RETIREMENT & ESTATE PLANNING DOMINO THEORY
Scott F. Barnett, J.D., LL.M., (Taxation)
WHAT DOMINOES DO I NEED TO PAY ATTENTION TO?
Our property is often held in different accounts. There are bank accounts, stock brokerage accounts, IRA’s, 401k plans, Life Insurance policies and others. Each of these might be set up very differently. And how they are set up controls who gets the property when we are gone.
Your Will does not control who gets that property. That’s right, even though your Will has language about how all your property is to be distributed, it does not control accounts that say something different. And as happened in Marilyn Monroe’s case, even the Will may cause results we would not want.
So, each of these items needs attention to make sure what you want to happen is what will happen.
Let’s look at some of the Dominoes that need your attention.
Bank Accounts and Stocks and Bonds Accounts: Is it only yours? Then it is governed by your Last Will. If it is in a Joint Account with “rights of survivorship”, or an I/T/F account (in trust for) the joint tenants or beneficiary get it no matter what your Last Will says. These are “contractual” terms that are not changed by your Last Will.
Often well intentioned account managers or the people in a bank that help you set up accounts suggest you create an “I/T/F” account. They tell you it avoids probate. It would be a nice way to let your grandchildren know you remembered them by leaving a gift.
All that is true. But they are not aware of the downside. If minor children get a gift, it usually becomes necessary to go through the expense of setting up a Guardianship of their property for them. While they are underage the money cannot be used for their welfare; because the parents have the obligation to support them. The Court will not give the parents’ access to their minor children’s money to pay for schools and other items that are part of that obligation of support. So, this “gift” to the grandchild cannot be used to benefit them.
If a child with “Special Needs” receives this money, that child may lose rights to Government benefits that help the parents support the child.
The last thing to remember is this. When the child turns the age of majority in that state, they get the money. If that age is 18, would you want that young a person to get that amount of money without any restrictions.
Good planning would be to reset these Dominoes. Either allow the property to go through probate and leave it to a trust for the child’s benefit; or, create a trust now so the property is already in place under the terms and conditions you want for the child. There are many flexible provisions possible to make that properly set up account operate better to benefit the child. Those details are for another day.
So, AVOID leaving property in accounts in a way that is not consistent with your Last Will. Alternatives exist so the last Domino lands where you want it to.
Life Insurance Policy Death Benefits: You probably made a Designation of Beneficiary at the time you applied for life insurance or later. It might have been one or two lines in a lengthy paper with lots of choices. That governs who gets the Death Benefits no matter what your Last Will says. [NOTE: There are some exceptions for particular circumstances. But, you should rely on the general rule just mentioned.] Many people often do not remember what they put in those Life Insurance applications. Do you? The policy is a contract and the Life Insurance company must pay out the Death Benefits according to that contract; even if your Last Will directs differently.
So, again the Life Insurance death benefits are not governed by what you say in your Last Will. If the beneficiary is not who you want it to be, you have to reset that Domino.
Often things change making it important to review the Life Insurance policy Death Benefit Beneficiary. There may be a divorce from that person; the named beneficiary may have passed; or the beneficiary may have begun bad habits where leaving them the Death Benefit is not wise after all.
Other Accounts with “Beneficiary Designations” – Many of us have other accounts with “Beneficiary Designations”. Our IRA’s and 401(k)’s work this way too. So, it is important to review everything we own or have a right to. There are often surprises about how those Dominoes are set up that you want to change.
Real Estate: What is the exact way the deed reads that you were given when you bought real estate? Sometimes we are surprised by what we find. For example, I have had clients who, because of some confusion, find one spouse is on the deed, but the other isn’t. At the same time, the spouse NOT on the deed is ON the mortgage. Or even vice versa. Making sure this Domino is set like you want it often requires a title search. Your real estate lawyer or title company can usually take care of this pretty easily.
Real Estate needs specific attention. Even if the “title” (the name of the person or entity that owns the property) is correct; other problems might exist that should be cleaned up. Someone may have filed a “lien” (a paper put on the public records that says there is money owed; and, before the real estate can be sold or a new mortgage given on it that old debt needs to be paid).
Often unpaid Real Estate property taxes owed show up. The Internal Revenue Service may have filed a lien for back income taxes.
All sorts of rights to file a lien exist. It can’t be done unless there is a real reason. If a “lien” is filed when there is not right to do it, the person that did it would become responsible for a “Slander of Title”. Then they would pay damages like if they slandered an individual’s good name.
In all events, ownership of Real Estate properties should be reviewed to make sure those Dominoes are set up as you expect and want them to be.
Business Interests: Stock of closely held corporations or professional associations, interests in closely held limited liability companies and partnerships are often set up wrong; if there is even any identification at all of who the owners are. Things may be fine on bank accounts or other things needed to do business; but, if the proper identification of a stock or interest owner is not made, there can be confusion if there is a death or incapacity; or even a sale of the company or its assets. Also, many of these interests are subject to agreements like Stock Holder and Buy-Sell Agreements; which govern what happens if the stock or interest owner dies. That may cause a surprise at a very sensitive time. So, care is needed to make sure that kind of paperwork reads the way you want it to.
This is all not as hard as it looks or seems. If you keep good records, it will be very easy. Most everything else is fairly easy to find; or repair if it is done wrong.
NEXT TIME: YOU NEED CARE TOO!