Many people use joint ownership and beneficiary designations as their own do-it-yourself estate plan. Sometimes it works, if all the stars line up. Unfortunately for many families, the stars do not line up. We see time and time again situations in which joint ownership and beneficiary designations backfire on the family and do not work as intended.
How about the mom who made her daughter joint on her home deed, and then had to take out a $200,000 mortgage on her home that was fully paid for, in order to release an IRS tax lien on the home against her daughter because her daughter didn’t pay her federal taxes. Or the dad who had to pay his son half the proceeds of the sale of the house because dad put the son on the house as a joint owner, and son refused to sign on the sale unless he received his half. Then there was this dad who used beneficiary designations on everything and one of his beneficiaries died before he did, so everything in those accounts ended up going through probate. And then there was this widower who died two weeks after remarrying but did no planning, and who ended up leaving 2/3 of his estate to his spouse of two weeks and the rest to his kids. Or how about the mom who lost her life savings because she named her son as joint owner on her accounts and he was garnished by judgement creditor.
Lifetime trusts
In order to avoid all of these issues with joint ownership and beneficiary designations, you may want to set up lifetime trusts for your children or other loved ones that take effect upon your death. With lifetime trusts, the assets of the trust are available for the beneficiary for their needs, however they are protected from others. If the beneficiary gets sued and has a large judgment against them, the judgment creditor can’t touch the amounts that you left the beneficiary in their lifetime trust. Similarly with the divorcing spouse, the inheritance would be considered the beneficiary’s separate property and not counted in the event of a divorce property settlement. With these lifetime trusts, upon a beneficiary’s death, probate is avoided because the trust directs who the assets will go after the beneficiary’s death.
Independent trustees
If a beneficiary is unable to effectively manage their property and financial affairs because of age or other situations, you may want to consider appointing an independent trustee to manage the inheritance of the beneficiary. By having an independent third-party, you have an objective observer who would more likely follow your instructions and the intent of your trust. You may think of using a beneficiary’s sibling or other family member as a trustee for a beneficiary who could not handle their own assets. There are two main disadvantages of having a sibling manage the purse strings for a beneficiary. Firstly the individual may not have the financial skills as a professional trustee would, and secondly, when one sibling controls the purse strings of another, that could be a recipe for destroying any type of relationship that the siblings once had.
Delay control until a certain age
Under current Michigan law minors cannot hold assets, so you will need an adult trustee until the beneficiary is at least age 18, when they miraculously gain all the insight and wisdom of adulthood. Even though the law says the 18-year-old has all the rights and powers of adults, with the exception of drinking, do you really want that 18-year-old handling large sums of money and go to college, the University of Corvette? You can put provisions in your trust so that the beneficiary does not get control over their inheritance until certain age such as 25 or 30, an age at which they are more responsible and more likely going to properly handle their inheritance.
Mental disability
If in the future, a beneficiary becomes mentally disabled, you can put provisions in your trust that provide for an independent trustee to step in and manage those assets for that beneficiary during the period of their mental disability. With this type of provision, the beneficiary is always provided for and the assets are not squandered by individuals who may be lacking in the skills to handle the funds.
Addictions
If one of your beneficiaries had an addiction to drugs or alcohol, what would happen if the beneficiary receives a large sum of money? Most likely that inheritance would be used to supply drugs or alcohol and those funds would just go down the beneficiary’s throat or in their arm. You can put provisions in your trust that prevents the addicted beneficiary from gaining control of the funds. The funds could be used for rehabilitation or other beneficiary needs as determined by the trustee, but the beneficiary would not have control.
Special needs
If one of your beneficiaries had financial or other difficulties and ended up on governmental assistance that is income or asset based, your inheritance that is left directly to them would disqualify them for their governmental benefits. The beneficiary would then have to spend down their inheritance and then reapply for the governmental benefits. You can put provisions in your trust that allows your trustee to set up a special needs trust for that beneficiary and transfer that beneficiary’s inheritance into that special needs trust. With the special needs trust, the inheritance can be used for the benefit of the beneficiary, without disqualifying the beneficiary from their governmental benefits.
You can protect the inheritances of your beneficiaries. With a properly drafted trust, after you are gone, you can give what you have to whom you want when you want the way you want.
By Matthew M. Wallace, CPA, JD
Published edited May 28, 2017 in The Times Herald newspaper Port Huron, Michigan as: Lifetime trusts are best way to protect heirs when you are gone