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tax matters

Last week, I spoke about some common mistakes that people make in their estate planning. The truth is, there are so many lessons to be learned that I promised to write about this one more time. (Some of these stories were shared by Erik Carter, writing for Forbes last fall). Watch out for these pitfalls when doing your estate planning:

1. Don't prepare your own will

Warren Burger, former chief justice of the U.S. Supreme Court, prepared his own will. He wanted to keep it brief; it was 176 words in length. The result was $450,000 (U.S.) in unnecessary fees and estate taxes. If a Supreme Court judge can't prepare his own will properly, most of us shouldn't be trying it either.

When preparing your own will, some of your wishes could be misunderstood or unclear. For example, suppose you leave money to "Michael and his children." Do you mean "Michael, if living, and if not to his children?" Or "divided equally among Michael and his children?" Or "half to Michael and half to his children?"

2. Consider the issue of mental capacity

Leona Helmsley, the hotelier, died in 2007 with an estate worth about $5-billion (U.S.). Although she excluded two of her grandchildren from her will, she did leave $12-million to her dog.

Her grandkids weren't impressed and sued, claiming that Ms. Helmsley was not of sound mind when she created her will. Turns out that the court varied (changed) her will, and her dog ended up with just $2-million. If you think that any unhappy family member might challenge your will – particularly where your will provides for something unusual – be sure to have a professional conduct a brief test to verify your mental capacity to avoid problems later.

3. Make sure others know where to find your will

Do you know where to find a copy of your own will? Your executor might have no idea where to look. When American Olympic sprinter Florence Griffith Joyner died, her husband was not able to find her will and he and her mother battled in court over her estate, which was eventually handed over to a third party for administration. The best idea is to keep a copy of your will in a safety deposit box and inform your executor about its location. Also, ensure your lawyer keeps a copy and let your executor know who your lawyer is.

4. A joint names arrangement isn't always best

Canadians love to place assets in joint names. This may save you probate fees on death, but let's be clear, this doesn't save you income tax. You'll still be deemed to have sold your assets at the time of death, which can trigger a tax hit (unless you leave the assets to your spouse, in which case the tax is deferred). The probate fee savings can be outweighed by other drawbacks: Placing assets in joint names can itself trigger a tax bill. You may also be giving up control over the assets. Finally, you can't undo the joint ownership, among other issues.

5. Guardians shouldn't always be sole trustees

A couple I knew passed away tragically a few years ago. Their children, who were minors at the time, went to live with a close family friend as the named guardian of the kids. The couple left $1-million of insurance proceeds in trust for the kids, to help look after their upbringing.

As it turns out, the guardian was also named trustee and mismanaged the $1-million so badly that there wasn't even sufficient funds to contribute to the post-secondary education of the children.

In hindsight, this couple should have named someone else – perhaps in addition to the guardian – as trustee over the money. The guardian of your kids may not be the right person to have sole control of any money you leave for the kids.

6. Don't ignore your personal credit rating

I've seen this problem too often: One spouse has a credit rating – perhaps even a very good one – but the other has none. If the spouse with the credit rating dies, the other spouse may have difficulty qualifying for a loan or even a credit card. If you don't have a credit rating today – start building one by getting a credit card and using it periodically.

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.