My question was simple. “Who owns that property, Ma’am?”

Her answer: “I do … I think. Why do you ask?”

Because you came to me to plan how your estate will pass, and that property might not be yours to plan.

Then there was this one: “On what do you base that depreciation and all the income tax savings it produces, Mr. Accountant?”

“The prior accountant was reporting it this way, but I don’t know,” was the answer. Well, I hope the IRS will be content with that answer when this client gets audited!

And this one: “Who is entitled to the income from that property, and how is it being reported for income taxes?” The reply: “It’s mine and I’m reporting it on my 1040. But is that wrong?”

If your deceased spouse had an estate tax plan that worked, then this property is not yours, and the income probably cannot be legally reported as yours. You might be paying less tax than you should, or more likely, you are failing to report it properly and your improper accounting could cause your children to pay estate taxes upon your death.

Preventable problems
“What was the appraised value of the equipment your husband left upon his death?” I asked.

“What equipment?” she replied, her eyes rolling toward the window. “All of our equipment already belonged to my son.”

“So you’re saying that your son paid you fair market value to purchase the equipment before your husband died, and the two of you paid income tax on that money?”

No, she said, that didn’t happen.

My response: So you’re pretending that your husband made a large gift to your son sometime before he died — and failed to file a gift tax return. Why would you want to do that? In order to avoid the hassle of an appraisal and avoid reporting the equipment in his estate? Apparently no one explained to you that if your husband left the equipment to your son on death, your son would be able to depreciate the full value of that equipment, even though your husband had already depreciated it once and your son paid nothing for it. In other words, your son lost hundreds of thousands of dollars of income tax savings.

“Where does the money come from to pay the mortgage against the property held in your late husband’s trust?” I asked.

“I pay it from my rent.”

My response: Trouble with that is, the trust receives the rent but requires that all rent be distributed — so, using it to pay a mortgage is a breach of the trust. Is everyone in the family fine with you violating the terms of an irrevocable tax planning trust? Will the IRS smile upon it?

No magic here
About a year ago I wrote a column about the Magic Book, a tongue-in-cheek exposé of the commonly held belief that a living trust magically eliminates all efforts, difficulties, fees and taxes upon your death. With that article, I was trying to illustrate that a good estate plan creates a legal template for what must be done upon death, but that people must take action to do what the plan directs. Nothing happens automatically.

It seems that my partners and I have been meeting more and more people (statistically, they are usually widows) who are experiencing estate plan disasters. In some cases, it is just their husband’s failure to plan: procrastination, distrust of professionals, can’t make up his mind, just didn’t get around to it … and then he dies. The family has to deal with everything the hard way.

Other cases involve what appears to be incompetent or outdated professional services. However, the disasters that bother me the most are the ones in which a sincere effort was made to create a plan, appropriate planning documents were drafted, and a person went to his grave feeling like he had diligently taken care of his affairs to make things work for his family. But then, out of ignorance, the ball gets dropped by the family.

The family members don’t know what needs to be done. They don’t have any real relationship with the late husband’s professionals and don’t want to spend money unnecessarily, so they don’t go looking for professional advice. Years later, the problems start to rear their ugly heads. When discovered, they are much harder to deal with and have irreversible consequences. Some or all of the intended benefits of the original plan are lost.

The conversations above each resulted from a failure to do what needed to be done. When your spouse or parent dies with an estate plan, don’t “do it yourself.” Get professional help right away so you will receive all the benefits of your loved one’s plan.

Ferguson owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.