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Estate plan derailed by tax and legal issues

Estate planning lets you protect your assets and ensure your wishes are carried out after you pass away. Even when you plan, a lack of understanding of estate law or tax structures can derail those plans and result in ongoing issues with the estate. The estate of one woman, who wanted to leave a sizable portion to charity, is a good example of the need for in-depth legal knowledge in estate planning.

The woman intended for the majority of her estate to be a charitable contribution to a foundation after some was set aside for her brother. According to news reports, an income tax litigation in California caused much of the estate to be spent on tax payments and legal costs.

The woman's estate consisted of two properties and a large retirement account. She owned a condo in California, where her brother lived. She also owned her residence in another state and a retirement account worth almost $250,000. The estate plan intended for the brother to receive $50,000 and for a Jewish foundation to receive the rest of the value of the estate.

Two problems occurred that caused litigation with regard to the estate. First, the brother did not desire to move from the condo. He proposed to the foundation that he give up the $50,000 cash inheritance in exchange for the ability to live the rest of his life in the condo. Because the foundation didn't want to deal with the real estate long-term, they denied this proposal but did offer the man another $10,000 if he vacated the condo quickly.

There were also issues in the California court with the fact that the estate set aside funds for future charitable contributions to the foundation. In some cases, funds set aside in this manner are eligible for a tax deduction. This issue, combined with the possible litigation over the condo and the fact that all of these issues were not communicated to the estate's accountant in another state before he filed estate paperwork, resulted in an income tax deficiency of over $75,000, substantially reducing the contribution to the foundation.

This case provides a great illustration of the importance of being thorough and communicating both before and during the estate administrative process. Had the woman understood her brother's desire to stay in the condo, she might have planned for it.

Source: Forbes, "Estate Intended For Charity Depleted By Litigation And Income Tax" Peter J. Reilly, Feb. 24, 2015

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