Tuesday, July 23, 2019

Estate Planning Mistakes to Avoid

Law Matters

The internet is awash with help for the do-it-yourself estate planner. It is also full of tips for the do it yourself auto mechanic, home electrician or plumber. If you like, there are even kits and instructions to build your own airplane or boat.

Many of those who recognize the danger of doing their own electrical work or fixing the brakes on their car do not feel the same danger in doing their estate plan. Where there’s a will, they will do it “my way.” Their plans are often undone by what they fail to consider.

One of the biggest mistakes made by the do-it-yourselfer is failing to plan for the death of a beneficiary. By statute, a bequest to a person who fails to survive the testator goes to the descendants of the named beneficiary, but only if the name beneficiary is a grandparent or a descendant of a grandparent of the testator. A lot of people do not consider that a child or children might die before they do, which can result in their estate going to whoever gets the residuary or what is left over after specific gifts are made.

Another problem is leaving assets or bequests to minors. A minor lacks legal capacity to own money, but who will manage the money for the minor? Unless the funds are left under Florida’s Uniform Transfers to Minors Act, a court will need to appoint a property guardian to manage the child’s money until age 18. The guardian is most often a parent of the child, who could be the former and despised spouse of the dead, named beneficiary. Intent of the decedent for use of the funds may be completely disregarded if the funds were not left in a trust established by the decedent with specific direction for permitted use of the money.

A lot of people try to plan distribution of their estate around specific assets. House in Florida to one child, the house in Michigan to another and the stock market accounts to a third. To even things out, a certificate of deposit is thrown in as part of the distribution to one of the children. None of those assets may be around at time of death and, even if still owned, their values may have changed substantially. Value of the Florida home may have skyrocketed while the northern home tanked. If the intent was to provide approximately equal distribution to each child, using a percentage or fraction of all assets as the distribution formula would be a better plan.

Some suffer from the belief that children will enjoy the Florida home as much as they did while mom and dad were alive. To ensure the joy, some parents place restrictions on ability of their children to sell their Florida home and mandate that they own it together for years to come. Who uses the house and when, paying bills and even desire to sell are deemed unlikely or ignored.

To avoid probate, some add their children on title to their real estate and bank accounts. Even the children may think that is quite thoughtful. Sadly, it can really be an absence of thought.

As far as the parents are concerned, placing children on title to realty and accounts opens a Pandora’s box of potential trouble. To sell or mortgage the house, the children must cooperate. Certainly, little darlings will go along with whatever mom or dad requests. But mom and dad might not be dealing with their own children. When one is incapacitated, mom and dad would be dealing with the guardian and the guardian’s responsibility is the financial well being of the child. That could mean sale of the property to get the child’s portion converted to cash. Creditors of a child might also make a claim to assets in the child’s name even if the child does not choose to help himself or herself to the assets before mom and dad die.

The kids may breathe a sigh of relief when mom and dad die and are no longer owners or on title of accounts and real property they titled with their children. That sigh of relief turns to a sigh of despair when the children find out that they have to pay a lot more income tax on the portion of the assets they received as gifts than they would have paid if inherited. That is because the tax laws treat gifts with the most unfavorable of tax consequences.

The person receiving a gift is treated as if that person paid the lesser of what the asset was worth at time of the gift or what the giver paid for it (basis). If inherited, the recipient is treated as inheriting the asset at its date of death value. When sold, the profit is calculated by subtracting the child’s basis from the sale price and the child pays taxes on that difference. For an asset with significant appreciation like stock or real estate, the difference between what gift basis and inherited basis can be substantial.

What about the family black sheep or problem child? Many parents have a child or children who they do not think would wisely use an inheritance. It might be because they are young. It might be because they are improvident. And, it might be just because the parents are worried about what might go wrong in a divorce or car accident. If they simply name the problem child as a beneficiary, the child gets his or her portion right away. If they place it in trust with conditions or terms for distribution (i.e. all of the income each year with chunks of principal at certain ages), many problems can be avoided. The terms of a trust are limited only by the intent and plan of the creator.

One of the more interesting mistakes is failure to include what is known as a residuary clause in the Will. The residuary clause states what is to be done with assets that are not otherwise specifically distributed by the Will (i.e. gifts not made because a beneficiary is dead or for assets which are not specifically given to a beneficiary). If there is no residuary clause, any assets that would be distributed by such a clause end up being distributed as if there was no Will at all. Although Florida has a statute directing who gets the decedent’s assets in absence of a Will, that statute does not always follow a person’s intent. The case of Aldridge is a good example.

Ms. Aldridge wrote her Will on an “E-Z Legal Form.” The form had a pre-printed section which stated that, “my property be bequeathed in the manner following.” Ms. Aldridge hand wrote instructions that her house, IRA, life insurance policy, automobile and three numbered bank accounts be distributed to her sister and if her sister did not survive her to James Aldridge. The sister died first and left Ms. Aldridge cash and land. Ms. Aldridge opened a new account for the cash and died without revising her Will.

The court ruled that the new account and land were not specifically included in the list of assets that were to go to James and therefore was part of the residuary of Ms. Aldridge’s estate. The court opined that language leaving listed assets to James Aldridge if the sister died first did not include other assets. That meant, Ms. Aldridge’s nieces were welcomed to the table of distribution for those assets, not what Ms. Aldridge wanted.

There are almost unlimited opportunities for estate planning mistakes in addition to those highlighted in this column. Avoiding them requires much more than access to the internet.

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