APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.
Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.
Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:
Die poor. In Arizona, an estate consisting of up to $50,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $75,000 in value. Most other states have a similar law, but with dollar limits that vary widely.
Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.
As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.
Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.
Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.
Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.
Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.
Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?
POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).
What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.
Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.
So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:
Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.
Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.
Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.
FEBRUARY 21, 2011 VOLUME 18 NUMBER 6
We get asked plenty of general legal questions. We try to give helpful answers, recognizing that we can not give specific legal advice to non-clients (and particularly to questioners from outside Arizona, where we are licensed to practice law). Often our best answer is “check with a local lawyer familiar with the appropriate area of law.” Unsatisfying, but it really is the right answer in many cases.
Still, we want to get general legal concepts out to the public. Why? Because we think it makes non-lawyers recognize when the legal problem they face is too complex for self-help, and it even helps make the questioner a better client when they do get to the lawyer’s office.
What kind of legal questions can we answer? very general ones. Like these, which are some of our most common questions:
Does my living trust need a new tax ID number? The best way to answer this is probably to explain when a trust doesn’t need its own “Employer Identification Number” (EIN — even if the trust isn’t an “employer,” that’s the kind of tax ID number it will get).
General rule: every separate entity requires its own TIN, whether that is a Social Security number (for you) or an EIN (for your corporation, trust, LLC, or whatever). First major exception to the general rule: if your trust is revocable, and you are the trustee, for tax purposes it is not a separate entity at all — you don’t need an EIN and, in fact, you shouldn’t get one.
Now let’s make it a little more complicated. If your trust is irrevocable, or you are not the trustee, the rules are a little harder to parse. The key question is whether your trust is a “grantor” trust. If it is, and if there is only one grantor (or one married couple), then it does not need an EIN. If it is not, or if there are multiple grantors, it must have its own EIN.
Note that whether or not the trust needs (or is even permitted to get) an EIN is not the same question as whether it has to file a separate tax return. That one is more complicated, and we’ll save it for another day.
Can a revocable trust be named as beneficiary of an IRA? Yes, but be careful. This is something you should discuss with your attorney or your accountant (or both).
Before we talk about naming your trust as the beneficiary, we have a question for you: what are you trying to accomplish by naming the trust as beneficiary? If your trust divides equally and distributes outright among a fairly small number of beneficiaries upon your death, why not just name those beneficiaries on the IRA as well as in the trust? Then you don’t have to figure out the rules on naming a trust as beneficiary, and you don’t have to keep wondering if you’ve done it right.
Maybe you have a child who is ill, or a spendthrift, or needs to have his inheritance placed in trust. In that case — and in a few other cases — it can make sense to name your trust as beneficiary of your IRA. Now you need to become familiar with the difference between what lawyers usually call “conduit” trusts and “accumulation” trusts. The former require distribution of any money received from the IRA’s minimum distribution requirements each year, and the latter allow (but do not require) the IRA distributions to accumulate. The distinction is important; the accumulation trust will require distributions on the basis of the oldest possible beneficiary of the trust. That is the result in most cases where a trust is named as beneficiary.
These same rules apply, by the way, for other tax-qualified accounts, like 401(k) and 403(b) plans. Some advisers will tell you it is not even permitted to name a trust as beneficiary of an IRA or qualified plan. They are wrong, but the rules are a little difficult to figure out in individual cases. Also, some account custodians (that is, the bank or financial institution where the money is held) may limit or even prohibit trusts as beneficiaries.
How does community property work in Arizona? Nine U.S. states are usually listed as the “community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico recognizes community property, and Alaska allows couples to choose community property treatment of their joint assets.
But what does it mean to have property held as community property? In Arizona, it means that the property is jointly owned, that each spouse has an equal interest, and that either spouse has the right to manage the property on behalf of the community.
When one spouse dies, his (or her) half int0erest in the community property normally passes according to his will or, if he did not sign a will, to his children (including those who are also children of the surviving spouse). To avoid that result couples are permitted to specifically designate their property as “community property with right of survivorship.” If that title has been used, the surviving spouse receives the entire community asset on the first spouse’s death. Note that the different community property states treat the right of survivorship differently, and we are only describing Arizona’s approach here.
It is also possible for a portion of an asset to be subject to community rights. This might happen, for example, if one spouse brought the property into the marriage but mortgage payments were made during the period of marriage from community income or assets. This kind of calculation is usually much more important in divorce proceedings than upon the death of one spouse.
Property received by inheritance or gift, and property owned before the marriage, are not community property — they are the separate property of the recipient or owner. Couples can choose to convert their community property into separate property, and can even agree that property acquired in the future will be treated as separate property.
Thanks. But I have a different question to ask. Go ahead — pose your question as a comment here, and we’ll try to answer it. Don’t be too surprised if we tell you that it is too specific, or requires knowledge of another state’s laws, or we can’t answer it for some other reason. But we’ll try to be helpful.
One word of caution: do not give us a detailed fact pattern and ask us for advice. We simply can not provide individual legal advice — free or even for a fee — based on unsolicited e-mails or comments. You will not have any lawyer/client privilege for your recitation of the facts, and we will not be able to help with that kind of inquiry. We do welcome your general questions that give us a chance to explain legal principles, though.
OCTOBER 18, 2010 VOLUME 17 NUMBER 32
Three weeks ago we wrote about how to leave an IRA (or other qualified retirement plan) to a special needs trust for your child who has a disability. Two weeks ago we wrote about whether you should (and how you would) name any trust as beneficiary of an IRA. At the risk of getting too technical for most readers, this week we are going to tread lightly where few have gone before: let us explain what happens after you have named a trust as beneficiary of your IRA, and what choices the trustee of your trust might face.
First we have to clarify a couple of often-misunderstood concepts. We will write here about IRAs, but the same rules will apply to pretty much any “qualified” retirement plan. That means 401(k), 403(b), Keogh, SIMPLE, SEP-IRA and other plans will follow the same rules. Different tax rules apply to Roth accounts, but some of the same distribution principles will apply. For convenience, though, we will keep talking about IRAs.
There are actually several stages of IRA we might discuss. Let’s distinguish among them:
A regular IRA is “owned” by the contributor. There may be some community property rules in the state in which the contributor resides, or some marital rights attaching to the IRA in non-community property states, but for tax purposes the contributor “owns” the IRA.
One choice your beneficiary may have after your death is to “roll over” your IRA. If your beneficiary is your spouse, he or she can roll the IRA over into a new IRA in their name. This, incidentally, is where the IRA/401(k) (and etc.) distinction gets muddy; your spouse can roll your 401(k) account over into a new IRA. Those IRAs, whatever their source, are usually referred to as “roll-over” IRAs.
Spouses are not the only ones who can roll IRAs into a new account. Non-spouse beneficiaries can also do something similar, and the resulting accounts are often called “roll-over” IRAs, too. But they are different. They are also “inherited” IRAs (see below), and the beneficiary must begin withdrawing money from an inherited IRA immediately.
If a non-spouse beneficiary leaves your IRA right where it is, they become the owner but the IRA is now an “inherited” IRA. They can designate a beneficiary in case they die before withdrawing all the IRA funds, but any beneficiary will have to make withdrawals at your beneficiary’s rate. So, in other words, you name your 45-year-old daughter as beneficiary, you die, she names her 22-year-old son as her beneficiary, and upon her death he has to withdraw based on her actuarial life expectancy, not his own. She might have decided to move your IRA to another custodian; in that case she has an IRA that is both a “roll-over” and an “inherited” IRA.
With that background, the Internal Revenue Service has recently clarified how this all can work if you name a trust as beneficiary of your IRA. In Private Letter Ruling 201038019, issued on September 24, 2010, the IRA gave guidance to an individual taxpayer who requested approval for a proposed way of handling just this problem.
Private Letter Rulings, by way of background, are not intended to be official regulations or rules. They are individual guidance offered (for a substantial fee) to individual taxpayers who want to be sure they are not going to get in trouble. Although “private” in the sense that they apply only to that taxpayer, they are public in the sense that the IRS discloses them to everyone, and they do give some indication of how the IRS thinks about the issues addressed. You are probably safe proceeding on the basis of an Private Letter Ruling.
Here’s what the taxpayer proposed to do, and what the IRS approved, in the recent Private Letter Ruling:
The decedent had named his revocable living trust as beneficiary of two IRAs. He had three children, each of whom was to receive an equal share of the trust after his death.
The trustees of his trust proposed to divide each of the IRAs into three separate IRAs. In other words, there would be a total of six IRAs, still (for the moment) in the name of the decedent. Then each child would be named as beneficiary of two of the IRAs — one from each of the original IRAs.
Once that was accomplished, each of the six “transitional” (their term) IRAs would be rolled over into a new IRA. Each of those new IRAs would name one of the children as the inherited owner, and each child could then name his or her own IRA beneficiaries.
The custodians of those “final” six IRAs were each given a copy of the decedent’s revocable living trust, which was valid under state law and became irrevocable upon the decedent’s death. Those elements of the plan critical because they are required by federal tax law.
Each of the three children would be required to begin withdrawing their IRAs immediately, and at the rate calculated for the oldest of the three children.
The taxpayer’s proposed approach was fine with the IRS, but it would not necessarily be the only way to proceed. The trustee of the trust might be permitted, for instance, to leave the IRAs right where they were, to withdraw the funds over the period of the oldest child’s life expectancy, and to distribute those withdrawn amounts to the three children. But the IRS guidance makes it clear that this approach works, too.
The Private Letter Ruling doesn’t address one question. Why would the original IRA owner have named his trust as beneficiary if the IRAs were going to be distributed outright to the three children anyway? In such a case, we usually recommend that the owner name his children as beneficiaries directly — thereby avoiding the shortened payout period based on the oldest child’s life expectancy, as well as the need to go through the intermediate steps described in the Private Letter Ruling.
There are a number of reasons the IRA owner might have chosen to leave his IRAs to his trust. Usually those reasons include a disabled spouse, a child receiving public benefits, an unequal distribution of proceeds or some other complication. The Private Letter Ruling in this case does not give us enough information to determine which, if any, of those conditions applied. Still, it does give us valuable guidance for those cases in which a trust is named as beneficiary of an IRA.
OCTOBER 4, 2010 VOLUME 17 NUMBER 31
Last week we wrote about how you can go about leaving your IRA (or 401(k), 403(b), etc.) to a child with a disability. In passing we mentioned that the discussion about how to leave your IRA to any trust could wait for another day. Today is that day. Let’s tackle this as a Q&A session (or, if you prefer, we can call it a FAQ list).
Can I name a trust as beneficiary of my IRA?
Yes. That was easy.
Are the rules the same for 401(k), 403(b) and other retirement accounts?
Generally, yes. If you have more esoteric retirement accounts, talk to someone to make sure you are doing the right thing. What the heck — talk to an expert in any case. Our purpose here is just to give you some background and introduce the language and issues, not to give you direct legal advice.
Before you tell me how to do it, why would I want to name a trust as beneficiary of my IRA?
There are several reasons you might:
If you have a child who is a spendthrift, or married to a spendthrift, or who is involved in tax issues or legal proceedings, you might want the retirement account to be protected against creditors.
If you worry that your child might get divorced and want to keep your retirement account out of the divorce calculations and proceedings, a trust might help protect the account (and, for that matter, other assets you are considering leaving to that child).
You might just want to delay the withdrawal of your retirement account as long as possible. Of course, you could name your child as beneficiary and trust him or her to withdraw the money as slowly as is permissible. With a trust you can help assure that “stretch-out” of the IRA.
Why is my banker/broker/accountant telling me I can’t name a trust as beneficiary?
That used to be the rule, and lots of professionals are not yet caught up. There are also a couple of special rules that apply when you name a trust as beneficiary — though they are not at all hard to comply with, so it’s not clear why advisers get hung up on those rules. Finally, even though the rules permit naming a trust as beneficiary they do not require all account custodians to go along — so your broker might be telling you that, while the rules permit naming a trust, your account can not take advantage of those rules.
If I want to name a trust as beneficiary, what must I do?
There are a handful of requirements. The important ones: give the IRA custodian a copy of the trust (that, by the way, can be taken care of later — but you can do it now if you want), name only one income beneficiary for the trust, and make sure your beneficiary designation comports with the trust set-up and your larger plans. That probably means you should get competent professional assistance, but that’s usually a good idea for your estate planning anyway.
Are there bad things that happen if I name a trust as beneficiary?
Yes, but not very bad. Depending on the ages of all the beneficiaries and potential beneficiaries, you might have shortened the stretch-out time to a period less than the life expectancy of the primary beneficiary.
Uh, could you please repeat that — in English?
Of course. Let’s use an illustration.
Suppose you have three children: Abigail, Ben and Candy. You are OK with Abbie and Ben getting their shares of your IRA in their names — you trust them to make sound judgments about how quickly to withdraw the money, and you don’t want to bother with a trust for them. Candy is a different story. The details of that story don’t matter: you just want to put Abigail in charge of deciding whether to withdraw more than the minimum amount each year from Candy’s share of the IRA.
You can name a trust for the benefit of Candy as beneficiary of 1/3 of your IRA (naming Abbey and Ben as the other two beneficiaries outright). But what will happen if Candy dies before the IRA is closed out?
As it happens, Candy does not have children. You decide to have the trust say that upon Candy’s death the remaining trust interest in “her” share of your IRA will go to Abigail and Ben. Abigail is ten years older than Candy. That all means that Candy will have to make her IRA withdrawals using Abigail’s age and life expectancy.
But wait. Candy does have children?
Well, why didn’t you say so? That makes it even easier. You can have the trust provide that if Candy dies before the last IRA withdrawal her children become the beneficiaries of the trust (and, indirectly, the IRA). As before, we use the oldest potential beneficiary as the determining age — and we are going to assume for the sake of this piece that Candy is older than all of her children. No effect on Candy’s withdrawal rate. But note that if Candy does die, her children will still have to withdraw from the IRA at Candy’s rate, not their own.
What about estate taxes?
Now you’re talking about a whole different kettle of fish (or something). As you know, the estate tax situation is in flux right now, and some states have their own estate tax rules. That makes it very hard to generalize, and unnecessarily complicates this discussion. Suffice it to say that your IRA will be part of your estate for estate tax purposes, and just because there is income tax due on it does not mean that there won’t also be an estate tax liability attached to it. But if your entire estate is worth less than $1 million, you probably are not going to care very much. Stay tuned for a new number to be inserted in that sentence sometime before the end of 2010.
That sounds pretty simple. Could you please make it more complicated?
We’d be happy to, but it’s not required. We could give you information about what lawyers call “conduit” trusts and “accumulation” trusts. We could explain why you can’t have the money go to a charity upon Candy’s death. We could even try to give you some better names for your imaginary children (while still adhering to the A, B and C convention). But for most of our clients, those complications are unnecessary.
The bottom line: it is not that hard to name a trust as beneficiary of your IRA, 401(k) or other qualified retirement plan. You just need to review the rules, and understand why you might want to do such a thing.
It is also permissible to consider all that, try to get the rules straight, and then decide not to bother. One thing that we don’t want to allow you to do, though: ignore the issue, prepare a will that seems to handle all of your assets, and then have an IRA beneficiary designation that doesn’t agree with the rest of your estate plan, imposes an undue burden on your children and beneficiaries, or fails to address your child’s disability, money problems or legal or financial situation.
We hope this has helped demystify a subject that lawyers and accountants often seem to enjoy complicating. Your life, however, tends to be complicated. Please get good legal, financial and investment advice before you decide what you should do.
It has been wonderful working with you. We are pleased that your estate plan is completed, and simultaneously saddened that we will not be seeing much of you for a couple years. Please remember to get in touch with us if there are major life changes. In any event, you should probably make an appointment in five or six years just to check on what is new — either in your life or in the world of estate planning.
In the meantime, we would very much like it if you would help us out. It will make things much easier for us (and for your family) if you will take these additional steps:
Please talk with your family. The best way to minimize disappointment and disputes after your death is to let everyone know what to expect in advance. Be prepared to discuss issues with your family, too. You may even make changes to your estate plan based on those conversations — we will be happy to have follow-up discussions as needed. There is no legal requirement that you either share or withhold copies, but there are good practical reasons to let them in on the plans.
Recently we had a client who carefully prepared her advance medical directives. She told the son she named as her agent what she wanted, and she completed all the documents correctly. When she fell ill, her daughter (who had not maintained much contact) could not believe her mother would want to refuse medical care. She initiated legal proceedings to force continued aggressive treatment. She was not successful, but the cost and heartache were both considerable — and brother and sister no longer speak to one another. Mom could have avoided that outcome, we think, if she had discussed her wishes with both children.
Coordinate your beneficiary designations. If your will leaves everything to your children equally, but your life insurance names only your oldest daughter as beneficiary, your daughter gets the proceeds regardless of your will. Is that what you intend? If so, make it clear. If not, change the beneficiary designation to match your will. Different considerations are involved with life insurance, IRAs, and other kinds of policies; please ask us for assistance in getting your beneficiary designations arranged.
In a recent case in our office, a mother told her three children that they and her long-time companion were named as equal beneficiaries on her IRA account. When she died it turned out that the companion was the only beneficiary. Did mom intend that result, or was it an oversight? An excellent relationship with the grieving companion is endangered by this outcome. If, in fact, mom wanted to split the account among the four people most important in her life, that will not be the result.
In our recent example, even if all four beneficiaries were to agree that the account should have been split, it is not as easy as just doing that. Income tax consequences mean that the children would receive considerably less than their mother apparently intended. Even if everything can be worked out harmoniously, there will be legal expenses, not to mention a period of uncertainty and unease.Please talk with your family, and even show them the documentation. Don’t leave them uncertain about whether you really intended the result your documents indicate.
Don’t tinker with your beneficiary designations, documents or titles. If someone at your bank says you should make all your accounts into “Payable on Death” (POD) accounts, please talk to us first. If we have helped you name a trust as beneficiary on your IRA and your accountant tells you that’s a mistake, please talk to us before you change it back.
Please do not put your children’s name on your house, or your bank account, “just in case.” We prepared your documents to take care of “just in case,” and your changes may undo the value and effect of the documents we prepared for you. We are happy to discuss the effect of the change in title; if your banker tells you that we “just don’t know how banks work,” remind him that he is not the expert on how the law works. There is nothing that prevents us from meeting with you, your insurance agent and/or your broker all at once; we can then discuss and reach agreement on what should happen to effect your wishes.
Prepare a personal property list. Almost every will we prepare includes a provision that allows you to designate individual items of personal property (like family heirlooms, antique furniture, favorite paintings, etc.) that should be left to specific individuals. We encourage you to complete that list, even if it remains a work in progress. It need not list every item in your house, but time and again we have seen the outright joy on the faces of friends and family members (and particularly, we might note, on the faces of grandchildren) who received an individual item from such a list. It can convey a special message to your loved ones.
Some years ago we handled the estate of a woman whose personal property list ran to more than fifty pages. She felt strongly about each item on the list; you probably do not have that many specific bequests you wish to make. If your list is only three items long, that is fine. And once again, we urge you to show it to your family; your son may surprise you by telling you that he doesn’t actually have any interest in grandma’s antique cedar chest, and you should know that now so that you can leave it to your granddaughter instead.
Prepare a list of assets and directions. It really helps if you have left a roadmap for the person who handles your estate. You know perfectly well where the life insurance policy you bought in 1955 is located, and how often the statement from that little bank in Ohio arrives. Your daughter does not, and if she is handling your estate she will spend countless hours looking for those kinds of information. You can make her job much easier if you give her some clues and direction. She also will need to make decisions about your funeral, your obituary and even what (if any) music will be played. If you have told her what you want, her job will be so much less stressful, and the other family members can hardly criticize her for following your directions.
When you signed your estate planning documents, we gave you a form called “What My Family Should Know.” It is not the only way to gather this information, but it can be a useful starting point. If you can not locate the form, do not hesitate to contact us for a new copy; even if you have partly completed it and just want to start over or make a few changes, we will be happy to give you another blank copy. Just ask.
Incidentally, we would really like it if your online login and password information was available somewhere. Whoever handles your estate (whether after your death or after you have become incapacitated) will be able to check (and close) your e-mail account, get up-to-date information from your online bank and brokerage services, and complete many steps that take much longer if they must be done solely by mail. There is a balance to be struck, of course; you need to keep that information confidential while you are still alive and capable, but available to the one person who needs it when you are not able to pass it along in person. Let us know if you need help with this project; we might have some ideas about how to manage the competing interests.
Feel free to update our information. Many of our clients send us periodic updates of their assets, titles and information. We do not charge to glance at those forms as they arrive, and that means there is at least one other place your family might look for roughly current information. We will simply hold the information in your file, to be updated again when we next hear from you.
We hope you enjoy perfect health, and that your estate plan turns out not to have been needed. This is one instance in which it is good if it turns out you didn’t need to expend the funds. But please help us so that if something should happen, we can make your estate plan work the way you intended. And we’re looking forward to seeing you in five years (or sooner) to update.
James Marier was married to his wife Kathleen for twelve years, until the couple divorced. As often happens, Mr. Marier continued to maintain a good relationship with his step-daughter, Tracy Marks. Her children called Mr. Marier “Grandpa Jim,” and he continued to spend holidays with his ex-wife, his step-daughter and the grandchildren.
Mr. Marier had a 401(k) retirement plan through his work, and after his divorce named his mother as its primary beneficiary. Later, after a visit from his sisters, he decided to break from his family altogether, and he wrote a will naming his step-daughter as personal representative and primary beneficiary. He also decided to change the beneficiary to leave his 401(k) plan to Ms. Marks.
Mr. Marier filled out the change of beneficiary form, listing Ms. Marks as his primary beneficiary. In the space marked “relationship” he apparently wrote in something, but then covered the entry with white-out. The form as sent to the plan administrator left the space blank. The administrator, in turn, mailed the form back to Mr. Marier with a note that he needed to complete empty space, and noting that “white-out is not accepted.”
Unfortunately, Mr. Marier’s health was declining rapidly by that time. When the form arrived he had just undergone surgery for a brain tumor, and the form was never returned to the 401(k) administrator. Mr. Marier did call the administrator’s office at one point, and asked who was named as his beneficiary; the individual who spoke with him looked at a scanned copy of the form and assured him that his step-daughter was his primary beneficiary.
When Mr. Marier died, the 401(k) administrator initially determined that the last beneficiary designation was improper and began the process to pay the plan balance to Mr. Marier’s mother’s conservator. Ms. Marks objected, arguing that she had been properly named as beneficiary. The administrator then decided that the failure to fill in the relationship line was “not a material omission,” especially since previous beneficiary designation forms on file adequately identified her, but turned to the courts to determine who should receive the account balance.
The trial court found that the 401(k) plan required that the form be properly completed, and ordered the money paid to Mr. Marier’s mother. The Eighth Circuit of the U.S. Court of Appeals disagreed, however, ruling that the plan’s decision to accept the form as being in substantial compliance, even though the administrator then turned the matter over to the courts, was sufficient to leave the account to Ms. Marks. Marks v. Irwin Bank & Trust, October 19, 2006.
When people consider “estate planning” they usually are thinking about preparing a will. Sometimes the common conception of estate planning includes preparing a trust as well, and often durable powers of attorney are also part of the plan. But two recent cases demonstrate that “estate planning” is really much more—it includes the titling of assets and beneficiary designations as well. The most carefully-considered estate plan may fail if those other issues are not also dealt with at the same time.
Lori Flanigan was divorced and had two children when she married her second husband, Craig Munson. Ms. Flanigan had two life insurance policies through her work totaling $217,600. Her divorce agreement required her to name the children as beneficiaries on her life insurance, but she had not gotten around to completing a beneficiary designation form when she died in 1995.
Her insurance policies provided that they would be paid to a surviving spouse if she had not designated a beneficiary, and so the proceeds were distributed to Mr. Munson. The children’s grandparents (who took custody after Ms. Flanigan died) then filed a lawsuit to impose a constructive trust on the remaining insurance proceeds and Mr. Munson’s home, since he had used some of the proceeds to pay off his mortgage and other debts.
The trial judge denied the grandparents their requested relief, but the New Jersey Supreme Court agreed that the insurance proceeds should go to the children. It ordered the money transferred to the children’s benefit—eight years and thousands of dollars in legal fees after her death. Flanigan v. Munson, April 3, 2003.
Daniel Lambert was not so lucky. He argued that his mother’s life insurance policy should be part of her estate, and that her will specified that he was to receive a portion of that estate. Unfortunately for him, whatever his mother’s intentions might have been she had named her daughter Suella Southard as beneficiary.
Another sibling, brother Steven Powell, was prepared to testify that their mother had always intended that the life insurance policy should be used to pay the costs of handling her estate and then distributed to the children according to her will. He was not allowed to testify, however, because of a long-standing court rule prohibiting testimony about conversations with deceased persons, the so-called “Dead Man’s Statute.” The Indiana Court of Appeals refused to permit imposition of a constructive trust on the life insurance proceeds. Lambert v. Southard, April 1, 2003.
The moral: “estate planning” requires consideration of beneficiary designations and account titles as well as signing of a will, trust and powers of attorney. Even a carefully-drafted estate plan, including a will, a living trust and both financial and health care powers of attorney, can be altered or frustrated by incorrect (or missing) beneficiary designations, joint tenancies, “payable on death,” “transfer on death” or “in trust for” account titles or other, similar arrangements.
