May 2, 2008

Still More Ways You Can Mess Up Your Estate Plan –Part Seven

By Robert P. Bergman
Special to the Times

The next installment in our continuing of “Ways You Can Mess Up Your Estate Plan”

15. Relying on beneficiary designations
A beneficiary designation is a very simple form of estate planning that does not handle contingencies well. For instance, if you name your son and your daughter as the beneficiary on your life insurance policy, and your daughter predeceases you, do you think the insurance company will pay the proceeds all to your son, or do you think the insurance company will pay your daughter's half of the proceeds to your daughter's children?
Most of us would like to think the latter, but most of the beneficiary forms I have seen say just the opposite: The forms usually say, "Unless otherwise indicated, we, the insurance company, will pay to the surviving named beneficiaries."

By naming your Living Trust as the beneficiary of your life insurance, your Living Trust can control exactly how the proceeds will be distributed, including such contingencies. The trust can also name who will manage and distribute the money for minor children or grandchildren.

16. Trying to leave property to a minor
No insurance company will knowingly pay $100,000 to a 12-year-old. They will only pay it to a court-appointed guardian for the child, who may not be the person you would want. The cost of obtaining such a court order can also be substantial.

Example: Your will or beneficiary designation indicates that your deceased daughter's share is to go to her children. If they are minors, a guardian will need to be appointed by the Probate Court. The court would give priority to the children's father, who may be your ex-son-in-law.

In a guardianship the money is required to be turned over to the minor once he or she reaches 18 to 21 years of age, depending upon the state of residency. That age is perhaps one of the worst ages to turn over a significant inheritance to a child or grandchild.

An inheritance left in trust for such a beneficiary can not only indicate who is going to manage the funds and make distributions for college and the like, but also indicate the age at which the funds will be turned over to the beneficiary. For instance, in our trusts we typically use 25 years of age, although many clients request an older age.

As long as the inheritance is held in trust, it can be protected from the minor's spending habits, protected in the event of a divorce, protected from the minor's creditors and can indicate who receives the inheritance in the event of the minor's death.

17. Failure to consider the estate taxes payee
John drafted his will to leave his home to go to his companion of many years and the remainder of his estate to go to his children. But he and his attorney never discussed who will pay the estate taxes, and his will said (as most do) that taxes and expenses will be paid out of the "residuary estate," that is, from the remainder distribution.

Therefore, on John's death, the estate taxes will be paid solely out of assets that pass pursuant to the residuary clause of his will, and therefore, out of the children's inheritance.

In this extreme example, the home was worth $5 million and the remaining assets were worth $5 million. The estate taxes were $4,430,000 (in 2003) and the expenses were $70,000, so the kids received only $500,000, while the companion walked away with the $5 million palatial home estate tax free.

We doubt if that is what John would have wanted if he had considered who pays the estate taxes.

Most wills say "pay all taxes out of the residuary estate." Phrases like that sound good, but may not be what you want unless you fully understand exactly what they mean.

For instance, in our Living Trusts we usually require that anyone receiving property outside of the trust pay their pro rata share of estate taxes, although sometimes we modify this provision depending on our client's desires. We also feel it is important to discuss the tax aspects of specific bequests.

Robert P. Bergman is a San Jose estate planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for incapacity and the eventual transfer of their property to their heirs. Bob specializes in working with parents who have minor children. Bob gives a regular monthly seminar at the Jewish Community Center in Los Gatos entitled “Everything You Wanted To Know About Estate Planning, But Were Afraid to Ask!” Visit his Web site at www.lawbob.com where you can learn more, get on his mailing list, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics that Bob has written. You can also reach him by e-mail at rpb@lawbob.com or telephone at (408) 247-0444. All inquiries are confidential. This column is intended to provide general information about estate planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.