After completing the estate planning process and executing their documents, clients generally experience a sense of relief, knowing that they have taken an important step in making sure that their estate is going to be distributed according to their wishes. Unfortunately, this is only partially true. It is an old maxim among estate planning attorneys that the number one reason trusts “fail” is that people do not take the critical step of transferring their assets to their trust. A pour-over will is a fail-safe against this particular pitfall, but it will not prevent assets from going through probate – one of the main reasons people elect to use a trust in their estate plan.
There are other substantial pitfalls that come into play, whether you decide to use a trust or a simple will. Here’s a common scenario:
Jack and Jill Client complete an estate plan including wills that leave everything to each other, to be divided equally between their three children (Jane, John, and Joe) upon the death of the survivor. In addition to their wills, Jack and Jill have several non-probate assets: Jack’s IRA account designating Jill as the beneficiary, their home which is owned as joint tenants with rights of survivorship, a checking account and savings account also held as joint tenants with rights of survivorship, and a life insurance policy for each of them naming each other as the primary beneficiary and the children as the contingent beneficiaries.
When Jack passes away, his probate property passes to Jill via the will. The house and the bank accounts pass to Jill; she transfers the IRA into an IRA in her name and designates the three children as beneficiaries; and Jack’s life insurance proceeds are paid to Jill, which she places in her savings account. Now in her late 70s, Jill decides it is easier to allow her daughter Jane, who is helping care for Jill, to also handle Jill’s financial affairs. Although Jill’s estate plan included a power of attorney nominating Jane as her agent to handle her financial affairs, she decides it is simpler to add Jane as a co-owner of her checking and savings accounts. At the time of Jill’s death, the checking and savings accounts combined constituted $300,000 of Jill’s assets.
Thus, at Jill’s death, despite the fact that her will divides her property evenly between her three children, the assets are divided as follows:
- 100% of checking and savings accounts – $300,000
- 1/3 of house – $100,000
- 1/3 of IRA – $100,000
- 1/3 of life insurance proceeds – $100,000
- Total to Jane – $600,000
- John and Joe
- 1/3 each of house – $100,000 each
- 1/3 each of IRA – $100,000 each
- 1/3 of life insurance proceeds – $100,000
- Total to John – $300,000
- Total to Joe – $300,000
Despite what Jack and Jill thought was careful planning, instead of each child receiving $400,000, Jane received double the amount that went to John and Joe. Even if Jill rightly assumed that Jane would “make this right” by dividing the $300,000 evenly between the three of them, Jane could face adverse consequences for making what would be considered substantial gifts to her two brothers – something Jill did not consider.
Consider another example. Jack and Jill decide to give 10% of their assets to their favorite charity. At the time they make this plan, they have an old IRA Rollover from one of Jack’s previous employer’s 401(k) plan that makes up about 10% of their total assets. Therefore, they decide to name the charity as the contingent beneficiary of the IRA Rollover. Over time, Jack and Jill use other investments and assets for their living expenses, including substantial medical expenses. Both Jack and Jill pass away before having to take mandatory withdrawals from the IRA, and they never otherwise withdrew money from the account. Over time, the assets in the IRA Rollover continued to grow, while Jack and Jill’s other assets diminished, and the IRA Rollover eventually comprised 25% of their total estate. Thus, although Jack and Jill intended for their children to receive 90% of their total estate, with the charity receiving 10%, ultimately, the charity received 25% of their estate, leaving only 75% to be divided between their children.
There are countless scenarios where an estate plan can be defeated through lack of coordination between your trust, other non-probate assets, and probate assets, or by decisions to “simplify” things during life by changing ownership of accounts to a child rather than through the use of a power of attorney designating that child to handle your affairs.
Fortunately, these unintended consequences are easily avoidable. When your estate plan is completed, your attorney should provide instructions for properly titling your assets to ensure that your estate plan is distributed as intended. Ideally, with your permission, while creating your estate plan, your attorney can work with your financial advisor and tax advisor to understand the nature of your assets. This can help your financial and tax advisors and your attorney plan for and minimize any potential adverse tax consequences. This also allows your advisors and attorney to identify your probate and non-probate property to ensure that your assets are titled properly and beneficiary designations on retirement accounts and life insurance policies are coordinated to meet your overall estate planning goals.
Coordination also allows your attorney to inform your financial advisor of your overall estate planning goal, so that, if there are any significant changes in your assets, your financial advisor and attorney can work with you to realign your assets to meet your ultimate estate planning goals.
Creating and executing your estate plan is only one step in the process. Coordination between you, your attorney, and your financial and tax advisors and ongoing review of the nature of your assets is the best way to ensure that the goals of your estate plan, whatever those goals may be, are fulfilled.
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