The Ten Biggest Problems With Your Estate Plan And How To Fix Them

The Ten Biggest Problems With Your Estate Plan And How To Fix Them

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Dear JGB friends:

For a while now, I have wanted to outline the biggest problems we see come into our office and to provide solutions to those issues. This month I hope you will enjoy the first installment of:

The Ten Biggest Problems With Your Estate Plan And How To Fix Them

Problem #1: Who will inherit your estate?

It may not be who you think!

Perhaps the most vexed clients we see are the family members who are shocked to learn that the estate does not go to the people they expected. Many people walk around with beliefs about who will inherit their estate that are incomplete, partially incorrect, or flat-out wrong.

The most common manifestation of what I term ‘estate surprise’ occurs when no will exists at all. A spouse often assumes he or she is the sole heir to an estate as a result of marriage, but that is not always the case. If there are children from a previous marriage, the spouse only gets one third of the estate by default. More than once, we have had to track down estranged children to provide them checks on behalf of a shocked widow who is administering her husband’s estate.

The next most common ‘estate surprise’ happens when the family brings a will into our office to set up a Probate, and we discover the will is not legally valid. Wills often look fine to the casual viewer but fail because they are not properly signed and witnessed. Wills that are self-prepared or prepared using online or other cheap software are rarely properly signed and, therefore, are not accepted by the Clerk of Court. When I am asked for my opinion about self-service will programs, I advise clients to read the disclaimer. One popular service has a disclaimer that tells users it cannot warrant the Will to be effective and advises the user to hire an attorney to review the document!

Even professionally made wills can fail. Recently a client brought their old will (for which they paid a lot of money to a competing firm) for my review. I was as shocked as they were to see that one of the witness blanks remained blank. No one had ever checked – the will did not have two witnesses and was therefore invalid. At least we were able to fix their plan by making new and properly signed documents.

Clients regularly ask me about what happens in the case a will is destroyed in a fire. That is very rare. In my experience, wills are more often damaged by water than fire, and even those cases are rare. More commonly, wills are lost. I have been able to use a copy from our archive as a substitute for a lost will a number of times. If a copy cannot be found and admitted to the court, then a lost will is worthless and the estate passes as if there were no will at all.

Non-Probate Problems

(or “What Happens When Beneficiaries Go Bad”)

Probate can be a pain, so much so that it warrants its own entry on this list as Problem #3 (which will be discussed in more detail in a future installment). Probate can be so scary that some people focus only on Probate itself and forget that a lot of estate assets transfer outside of Probate. Sure, Living Trusts avoid probate, but so also do many beneficiary-designated assets that don’t have all the planning and contingencies that go into a Living Trust. Life insurance and Qualified Retirement Accounts (e.g., plans like an IRA, 401(k), TSP, 403(b), 457, TIAA/CREF, etc.) pass by beneficiary designation. Bank accounts can be set up to Pay On Death (POD) and stocks and bonds can be set up to Transfer On Death (TOD) to avoid Probate. All such designations, when all goes well, transfer property directly from a deceased person to a beneficiary with a death certificate.

The first problem with beneficiaries occurs when there is no beneficiary. This can happen because a person never designated a beneficiary, or a named beneficiary died, or a financial institution lost any record that a beneficiary was ever named. I have seen all three circumstances cause expensive and miserable headaches for families dealing with estates.

When there is no beneficiary, the asset passes one of two ways depending on the fine print in the beneficiary agreement. The options are either:

a) the asset passes to the Estate (any time you see Estate with a capital ‘E’ that means Probate), or

b) the financial institution has its own default hierarchy of heirs. (Lord knows what that could be.)

Regardless, when listing beneficiaries, a person should always consider where they want the inheritance to pass if the named beneficiary dies before them. There is a whole different set of issues if the beneficiary is alive but is a minor, is incompetent, or is receiving state assistance like SSI. (This will be discussed further in Problem #7: Some Beneficiaries Can’t (or Shouldn’t) Manage Their Own Money.)

Another problem where beneficiary designations cause ‘estate surprise’ happens when a will says one thing and the beneficiary designations do another. Let’s say your dad’s will says everything goes to your brother and you 50/50. Let’s say he inadvertently only listed you as beneficiary on his life insurance. (This happens ALL THE TIME.) If your dad dies, your brother is going to expect half the estate. He is not going to be happy when he finds out you got all the life insurance. Sure, you could give him half, but you don’t need to and you might not want to after you hear all the nasty things his family said about you for taking the proceeds. Further, gift taxes can affect you for giving your brother his share. Worse, you could forget to make the gift, get sued, or die before you get around to transferring the money.

Let me demonstrate all these problems in one fictional example.

A Case Study: How a Bad Plan Breaks a Family

Mike and Carol have a wonderful life. Mike, a widower with three sons, married Carol, a divorcee with three daughters. They own a big house together and enjoy family adventures, assisted by their zany housekeeper, Alice.

Ever diligent, Mike and Carol get sweetheart wills prepared. Both wills designate the spouse as the primary heir and divide the remainder equally among the six children. Mike and Carol dutifully designate each other as beneficiary of their IRAs and life insurance. To make managing family finances easier, Mike and Carol are joint on all investment, bank, and brokerage accounts.

One day, tragedy strikes and Carol passes unexpectedly. Mike rushes to the lawyer’s office. “I don’t know what to do,” he says. “I lost my wife, I am a single father of six kids, and now I have to go through Probate!”

“There, there,” the lawyer reassures, “I can’t help with the first two issues, but you don’t need Probate. Everything Carol owned was either jointly owned by you or you were the beneficiary, right?”

“Yes,” Mike nods.

“Then nothing needs to go through Probate,” the lawyer reassures.

Mike returned home feeling reassured and trying to remember why he did a will in the first place. Time passed. He missed Carol, but he grew comfortable in his role as father of six. About that time, Alice, the housekeeper grew weary that her boyfriend, Sam the butcher, never proposed. Mike realized how fetching Alice was. They dated and decided to marry.

The kids were thrilled. Alice was like a mother to them already. Before the wedding, Mike told Alice he was not going to change his will and he would keep the six kids as beneficiaries. “Oh, don’t worry about that,” Alice said, “I’m not marrying you for the money.” They were wed in a wonderful ceremony.

A few months later, Mike started a new job. He did not have time to fill out his beneficiary designations on his first day and the forms got lost in his desk. Mike refinanced the house, and thinking it helpful, the mortgage company put Alice on the Deed during the process. Mike’s new job made him travel more, so Mike added Alice to the bank and investment accounts to help manage the family finances.

Soon, tragedy again hit the family. Mike passed on a cloudy Tuesday. Soon thereafter, the children and Alice met at the lawyer’s office for a reading of the will. (You may note that such readings only happen in movies, and not in real life. Please pardon the narrative license here.)

The attorney: “I am so sorry for your loss.”

Alice, dabbing eyes with handkerchief: “Thank you.”

Kids, holding will: “When do we get our money?”

Attorney: “Well, kids, I have good news and bad news. The good news is that you are the sole heirs of your father’s will. You will get everything in his Probate Estate. The bad news is that there is nothing in his Probate estate.”

Kids: “WHAT???”

Attorney, cleaning his glasses: “Well, you see, Alice is on the title for the house, and accounts, and is the beneficiary under the default terms of the life insurance and IRA, so they pay to her.”

Before Alice can say a word, the kids explode: “That shrew stole our money. She is a gold digger.” They continue with insults unfit to print here.

Silence takes the room for a moment. Alice was about to say she would, of course, pass the funds to the children. But she is shaken by the outburst of the children. She has never been so insulted. She leaves the meeting and never speaks to the children again. She also retains title to all the assets.

This story, while silly, happens regularly in reality and there is nothing funny about it in practice. The kids are disinherited by accident. No one wanted that result, not Mike, not Carol, not even Alice. This could have been avoided by Mike and Carol being more vigilant about account titles and, more importantly, they should have centered their estate plan around a Revocable Living Trust.

Solution to Problem #1:

Who will inherit your estate? It may not be who you think!

Sometimes the most important answers are the simplest. All Mike and Carol had to do was keep track of how their accounts were titled and who was named as beneficiary. In reality, those details can be hard to follow. In my practice, clients routinely think they remember such details but, in fact, they do not remember correctly. Get a good advisor. Check on the title and beneficiary designations of your accounts regularly.

Check with your lawyer. Make sure your will says what you think it says. Double-check that your will beneficiaries line up with your IRA and life insurance beneficiaries. Look up the deed to your house and see if there is a joint owner with rights of survivorship. Families fight when the estate appears to say one thing and then does another. Be clear about your intentions and make your estate follow your wishes.

The best solution to Problem #1 is to set up a Revocable Living Trust and fund it with all your accounts, assets, and real estate. In the story of Mike and Carol, there would have been no problem if Carol had her assets in a trust which would provide for Mike’s use during his life and then pass on to the kids. Setting up a trust takes time, money, and energy, but it pays back all those things sevenfold in the long run.

Our next installment will focus on Problem #2: Who is in charge of your Estate?

TrustGuard™ 2019

TrustGuard™ renewal enrollment for 2019 is now open. TrustGuard™ is for our clients who are serious about protecting their investment in a Trust-based estate plan with an annual review of the plan. The annual fee includes a review of your trust plan and trust funding and annual updates. We sent an enrollment invitation both to clients who were paid TrustGuard™ members in 2018 and those whose trusts were signed in 2018.

Enrollment for the 2019 TrustGuard™ period ends on February 28, 2019. JGB clients who do not re-enroll during the enrollment period will not have another opportunity to re-enter into the program.

Participation in TrustGuard™ is entirely voluntary. The program fee is billed at an annual flat rate. Any JGB clients not enrolled in TrustGuard™ will pay for services covered by TrustGuard™ at our standard rates. The TrustGuard™ enrollment fee is $700.00. Contact our office for a TrustGuard™ Enrollment Form.

DID YOU KNOW?

*Did you know communicating responsively to our clients is important to us? If you send us something and don't hear from us, please give us a call to confirm we received it.

*Did you know that the attorneys at Johnson, Gasink and Baxter, LLP have built their practice by working with great clients like you? We are now offering small estate planning classes for clients and their friends. Class attendees will learn about their estate planning options, the dangers and expense of probate, and how to effectively utilize a Revocable Living Trust plan. The classes are offered at the following dates and locations:

  • Mar. 12th at 2:00 and 7:00 at our Virginia Beach office
  • Mar. 21st at 2:00 at our Williamsburg office
  • Mar. 25th at 2:00 at our Richmond office
  • Apr. 9th at 2:00 and 7:00 at our Williamsburg office

Don't let something happen to your friends and loved ones without proper estate planning in place! Please contact Brooke Heilesen at 1 877 790 4555 to reserve a spot in a class.

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