small farmer. They are land rich/cash poor, and upon death the family has to sell the farm/business just to pay the tax. Life insurance isn't that expensive, and a very reasonable policy can be set up to cover this. Ok, but that is still more money out of good working folks' pockets. So, let's see how many small farms/businesses this affects each year. The tax policy center tells us: 40, as of 2011, when the exemption was less than it is now. Less than one per state.

Rep. Brady is quoted as saying
 “A majority of the U.S. House stands for permanently repealing the terrible Death Tax,” Brady, who represents Walker County, said. “It continues to be the number one reason family-owned farms and businesses aren’t passed down to the next generation, and it’s time to bury it once and for all.”
While this may be an issue for the 40 families a year that bear this burden, I would argue that family wealth doesn't make it to the second or third generation because of laziness, entitlement, and apathy. Or good 'old affluenza. Else, $10 billion in revenue isn't much compared to other taxes, but its something. Tax on dying? This is a tough one to explain, but read on.

Arguments For an Estate Tax:
  1. It raises dearly needed revenue
  2. Only affects a tiny percent of households
  3. Without it, much less incentive for charitable bequests
  4. Ideally prevents dynastic/aristocratic wealth 
So, why would I argue against a tax cut? The only reason I'm talking about this is I read another article the other day, aptly titled "The rise of the non-working rich" by Berkeley professor Robert Reich. His general point is that rich are getting richer and that America is heading toward an aristocracy only taxes can fix.

Do I want to pay a death tax? No. However, I hope to have enough money at some point to worry about it. I think most people are of this mindset, which is why its fun to rage against the tax, even though 99% of us will never have to pay it. Reich's points are that if we don't keep the estate tax, and ADD new taxes (a tax on "wealth" he limits to stocks and bonds, similar to the property tax) then we are headed for trouble. Where he really misses the mark is suggesting that we eliminate the adjusted cost basis at death, which I have talked about here. This plan would punish the families who inherit the farm or their parents house, and crush IRA's and other investment accounts: this is not the way to go.

When the estate tax was less than $1 million (last in 2001) it affected a lot of people, and was an issue for a lot of small businesses and farms. Now its over $5 million. If you have over $5 million, you have the resources to plan for the tax hit.

If you don't argee with any of this, the biggest argument for an estate tax is that the richest guys endorse it: Warren Buffet, Bill Gates, George Soros, and so on. They get it, that if there is no penalty on dying with your money, not as many folks will give it away. Charities dry up, and the world is a generally worse place. So who, really, is spending all this time, money, and other resources fighting for an estate tax repeal?


The net worth of the average Congressman is now allegedly around $1 million, but the average is skewed higher to around $7.8 million (who knew Nancy Pelosi was so loaded?).  So, these guys are worried about the estate tax, because they are going to have to pay it. I can't blame them, you need to think about #1 and vote your pocketbook. However, that is not who I want in Congress, or what I want them to be focusing on.  I have heard arguments that the estate tax only benefits estate planning attorneys: I haven't prepared a really comprehensive estate tax plan for a client in years. A few clients have had almost enough, but not many folks have that much money.

The death tax sounds scary, so people don't like it. I understand that. So raise it to $10 million per decedent, indexed for inflation. That will cover MORE of the family farms, and make the average congressman happy.  If we do get rid of it, once and for all, I'm afraid the consequences to the rest of us will dwarf any marginal benefit that those wealthy enough to complain about it will experience.