This is another in a series of blogs on the basics of estate planning.
Perhaps the most common mistake in estate planning is a lack of coordination. This is not where the client, attorney, or advisor cannot walk and chew gum at the same time. This is a failure to consider all the different aspects of a plan and how they may (or may not) work together.
An ever-increasing share of an individual’s wealth is controlled by beneficiary designation.
These may take the form of:
- Real estate controlled by a beneficiary deed
- Life insurance
- 529 plan
- Brokerage account with beneficiary designation
- Bank account with beneficiary designation
The client may have thought they were being proactive by putting beneficiary designations on many of their assets. Let’s say they’ve executed a beneficiary deed on their house with their daughter, Susan, as the beneficiary. Let’s say their brokerage account designates their son, George. The IRA names their son, Bobby, directly.
Years later, the client decides to get a will and seeks the help of an attorney. The client tells the attorney they want a simple will leaving everything to their son, Bobby, because he’s been caring for them for years now. The attorney could draft a will-based plan leaving all the client’s assets to the son. It may be a well-crafted plan and keep the assets in a testamentary trust for the son, maybe providing divorce or creditor protection, if appropriate.
However, the only thing Bobby would get would be the IRA. Further, the IRA going to Bobby would not have creditor protection under federal law (though in places it might have protection at the state level).
This underscores the importance of clients telling their attorneys what they’ve done in the past and consulting with their attorney before moving assets in the future. If the attorney had drafted and funded the assets into a trust, this would have avoided the problem. Of course, the problem could still exist regarding assets not funded into the trust or later acquired in the client’s name individually. However, if a will were used as the primary planning vehicle, the attorney may not have known of the beneficiary designations. The will only controls the items which are in the client’s name upon death. Items with a beneficiary designation transfer to the beneficiary upon death and are not part of the probate estate and not controlled by the will.
Similarly, items in joint tenancy pass to the surviving joint tenant by operation of law and are not controlled by the will.
A well-drafted will or trust is only one aspect of a good estate plan. There’s nothing wrong with using beneficiary designations where appropriate. But, the designations must be coordinated with the rest of the plan.
An upcoming blog will look at another common mistake in the planning process.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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