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Make one estate plan, not a dozen

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Estate Plan Edge: A will or a trust alone is not an estate plan — and it can work against your wishes.

The Farm Progress Show is always a great opportunity to meet with so many of you. It is also interesting to hear some of the family stories about estate plans that worked and, unfortunately, estate plans that failed.

One of the most common themes of the sad stories went something like this: “When my mom (or dad) died a couple of years ago, her will said that the five kids would share her estate equally. But for some reason, my brother ended up with almost all of it.” There is always animosity in these stories. Family reunions are strained at best, but more likely nonexistent.

The variations on the stories include “mom had a will” or “mom had a trust,” with the frustration level even higher in the latter case. The person who ended up with most of the estate may have been the executor or trustee, they may or may not have been the farmer — but that’s never the person telling me the story!

How do these things happen?

It is almost always a result of the parent having attempted to plan but failing to follow through to make it work. The family mistakenly thought of the document — the will or the trust — as the estate “plan.” However, the plan document will only direct the division and disposition of assets that document is designed to control.

Reality check

What did Mom’s will control? Property and accounts owned in her sole name, and beneficiary assets (such as life insurance, annuities and individual retirement accounts) that designate her “estate” as beneficiary. Such assets will follow her will, and are administered through probate court proceedings.

So why did that one brother end up with most of Mom’s assets? Probably because Mom heard she should try to “avoid probate.”

There are plenty of ways to do that. She could deed property to a child and retain the income for life (a life estate). Not only is this a way to avoid probate, but some people do this to protect the property from nursing home expenses. She might simply add a child as a joint owner on the deed.

Or, she could sign a Transfer On Death Instrument (TODI), which allows the real estate to pass on her death to the designated beneficiary without probate. For her financial assets, she simply names a child as joint owner with the idea that this child can handle the finances if she becomes ill. On death, the account will also pass to the joint owner free of probate. She probably named the child who is handling her finances as the designated beneficiary of life insurance, annuities and IRAs, rather than having them pay to her estate, which subjects them to the probate process.

Mom thought avoiding probate was the main purpose of estate planning, so in order to avoid probate, she titled her assets such that they will not be divided according to her will. Ironically, Mom probably thought she was keeping things “simple.” But by naming joint owners or individual beneficiaries on each of a dozen assets, she has a dozen different plans that work against each other.

According to the will?

“But,” you might ask, “wouldn’t naming the son who is also going to be the executor as the joint owner or beneficiary mean he divides those assets according to the will?” Unfortunately, no. As joint owner or beneficiary, he gets those items when she dies. Period. 

To add insult to injury, if Mom leaves any liabilities (medical expenses, funeral bill, debts or taxes), guess who pays those, as well as the professional fees incurred by the executor brother? The estate. The executor is obligated to use whatever assets do pass under the will to pay the liabilities, further reducing what gets divided among the kids by the will!

What if Mom used a living trust instead of a will? Does that solve the problem?

We heard the same horror stories, and the causes were largely the same. The trust says divide equally, but Mom left many assets out of the trust. She still named the in-charge son (trustee) as joint owner or designated beneficiary on assets. On her death, he gets the assets because they were not controlled by the trust.

Estate plans can and should work. But you must decide how you want your estate to be divided, put it into a written legal document, and then assure that all your assets are titled as necessary to follow the plan.

Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com. The opinions of this writer are not necessarily those of Farm Progress/Informa.

 

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