Estate Planning

Your Will is Just the First Step in Estate Planning

If you are one of the 45 percent of people who have written a Will, congratulations! But it’s not enough just to have a Will in place. You also want to review the ownership of your assets to ensure everything aligns with your Will. There are a lot of moving parts that need to be considered so that your wishes are met.

Coordination is essential, because there are three ways that property passes at death: By Will, by contract, and by operation of law.

Most people think the Will is paramount, but that isn’t always the case. For example, assets that you own jointly with another person (such as a spouse) automatically pass to the surviving joint tenant by law, with or without a Will. For assets that pass by contract – such as life insurance, annuities, 401(k)s, and IRAs — it doesn’t matter what your Will says about those assets because they pass to the person or persons named as your designated beneficiary by contract.

Conflicts Between a Will and a Beneficiary Designation

I cannot tell you how many times I’ve seen a carefully constructed Will rendered meaningless because the ownership of the individual’s assets were not coordinated with the provisions of the Will.

Recently, a friend of mine and her spouse signed their Wills. She reached out to me to ask who should be the beneficiaries of their life insurance policies. Based upon the size of their estate, their ages and the fact that they have minor children, they have Simple Wills with a testamentary trust for their children. So basically, all assets pass to the surviving spouse, but if there is no surviving spouse, the assets were held in trust for the children until they reach age 35. The current beneficiaries of their life insurance policies were each other as primary beneficiary and their children as contingent beneficiaries, so the death benefit was to go directly to the children rather than to the trust!

Minors lack the legal capacity to own property, so the proceeds of her life insurance policy would have been put in a UTMA (Uniform Transfer To Minors Act) account and the children could get full control over the money at age 21. The trust being set up by her Will, however, would have withheld the money until age 35. Things were set right by sending a simple change of beneficiary form to the insurance company, but if the conflict hadn’t been discovered until after her death, it would have been a problem.

My friend had taken the step to get her Will done, but nobody coordinated the rest of her assets to bring them into alignment. That’s why I encourage financial professionals to be present when their clients sign their Wills – if possible. That way the financial professional can bring all the paperwork needed to change all the beneficiaries and ensure everything is coordinated with the Will.

If the process is handled well, and the financial professional is involved and everything is coordinated, I can’t tell you how many times people say “Whew, I have such peace of mind now.” That’s what my friend said to me: “I’ve been dragging my feet doing this, and now I feel good about everything.”

I follow my own advice with my own estate planning. I walk the walk, and I talk the talk. As a single parent with two minor children, I have set up an irrevocable trust with significant amounts of life insurance. But I also own assets outside of that trust — my 401(k)s, etc. I didn’t want that money going to my children before they’re 35, so it’s set up to distribute at ages 25, 30 and 35. I also didn’t want to use a Will to handle the details because I want to keep things private, so I have a separate standby revocable trust for my family, which is just sitting there waiting to receive assets. Hopefully, the trust will be waiting a long time to receive any of my assets, but planning ahead helps protect my family.

Small Things Can Cause Big Problems

I want to close with a story of how wrong things can go if your plan is not in alignment regardless of the size of your estate. After her husband passed away, a woman met with her financial professional to review her assets. All of their assets had been owned jointly, with the exception of her deceased husband’s life insurance policy. He had received paperwork to name beneficiaries of this policy, but he never sent the paperwork in.

Because they jointly owned the house and all of the other assets, these assets passed to her automatically at his death. The life insurance policy was more of a problem. Because her husband failed to name a beneficiary, the proceeds passed to his estate which meant that they had to go through the probate process. The little glitch in the story is that her husband died without a Will, so state intestacy law determined how the proceeds would be distributed. At the time, state law said 50% of the estate goes to the spouse and 50% goes to the children! Suddenly, the proceeds from the insurance policy were going to be split 50/50 between her and her adult children – but her children could disclaim and refuse to accept the money if they wanted to. It took almost a year with probate, disclaimer and family drama before she ended up with the money from the insurance policy. All that trouble could have been avoided by a proper beneficiary designation (and a Will).

I’m sure you can now understand why I’m so passionate about this. Everybody needs a Will, no matter how large or small their estate. However, the Will is only the first step. You need to make the paper work for you, coordinating your assets so that all three aspects of inheritance — your Will and your beneficiary choices — are in alignment. Make sure your lawyer and your financial professional are both involved so that your objectives are met.

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your client’s situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.
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