When good money intentions lead to poor outcomes – Daily News

on Oct10
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I’ve seen it happen many times. Parent believes their estate is simple and their kids all get along. So, the parent either avoids doing any estate planning and instead creatively titles their assets, or a parent puts an estate plan in place that attempts to treat the children equally, whether that’s fair or not.

Often, it is these very actions by the parents that cause disharmony among the children.

No estate plan

A common action taken to avoid doing any actual estate planning is to title property (typically the family home, but sometimes bank accounts) as “joint tenants” with another party so that when the first party dies the assets go to the joint tenant. This works in a narrow set of circumstances — there is only one intended beneficiary, and the party owning the assets has a short life expectancy.

A parent putting one child on title as a joint tenant with the intention, however well-meaning, that the one named child will “share” with the other children, is a disaster waiting to happen. At a parent’s death, there is no legal requirement that favored Freddie share with his siblings.

Freddie may well feel he “deserved” the money or other asset and keep it for himself. This is often the case when the child named on accounts or real property is also the child who primarily took care of the parent before their death. That child’s resentment of the less involved siblings may cloud their judgment about doing what mom or dad wanted. The other children will have no legal recourse.

Also, while both names are on the account, creditors of both parties may be able to seize the account. Even if favored Freddie means to follow mom’s wishes, if he’s got an IRS lien or another creditor out there, the creditor will likely get the asset before the siblings do.

If the assets make it past the creditor after the parents’ death and Freddie is willing to do as mom or dad wished, Freddie will still have to consider the tax consequences of cutting his siblings in. Any transfer from Freddie to the siblings will be considered a gift from Freddie.

If it’s under the $15,000 per gift recipient annual gift tax exemption, there are no gift tax consequences. If it’s over that amount, Freddie will need to use up some of his own gift/estate tax exemption. That won’t make Freddie’s own heirs happy if Freddie winds up with a taxable estate. There may also be income tax consequences if Freddie has to liquidate assets to pay out his siblings’ shares.

Payable on death accounts

Sometime in the last few years, banks must have decided that it’s easier for them to deal with a “payable on death” designation than the client’s actual wishes set out in a trust.

Lately, I’ve seen too many clients, after we’ve carefully discussed and crafted their estate plan, confronted with a bank employee who advises that instead of putting an account in the name of the trust, the client should just fill out the bank’s “payable on death” form.

The form is rarely sufficient to cover the planning done, the “if not this person, then this person, but never that person” worked out in the trust, it does not allow for holding the assets in a trust, and is of course, useless in the event of the client’s incapacity.

In short, do not take legal advice from a banker — no matter how good their intentions.

Trustee mistakes

On choosing a trustee

Even when an estate plan is enacted, including a will and trust, good intentions can have bad results. Clients sometimes have difficulty choosing a trustee. They don’t want to seem to favor someone over someone else, or they don’t want to burden a family member. These are valid concerns.

The job of a trustee is a serious job and requires time and attention. Some trust administrations go on for up to a year after the trust maker’s death, many go on for years and years after, and some for generations.

Parents are often inclined to name the oldest child, all of their children, the child who lives closest, or the child with the most time on their hands, as the trustee. None of these are valid reasons for choosing a trustee.

If you’re going to choose a child as a trustee, chose the one with the best financial sense, the one who gets along best with the other children, the smartest one, the one with the best sense of fairness, the most organized one, or the best looking one (okay, kidding about that last one).

One trustee

Notice I’m saying “one.”

One trustee to make decisions, carry out the trust terms, and be the main point of contact for the beneficiaries, the accountant, and the attorney, is generally the best approach. If you have only two children, sure, name them both. If they disagree, they’re only harming themselves.

But what if one of them is really irrational? One’s spouse influences them more than you’d like? One travels extensively and won’t be available to do their share of the work?

In those and similar situations, name the other child only. Naming three or four people to serve as co-trustees is unwieldy in even the best circumstances—trustees sign a lot of documents and forms and not all can be signed electronically; many require notarizing. Plus, if there’s a tie in a vote, nothing gets done. Not to mention an attorney or accountant having to talk to multiple trustees gets expensive.

Estate planning is one area where your good intentions to keep things simple and cheap could have a permanent, terrible outcome. As Thomas Edison once said, “A good intention with a bad approach, often leads to a poor result.”  Having a carefully thought-out estate plan is a gift to your family and other beneficiaries. It’s your final gift. It’s worth taking the time to make informed decisions.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.”  You can reach her at Teresa@trlawgroup.net

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