You have done more than the majority of people in the state of Michigan, you have some estate planning documents. You have a will, a power of attorney or two, and maybe even a trust. But you also have a couple of IRAs, a retirement plan, life insurance and a brokerage account. A home and some bank accounts round out the rest of your assets.
Your life insurance agent had you name your spouse or children as beneficiaries of your life policies. Your IRA custodian and retirement plan administrator had you do the same thing. You now have named a transfer on death beneficiary on your brokerage account because you were encouraged to do so by your financial advisor.
The kids are now on your bank account as joint owners. Your banker said you should have a joint owner so that in case something happens to you, they can pay your bills. An attorney may even have drafted a quit claim deed naming your kids as joint owners of your home so that they will get it after you’re gone.
However, what these advisors usually forget to tell you is that when you have the beneficiaries or joint owners, you bypass your will and trust. These beneficiary designations and joint owners take precedence over the instructions you have in your will or trust. As to these assets, your instructions in your will or trust are ignored.
If this sounds familiar to you, you no longer have an estate plan, you just have a bunch of documents. You no longer are in control while you are alive and well. Your assets may not provide for you and your loved ones during your mental disability. And after your death, what you have may not go to whom you want when you want the way you want.
For example, you could be the woman who lost her life savings because they were joint with her son who was sued and had a big judgment against him. The judgment creditor garnished his accounts, which included Mom’s accounts holding her life savings on which he was named a joint owner.
Then there is the woman who put the kids’ names on the house jointly with her using a quit claim deed. She had to take out a nearly $200,000 mortgage for her home that used to be free and clear, to remove an IRS tax lien against one of the kids.
What about the dad that put son’s name on the house as joint owner, who then had to pay son one-half the proceeds of the sale of the home because son wouldn’t sign off on the sale unless he got his share.
Then there was another dad who died with a trust, a will, joint owners and individually named beneficiaries, who were all different. Nothing was coordinated. Some kids received more than others. Some grandkids received something and other grandkids received nothing. This was not a happy family.
Or you could have been the son who was named an immediate beneficiary of his share of Dad’s brokerage account. The son’s x-wife found out about the inheritance and garnished over $100,000 for back alimony and child support. Ouch!
What all of these advisers giving estate planning advice typically have in common, is that they are not estate planners and they have not read your estate planning documents. And they probably all tell you that you need to name a beneficiary or joint owner to avoid probate, either during your lifetime or after death.
They are well meaning, but since they are not estate planners, they do not understand the legal consequences of their advice. They are looking at it from their perspective, not yours. Beneficiary designations and joint owners are easy for advisors to administer after a death. All they need is a death certificate, and voila, they are done. They have nothing more to do
If you use a power of attorney or a trust, or have a probate estate, then there are additional documents for the advisors to review. Oftentimes, powers of attorney and sometimes probate documents are sent to the financial institution’s legal department. Then you may have to wait days or weeks while the legal department reviews the document. Then the legal department often asks for more documents to review, with another wait. This is a lot more work for the advisor than joint ownership or beneficiary designations.
If you have a will based plan, the best way to make sure everything goes in accordance with your instructions after you are gone, is to keep all your accounts and other assets in your sole name. Name your estate on any beneficiary designation forms. If you want someone else to be able pay bills for you, add them as a signer on the account with your financial power of attorney, not as joint owner.
The down side of a will based plan is that everything goes through the probate court process with the associated costs. I recently did a survey of probate attorneys, and the most often quoted cost of probate was 5% to 10% of the gross value of the assets going through probate. The up side of a will based plan is that your wishes and instructions are followed.
A more efficient way to transfer assets after a death is with a fully funded trust based estate plan. Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust.
The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.
Will based plans are more economical to draft than a trust. However, the after death costs are substantially more with a will through probate, than with a fully funded trust. It is like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.” It is actually cheaper overall to pay your estate planning attorney to not only draft your trust, but to also fund your trust at the outset, than to attempt to fund your trust on your own.
We have found in our practice that for fully funded trust based estate plans, the initial fees, annual update fees, disability costs and the after death administration costs combined, total less than 5% of the value of the assets. This is substantially less than with a will based plan, with which the after death costs alone are 5% to 10% of the value of the assets.
With a properly drafted fully funded trust based estate plan, you are in control during your lifetime when you are alive and well; you and your loved ones are provided for in the event of your mental disability; and when you are gone, you can give what you have to whom you want, when you want, the way you want; all at the lowest predictable overall cost to you and your loved ones.
By: Matthew M. Wallace, CPA, JD
Published edited March 15, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Do you have an estate plan or just documents?