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Estate Planning: Don’t Just Set It and Forget It

May 29, 2015
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By Daniel J. Friedman

Learn more about Daniel on NerdWallet’s Ask an Advisor

I recently had lunch with a good friend who works for an insurance company. We were talking about how to use insurance products, specifically annuities, to defer the taxes many of us face on our investments.

Although we all know the tax man would like to come in and take a little more off the top, there are worse things in life than making money and paying taxes. Still, I am reminded of the wisdom of American jurist Learned Hand: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

This got me thinking about another friend who could have used some important tax advice. His father had an estate plan, a will, a living will and a power of attorney. Although my friend and his family had reviewed his father’s estate documents, they didn’t ask him to make any changes. After the father’s death, family members discovered they were responsible for thousands of dollars in income taxes.

Money had been put into an annuity, but the family failed to safeguard the investment from the worst possible tax consequence. This was a pretty big missed opportunity.

The purpose of estate planning is to account for as many uncertainties as possible in this uncertain world, as well as to maximize and manage the value of an estate by reducing taxes and other expenses.

We often see estate plans written by well-meaning attorneys who are evaluating a person’s circumstances and how they want their assets and possessions managed and ultimately distributed. Obviously, everyone wants as much as possible to go to heirs and charities.

As the son’s financial advisor, I had discussed solutions for his father’s annuity, while his dad was still alive, that could have reduced the tax hit by 90%. We’re talking over $10,000 in taxes that need not have been paid.

If you do not have a will, trust or financial planning document in place, get them before it’s too late. If you already have these documents, review them if circumstances change, and at least every five years otherwise.

Remember: Tempus fugit. Don’t delay.

Image via iStock.