Estate Planning is often misunderstood. Some people think it only involves preparing a simple Will. Some think it only involves preparing a Will or a trust. How hard could that be? But it entails so much more than that. It involves coordinating all the various aspects of a person’s assets so they achieve the goals of the person. Typically, this involves a Will and / or a trust. But it also involves coordinating beneficiary designations on life insurance, IRAs, retirement plans, etc. It also includes planning during lifetime for the person’s incapacity. Increasingly, it may also involve planning for qualification for public benefits, either for the client (for Medicaid) or one of the client’s loved ones who has special needs. In considering how to plan, many different considerations may come into play, including various tax and property issues.
Let’s look at an example: John and Betty have three children, Bill, Jane, and Mary. They want each other to get everything at the death of the first of them to die and then for their assets to be split among their children at the death of the survivor of them. Betty has an IRA that is the majority of their net worth. They have a house they own together. They have a brokerage account.
John and Betty decide to save money and use an internet do-it-yourself package to devise their own plan. Unfortunately, doing so had unintended consequences. They each prepared a trust and put the brokerage account and house in it. They each prepared Wills. Both of these documents left everything to the other of them and at the death of the survivor divided the assets among their three children. John and Betty were smiling because they thought they avoided probate and the fee for having an attorney plan their estate.
However, they didn’t consider everything. They knew they couldn’t put the IRA in the trust during Betty’s lifetime, which is correct. However, they didn’t check the beneficiary designation on the IRA. Sometimes, people forget about beneficiary-designated assets when trying to plan their own estates. Unfortunately, before Betty married John, she had named her then-boyfriend, Luke, as the beneficiary. Since she hadn’t changed that beneficiary designation before her death, Luke received the IRA (the bulk of their assets) not John. This was the case even though Betty had named John as the primary beneficiary of all of her assets in her Will and trust (as John and named Betty his primary beneficiary, as well). Imagine the family’s dismay when they discovered that most of the family’s assets went to Betty’s old boyfriend, Luke.
Estate Planning may seem simple on the surface. But there are many factors to consider, including tax law, property law, family law, public benefits, and many more areas of the law. Don’t be penny wise and pound foolish. An attorney who focuses their practice in Estate Planning can help avoid the pitfalls which Betty and John stumbled into and many more.
Future articles in this series will address other questions about Estate Planning. Here is a link to the prior article in the series.
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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- CRT: Best Tool for Proposed Tax Changes? - April 27, 2021