Mistake # 1. Poorly designed or improperly integrated wills.
Joe, a utility contractor, came up to me after one of our seminars and said, “I liked your talk. I wish I could use you but I already had my wills done and I think they are pretty good.” He continued with, “I always believed in working with top professionals. My lawyer, accountant, insurance agent and stockbroker are all top notch. I think my affairs are in pretty good shape.”
I told him I was glad to hear that and that he was unusual, because most people go out and hire competent professionals and put together their financial plans piece-meal. Many times, they have perfectly good legal documents, insurance policies and investment portfolios, but because their advisors are not working together as a coordinated team, they may end up paying extra estate or income taxes because the different parts of their plan are not properly coordinated. Furthermore, their family and business planning goals may not be achieved.
Joe said, “Well that may be, but my lawyer told me he gave me a state of the art tax sensitive will. He said it has the Bypass Trust to save estate taxes, the QTIP provisions to protect my children from my first marriage and it even is set up to avoid the generation skipping tax.”
“That sounds like a well designed will,” I replied. “How does the rest of your plan coordinate with it?”
“What do mean?” says Joe.
“For instance, how are your assets titled?”
“We have a house here in NJ and a condo in Florida. Both are in Joint names to avoid probate. My wife and I both have good-sized IRA’s. We named each other as beneficiaries. We put all of our stocks and bonds in joint names also. Of course, I want to leave the business to my son. My daughters will split up the rest of my assets. I even have a Buy-Sell agreement so my partner will buy out my family if I were to die prematurely.”
“Well Joe, each of the things you described sound great by themselves. The only problem is that in order for your plan to work the way you intended it, and so that you can save as much tax as possible, the various components of your plan need to be properly integrated with each other. For instance:
-Your houses and investments are in joint names. That means that if one of you were to die, those assets would go directly to the other, bypassing the will.
-Your IRA has your wife as beneficiary, however, your will has no control over your IRA, meaning that she will inherit this account directly. This might not be bad, except that you mentioned that you have children from a first marriage. This may be an issue from what you have told me because you want to ensure that your wife can use this money while she is alive, but as important, you want any money left over transferred to your children. The way your current plan is set up, this may not happen.
-So far, your IRA, your homes and your investments will not be controlled and directed by your beautifully designed tax sensitive will.
-In addition, you said your will designates your son to take over your share of the business. Unfortunately, your Buy-Sell agreement will govern what actually happens here. It says that your partner has to buy your shares from your estate. Your partner will end up with the business and your wife will end up with the cash, subject to the will’s provisions. This may very well leave your son out of the business.
From what you are telling me, these are some of the issues you may want to consider, keeping in mind that I have not been able to examine any of your documents and facts in your plan.
Joe gave me a blank stare for a full minute and then said, “Gee, what do you think I should do?”
“Let’s get all of your documents and all of your advisors in a conference room and make sure that every single element of your plan is properly designed and integrated, so that you end up with exactly the results you intended.”
“Sounds like an excellent plan, can you help me orchestrate that?”
“I would be happy to.”
Securities and Investment Advisory Services offered through NFP Securities, Inc. a Broker/Dealer, Member FINRA/SIPC and a Federally Registered Investment Advisor. Wealth Preservation Solutions, LLC is a member of PartnersFinancial, a division of NFP Insurance Services, Inc., which is a subsidiary of National Financial Partners Corp (NFP), the parent company of NFP Securities, Inc. This essay is designed to illustrate a point, and is not a recommendation that any specific actions be taken. Please consult with your financial professionals to discuss your personal situation.