The following is a description of a common mistake made by individuals when trying to stay true to their estate planning goals.
A widow named Jean meets with her attorney and signs documents to set up her estate plan. The core of her estate plan was a will which at her death, divided her remaining assets equally between her two children, Bill and Sue. Her investments consist of a checking account, savings account, some Certificates of Deposit, stock in a few companies, an IRA consisting of mutual funds, her home, one relatively new car, and her household contents.
After signing her will, she decided it would be a good idea to put her daughter on her checking account in case something happened and needed help to pay her bills. She picked Sue because she lives close by, and Bill lives several hundred miles away on the east coast.
Jean also added Sue’s name on all the Certificates of Deposit and the savings account. She maintained the stocks, her home, and car in her sole name. In her IRA, she named Bill and Sue as equal beneficiaries.
Ten years later, Jean passed away. Her will said everything was to be divided equally between Bill and Sue. However, regardless of what the will said, that is not what happened. Because Jean added Sue to all her bank accounts, all those funds bypassed the will and went directly to Sue as the surviving joint owner. The IRA also bypassed the will but was divided equally between Bill and Sue because of the beneficiary designation. All her remaining assets, since they were owned in Jean’s sole name, were distributed equally between Bill and Sue as directed in her will.
How do you think Bill feels about Sue getting more than he did when the will said everything was to be divided equally between them? How does Sue feel that she is put into this position? Does Sue have to give Bill a portion of her inheritance to equalize the distribution of Jean’s estate?
What this scenario points out is the importance of how assets are titled to make certain your primary estate planning goal is fulfilled. If Jean wanted to have Sue to access her bank accounts to pay her bills if she was not able to do so, she could have instead named Sue as her power of attorney and not as a joint owner. Under a power of attorney, Sue would not own assets with Jean but could transact business on Jean’s behalf. Not only would Sue be able to have access to Jean’s bank accounts to pay her bills she would also be able to handle other business for Jean, such as managing her other investments and handling all her other financial matters.
By leaving all of Jean’s assets in her sole name, all her remaining assets would be divided equally between Bill and Sue, which is her primary estate planning goal. There would not be the uncomfortable or even confrontational situation between Bill and Sue under the scenario when Jean adds Sue to her bank accounts.
If Jean desired to avoid probate, she could have named Bill and Sue as beneficiaries on all her bank accounts under a Paid on Death (POD) designation. Jean could have done something similar with her stock holdings by adding a Transfer on Death (TOD) beneficiary designation naming Bill and Sue as equal beneficiaries. The TOD designation could also be used on the house and car to pass them to Bill and Sue equally outside of probate. Of course, the IRA already has a beneficiary designation option which Jean exercised.
As an alternative, Jean could have set up a revocable living trust and transferred title to almost all her assets in the name of her trust, which would have also avoided probate at her death. In addition, the trust would provide for the management of her financial affairs for all the assets titled in the name of her trust. Of course, with a revocable living trust, Jean would be able to maintain total control of her assets and financial affairs while she is alive and competent.
Unfortunately, it is very common for individuals to unknowingly unravel their estate plan by titling assets incorrectly. This especially happens when several years pass from when the estate plan was first put in place. To avoid this mistake happening to you, it is important to annually review your primary estate plan, be sure it is up-to-date, and verify that all your assets are titled correctly and with the proper beneficiary designations.