It is not uncommon for individuals to believe if it is in the Will, that is exactly what will happen upon their death. Unfortunately, this is not always the case. There are many situations where the disposition of someone’s belongings may not follow what the Will has to say. I refer to this on occasion as “accidental estate planning”.
The process of getting one’s Will drafted is not problematic, that is, once the process is started. For so many, preparing or updating the Will is often on the to do list for months or perhaps years before the first step is actually taken. By the time it is finally started and the few decisions are made, such as executor, guardianship for children, special gifts they are so ready to put the process behind them once the documents are signed and filed away, and the whole episode is forgotten. Sadly, this is the first place that creates errors in the estate plan.
The Will is part of probate, which is the legal process of changing the ownership from the decedent to the heirs. However, there are assets which may not be part of this process and yet the ownership still becomes the heirs’. One group of assets are those which transfer to beneficiaries via a beneficiary clause. This clause becomes a contract and upon death, these instructions are followed. Even if the Will specifically names an asset like an individual retirement account or a particular annuity, unless the beneficiary statement names the “estate” as the beneficiary, these assets will follow what is on the beneficiary designation rather than what the Will may say. Thus, it is important to routinely review beneficiary statements on life insurance policies, annuities, POD or TOD accounts and retirement accounts.
Before someone jumps to the wrong conclusion, it is not always best to name the estate as the primary beneficiary just so the Will controls the destination of those assets. Doing so may create taxable income when it could have been avoided. Careful consideration should be taken when naming beneficiaries.
Another cause why assets could avoid the probate process is the way they are titled. Whether it is a bank account or the deed for real estate owned, how it is titled can impact an estate plan. Every time a new bank or investment account is opened, there is a chance that how the account is titled may impact the estate plan. For couples, it is not uncommon for new accounts to be title in joint tenancy, “WROS”. It is these initials which avoids the probate process. “WROS” means, with right of survivorship. While it may not cause significant harm when this is used between a husband and wife, there are other times when this type of ownership is used and will cause an estate plan to become disproportionate.
Elderly parents often add one of their children to an account for the ease of management in the event that the parent becomes ill or unable to manage their own affairs. While this is not the best way to prepare for poor health, it is often used. The problem arises when the child is added to the account and joint tenancy “WROS” is the ownership structure. Upon the parent’s death, that particular account now belongs to the surviving tenant, the child. In the event they are an only child, no harm. But, when there are other children or heirs to an estate, the result is they are accidently disinherited from the particular account and any others handled in the same manor.
There can also be provisions within the Will which become outdated because certain assets may have been sold or the value of the estate has changed significantly and thus certain specific gifts can no longer occur.
While dealing with the estate plan and its issues may not be high on the list, resolving problems prior to a death is far more appealing than attempting to correct mistakes once a death has occurred. We recommend doing what we call a “Financial Fire Drill”. It is taking the time to see what would happen in the event of a death and determine if the actual results are what are expected.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.