During your lifetime, you spend the first part trying to attain financial security and the second part working to maintain it. This adage is why many people spend substantial time and effort maximizing their legacy goals in their estate plan, ensuring their wishes come to pass. Your life’s work and ability to provide for your family provide a gratifying feeling for you and your heirs. However, your careful planning can go awry when last-minute changes become part of the mix, often guided by advice from well-meaning family and friends but not a professional estate planning attorney.
Here are five common mistakes that people make that will upend your estate planning:
- Leaving money to someone while you are alive but not changing your will. Frequently people include cash gifts in their will. For instance, a favorite nephew may inherit $50,000, a childhood friend $100,000, even a housekeeper may receive $10,000 for loyal service. It is quite common when family members meet after a loved one has passed to hear that the deceased has already gifted these particular cash amounts. The mistake is that the gift is given, yet your will continues to reflect the named individual should be given what has already been received. In the absence of an updated will reflecting the gift, the probate process will still award the individual named the cash amount or, in essence, an additional gift. While some recipients will approach the gift during their lifetime as an advancement on inheritance, others may not agree, and the argument may wind up in court.
- Insufficient assets are funding your trust. You may have created your trust years ago, and its assets may have decreased in value and be insufficient to cover the costs of all the gifts associated with your trust. Your good intentions in creating the trust can evaporate, leaving some inheritors short-changed or receiving nothing at all without proper management and preservation of the trust’s assets. It is good to remember the rule that cash gifts get paid first. For example, if you leave your sister one million dollars and the rest in trust to your children, and you die with assets totaling $1,100,000, your sister will receive her cash outright while only $100,000 will remain in trust for your children. If there is no cash to fund the trust, the trust provisions are zero-sum, and the unlucky heir will have to learn of the unfortunate circumstances.
- All assets do not pass through your will. Your estate division is primarily likely to be probate and non-probate assets. Just because you believe your assets’ aggregate is enough to satisfy your gifting, not all assets will pass through the will. You must understand the difference between probate and non-probate assets. Non-probate assets often pass as a beneficiary designation or joint ownership outside of a will. Also, consider the need to deduct any outstanding debts, expenses, and taxes in the valuation of your assets.
- You are adding a joint owner of accounts or real estate. Joint ownership seems a simple solution bypassing excessive planning; however, adding a joint owner can create serious problems. Yes, the bank account or piece of real estate will quickly become wholly owned by the survivor, and yet if your will is reliant on that asset to pay other inheritors, debts, expenses, or taxes, there may be a cascade of problems after you die. Adding a joint owner will often lead to will contests and even prolonged court battles, so be sure your estate planning attorney agrees that the option of joint ownership is a sound one in your particular situation.
- Changes to your beneficiary designations. If you make changes to your beneficiaries without speaking to your estate planning attorney, you can create all sorts of unintended results. This situation is particularly true in the case of life insurance. For instance, the policy can pay your trust in order to meet bequests, shelter money from estate taxes, or pay those taxes. However, if you change the beneficiary, you will have to designate the money elsewhere to cover the existing bequests and estate taxes. In another case, if you have a retirement account payable to an individual inheritor but you change the beneficiary to your trust, you may create adverse income tax consequences.
These are just five of the more commonplace mistakes that can occur in your estate plan. Sadly, there are many others, and so caution and professional legal advice are crucial. While it is essential to review your estate planning documents regularly and perhaps make changes, it is imperative to do so under the advice of your attorney. What may seem like a harmless amendment or change may create unintended tax consequences, cut someone out of receiving an inheritance, or worse yet, set into motion a lengthy court battle that harms family relationships.
Reviewing your estate planning documents with your attorney will ensure that your desired changes will address your new need without negatively impacting your overall intentions. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
You might think that leaving your property to your heirs would be easy. You make a will or a trust, you do a transfer-on-death deed for your real estate, you put your kids on your bank account, you designate beneficiaries for your life insurance and retirement accounts, and you’re done.
If only things were that simple. The result you wanted can be seriously foiled, if all the above elements are not carefully coordinated.
After you consider the following, we hope you’ll agree that it’s best to consult a qualified attorney. That’s the person you need to help you construct an estate plan that will do what you want it to do.
A pitfall: Conflict between deeds and wills or trusts
If your will or trust conflicts with a deed for real property, the law will resolve the conflict for you by following the deed, not the will or trust. This can produce unintended results.
Suppose Mary wanted to divide her property equally between her two children, John and Jane. She recorded a beneficiary deed for John so he could inherit the house. She wrote a will leaving money to her daughter Jane that was roughly the same value as the house.
Subsequently, however, Mary forgot about John’s deed. She made another will that split everything equally between John and Jane.
On Mary’s death, John ended up getting significantly more than Jane. The portion of the second will including the house would be invalidated because the earlier deed would supplant the will. So John got the house through the deed, plus half the money through the will. Jane got half the money only. That was not what Mary intended and the unfairness damaged John’s and Jane’s relationship.
A similar pitfall: Conflict between beneficiary designations and wills or trusts
Financial accounts can transfer automatically to people of your choice, avoiding probate, if you designate beneficiaries by means of “transfer on death” (TOD) through your broker. But you must not depend on your will to change TOD designations. The beneficiary designations establish a contract between the holder of the account and you. When you pass, the holder is legally obligated to transfer your account to the beneficiaries you designate, regardless of what your will says. The designations, like deeds, supplant wills.
So if you have named your spouse as a beneficiary of, say, a retirement account, and then you get divorced and forget to change the beneficiary designation, your ex-spouse – and neither your new spouse nor your children nor anybody else – will receive the account proceeds when you die, regardless what your will says.
Underage beneficiaries and guardianship proceedings
Suppose your financial advisor calls to alert you that you have not designated beneficiaries on your accounts and that if you don’t do so, your estate will have to go through probate when you pass. By making TOD designations, your beneficiary would simply present a death certificate and the assets would transfer to him or her without the need to go to court. That sounds good. So you follow your advisor’s suggestion and designate your beneficiaries.
In the meantime, your lawyer drafts a good will for you. This will, as good wills should, contain a subtrust providing for underage beneficiaries. Your lawyer, echoing your financial advisor, explains that the subtrust is intended to avoid the necessity of court proceedings.
Your efforts to avoid court will be defeated, however, if you choose an underage beneficiary to receive your financial account through TOD. Guardianship proceedings would still be necessary to administer the money until the beneficiary came of age.
It would have been better to route the gift to the underage beneficiary through a will or trust and not through TOD designation. If wills or trusts are properly drafted, they contain provisions to administer the underage beneficiary’s inheritance privately and thereby avoid the court guardianship proceedings.
Another pitfall: Disabled beneficiaries and government benefits
The pitfall here is similar to the one above. If your beneficiary is disabled and gets a TOD (or any other kind of) inheritance, the inherited money could jeopardize the beneficiary’s entitlement to government benefits. Most benefits programs are “means-tested.” To be eligible, recipients must own practically nothing. If your beneficiary were suddenly to inherit, he or she would lose benefits and end up having to pay for care until the inheritance was spent. That could involve a lot of money!
Rather, like for underage beneficiaries, the disabled beneficiary’s inheritance should be routed through a will or “supplemental needs trust” (SNT) that imposes restrictions on spending. With those restrictions in place, the benefits would keep coming, and the inheritance assets could be used to pay for “extras” that benefits don’t cover. These extras might include payment of real estate taxes, upkeep of a residence, or vacations, or a flat-screen television. The inherited money would be managed by a trusted person and the disabled beneficiary would still continue to receive the crucially important benefits.
Bank accounts and disabled or underage beneficiaries
The pitfall is the same as above. If you have designated underage or disabled beneficiaries by making your accounts “payable on death” (POD), court proceedings will be necessary in the case of the underage beneficiary, or the inheritance could jeopardize or eliminate the disabled beneficiary’s government benefits.
The problem is likewise similar here. If your beneficiary has a gambling habit or drug addiction, or if he or she needs bankruptcy protection from creditors, and if he or she inherits without trust protections, the inheritance could be lost to the beneficiary’s detriment.
Joint tenancy of real property
It may be tempting to avoid probate by putting real estate in your beneficiaries’ names as joint tenants. But if multiple people own real estate jointly, all must agree on what is to be done with the land and all should contribute equally to property maintenance expenses. This can create disputes. A better solution might be to subject the property to probate, to dispose of it in orderly court proceedings.
Joint bank accounts
The intent to avoid probate here is similar to a joint tenancy of land, but putting your bank account in your and your children’s names exposes the funds to risk that should be avoided. Once a person is named as a co-owner of a bank account, that person has immediate and unfettered access to the funds. The funds are thus exposed to misappropriation by the joint-tenant child, or they can go instead to the child’s creditors in bankruptcy, or to ex-spouses in divorce proceedings.
It would be better to create a power of attorney that allows a trusted agent access to bank-account funds for your benefit while you are alive. Then, for when you pass, you could name beneficiaries via a POD designation with the bank – but remember the warnings above regarding underage or disabled or spendthrift beneficiaries. Those beneficiaries’ access to funds should be protected by a trust.
A lot of moving parts
Each of the estate-planning strategies above could work well in and of themselves, but, taken together, may have an adverse impact. Crafting a plan that combines and coordinates the various strategies requires expertise and care. That care is worth taking, to safeguard the wealth you have built up over the years. Don’t risk a result you don’t want. Call on us to design a plan that harmonizes all the moving parts, so the gears will work together and you will leave the legacy you intended. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.