When Your Estate Plan Does Not Match Your Assets

Henry is a widower with three children. He wants his children to inherit in equal shares, and he hires a lawyer to create his Will.

The lawyer creates the Will using Henry’s instructions, and six weeks later, Henry signs in front of two witnesses and a notary.

The Will is valid, and as far as Henry is concerned, his work is over. When he dies, his children will inherit equally. Unfortunately, Henry did not understand that the Will applies only to probate assets, i.e those assets that go into the estate upon death. The will does not apply to his non-probate assets, assets that  bypass the Will because they automatically belong to someone else upon the owner’s death.

Henry did not discuss with his lawyer what arrangements he needs to make to ensure that all his assets flow the way he wants once he dies. He thought the Will was all that he needed.

What happens to Henry?

Five years later, Henry is having health issues and is struggling with his bills. He has the money, but he is tired, sleeps a lot, and does not always remember which bill is due when. Henry’s son Kevin creates a joint account with Henry, so that Kevin can pay his father’s bills for him.

Kevin does so, dutifully, until his father dies two years later.

Henry named his good friend Mark to be the executor of the estate. Mark knew that Henry had wanted his assets to be equally divided amongst his children. Unfortunately, Henry’s assets were not set up to allow for this.

While trying to administer the estate, Mark ran into three different problems.

Problem #1: The Joint Account

The joint account that Henry and Kevin both had access to had $50,000 in it when Henry died – money that Henry had put into the bank. Kevin’s siblings want him to share the money, as Henry’s Will states everything is to be split evenly.

Kevin refuses, stating that the money is legally his, as that is what the bank has told him. He is angry that his siblings did not do more to help him when their father was struggling, and he does not think they deserve the money.

The siblings go to Mark for help, but there is nothing Mark can do. The joint account is a non-probate asset, which means that the Will does not apply to it. as The account automatically belongs to Kevin once Henry has passed away.

Problem #2: The Life Insurance

When Henry was younger, he purchased  a life insurance policy for $100,000, and named his brother, Cory, as the beneficiary. When Henry got married and had children, he forgot to update  the beneficiary on the policy.   Therefore, when Henry died, the money went straight to Cory. Mark asks Cory to give the money to Henry’s children voluntarily, but Cory cannot because he owes a lot of back child support, and the government took takes the money as soon as it reaches his account.

Problem #3 The IRA

Henry also had an IRA (Individual Retirement Account) when he died. He had made his wife the beneficiary, but he never updated the policy when she died, nor did he name contingent beneficiaries. Mark was able to get the IRA into the Estate, so it could be shared amongst the three children, but this led to a poor tax consequence. When an estate inherits an IRA, it must be cashed out within five years.

If Henry had named his children as the beneficiaries, they could have stretched the payout over ten years, which would have allowed them to pay less in income taxes.

What could Henry have done differently?

If Henry had aligned his non-probate assets with his estate plan, his children would have inherited all his money equally in a tax efficient manner, as he intended when he created a will. Henry could have done several things differently to have a better outcome for his children.

Instead of having a joint account with Kevin, Henry could have appointed  Kevin his power of attorney, which would have allowed Kevin to help Henry with the bills without making Kevin an owner of the account.

Then, Henry could have made each of his children equal  beneficiaries of the joint account. The bank account would still have bypassed the Will, but it would have been allocated the way Henry wanted.

Additionally, Henry could have updated his life insurance policy and IRA , naming his wife as the primary beneficiary of each policy and his children as contingent beneficiaries, inheriting equally. Therefore, when Henry’s wife passed before him and there was no longer a primary beneficiary, the contingent beneficiaries were still in place to automatically inherit the policies upon Henry’s death.

When you are creating an estate plan, it is important to understand how that plan will treat your probate assets, and what you need to do with your non-probate assets to make sure they pass on the way you intend. It is essential  to review your estate plan each time you have a life event, and make sure that the designations on your accounts reflect how you want them to be distributed. It is also important to name contingent beneficiaries in case your primary beneficiary pre-deceases you. When working with an estate planning attorney, always be sure to discuss how to make changes to all your assets to ensure they align with your overall estate planning goals. Life is full of changes – make sure your estate plan and accounts don’t get left behind.