Monday, November 28, 2005

A Role for Lawyers after all? DIY Will almost Creates Unnecessary Estate Tax

Category: Estate Planning

Ah, DIY - the independent Do-It-Yourselfer who has kept Home Depot and similar stock on the rise. Why pay someone else to do it when you can do it yourself? Can't you be your own expert? While there are many, many things you can DIY in your home, and in terms of how the law effects you, there is still a role for those trained in the task at hand and who focus on it daily. Much as building a desk is worlds apart from adding a new level to a home, a computer generated residential lease is worlds apart from a Will. In each case, the key differences lie in the scope of the project, as well as the unseen critical details that someone untrained may easily miss. You no more want your estate plan to be ineffective then to have your new addition collapse.

One such situation is a client of mine who created a Will on a computer, signed it, did not have it witnessed, and was fortunate enough to die after February 27 of this year (prior to that date, unwitnessed computer generated wills were not valid in New Jersey). Now the only issue is whether the unwitnessed Will is valid - a key issue in that the Will states that the decedent had an estranged daughter to whom he wanted nothing to pass. The purported Will leaves everything to the brother, but if it is not valid, then under the intestacy statues, everything passes to the daughter, in direct contradiction to the decedent's stated intent. Estate planning is fraught with formalities, which are intended not to impeded you, the DIYer, but to protect you. Bear in mind that an estate plan is an expression of your wishes to be carried out after you are dead - the formalities ensure that those wishes can be carried out by other people.

Another such situation is the recent case of Marie L. Sowder v. United States; No. CV-02-0136-WFN. The case and problem are described in more detail at Steve Leimberg's Estate Planning Newsletter #893 (November 21, 2005) at (fee service). Here, the decedent generated his own will. In leaving the balance of his estate to his wife, he wrote the following:

"All the rest, residue and remainder of my estate, both real and personal, of every nature and wherever situate, of which I may die seized or possessed, I give, devise and bequeath unto my wife, Marie L. Sowder, if she survives me, and if she does not survive me, or dies before my estate is distributed to her, to my issue me surviving, in equal shares per stirpes."

Now, to a layman, this is a straightforward bequest to the surviving spouse. As assets passing to a spouse generally do not generate any tax, Mrs. Sowder filed a federal estate tax return fully expecting no tax to be due on her. Right?.... Wrong. To the IRS and any tax attorney, the language or dies before my estate is distributed to her, creates a "terminable interest". Instead of $0 tax, a tax liability of $828,678 was assessed for estate taxes and more than $133,000 for interest. Quite a large "oops".

A "terminable interest" is more fully described in Leimberg's Estate Planning Newsletter #893 as follows:

"Interests in property which do NOT qualify for a marital deduction include certain so-called "terminable interests." Terminable interests are those interests that, although they MAY go to the surviving spouse, might also "terminate".

Fatal terminable interests are ... those that might operate so that the surviving spouse does not actually become the sole and absolute owner, and if they do, might still pass to some person OTHER than the surviving spouse or his/her estate because of the mere lapse of time, the occurrence of an event or contingency, or the failure of an event or contingency to occur." See IRC Sec. 2056(a).

Here, the estate was saved from having to pay the unnecessary tax because (1) the decedent's state of residency, Washington, had a statutory policy of "fixing" problematic terms in wills after death based on evidence of the decedent's intent, and (2) strong, clear and convincing evidence of the decedent' intent to reduce taxes existed. While the tale turns out well for the Sowders, the moral might be that when doing DIY, not all projects, be they building or legal, are the same, and that the professionals are there for a reason.