Why Clients Should Plan Their Wills in Advance

Tax tidbits
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In nine previous columns, I discussed my use of “tax tidbits” to enliven conversations when talking taxes with clients or speaking to groups like retirees and home sellers. The tidbits discuss amusing court decisions and tactics that trim taxes for this year and even provide a head start for next year.

I‘d like to share more of my favorites with you here.

Check that your will provisions and beneficiary designations are up to date. Review your overall estate plans. Tax laws and other laws relating to property change—as do your circumstances and your beneficiaries.

How long has it been since you last checked your will? Are all named beneficiaries and executors still alive? Rather than have property eventually wind up with persons in whom you aren’t particularly interested, name contingent beneficiaries. Why run the risk that a court might have to name a substitute if your executor dies or becomes disabled? Do it yourself instead.

Other typical events that may signal the need to go over your will: your family becomes bigger; a substantial change in your financial situation; changes in your family status; sale of an asset mentioned in your will; change of guardian for children; a move to another state.

Remember to update beneficiary designations for insurance policies and 401(k)s, 403(b)s, IRAs and other retirement plans. Otherwise, proceeds might wind up with a former spouse or someone you now consider unworthy.

Prepare a will or make sure an existing will is current. When you die without a will (intestate, in legalese), your assets pass in accordance with your state’s intestacy laws. The absence of a will often means that your estate will be burdened with unnecessary administrative expenses and taxes.

When you make out a will or update an existing one, also prepare a letter of instructions. This is the legal term for an informal document in which, among other things, you list the location of your important per­sonal papers and assets.

Your heirs need to know what your assets are—traditional or Roth IRAs; 401(k)s and other retire­ment plans from your employer or your business; insurance policies; bank accounts; mutual funds; brokerage accounts and other holdings like real estate; jewelry or art works—and how to dispose of them. Advance planning can help ensure that your intentions are carried out and that your heirs aren’t taken advantage of by incompetent or dishonest advisors during a vulnerable time

No-proof deductions approved by the Tax Court. Tom Owen McCallson became embroiled in a dispute over the right of his auto repair business to use a piece of land. The dispute ended when the owner of the land used a snow plow to bulldoze the assets of Tom’s business into a ditch, destroying Tom’s tax records in the process. Subsequently, Tom’s return was scrutinized by an unsympathetic IRS auditor, who disallowed his business deductions. The auditor was not content with assessing additional taxes and interest charges. He decided to throw in penalties because Tom had claimed expenses without substantiation. Tom took the dispute to the Tax Court, where he prevailed. In a 1993 decision, the court concluded that he properly deducted undocumented business expenses; the facts demonstrated that he must have incurred them. It upheld his deductions for the expenditures in issue and erased the penalties.

How to gain control over your tax tab. Educate yourself on the current tax opportunities and pitfalls. Ideally, you should be equipped to weigh the tax consequences before you make decisions on whether to invest, borrow or spend. 

In these uncertain economic times, it’s more vital than ever that you assume greater responsibility for your financial future. You ought not to rely exclu­sively on paid advisers to keep on top of tax-law changes or other legislation that might make it necessary to revise your plans. At the very least, you should be knowledgeable enough to raise good ques­tions and evaluate answers when you deal with a professional. The informed client gets the best advice. 

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).  

About Julian Block

Julian Block

Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com

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