ESTATE PLANNING: Myopia Can Be Hazardous

INTRO: Well intentioned people are frequently short-sighted when it comes to estate planning. In this article, I’ve highlighted a few common types of estate planning myopia that can lead to significant problems. These include failing to fully fund one’s revocable living trust and neglecting to submit beneficiary designations (or submitting ones that are not optimal) for retirement plans and life insurance. As always, I’m available to help you and your loved ones avoid the detriment that can result from such myopia by helping you plan and keep your plan updated. Be well, stay dry, and enjoy the sunshine when it visits!

Over the years, I’ve encountered many situations in which clients, regardless of best intentions, have been myopic. In this context, let’s define myopia as a lack of foresight or discernment (or narrow-mindedness). Unfortunately, myopia often leads to unnecessary cost and inconvenience, if not also unintended consequences.

Here are two common examples of myopia in the world of estate planning:

1) Failing to fully fund a Revocable Living Trust: One of the most valuable benefits of a Living Trust is probate avoidance – avoiding this expensive and inconvenient court-supervised estate administration process.

Often, a Living Trust is established by a person or couple who keeps significant assets (e.g. bank or securities accounts) in their own name(s). Conveniently, an account co-owned by spouses will, on the death of the first spouse, be automatically owned by the surviving spouse. The problem is that probate is not avoided if the account is still held in the surviving spouse’s name when the surviving spouse dies. The negative consequences tend to be much more severe when people don’t transfer title of their real estate into their Living Trust.

The preparation and execution of a Living Trust is only the first step. In order to avoid probate, one must accomplish the second step – retitling all or substantially all assets into the Living Trust. With advice and assistance from a knowledgeable estate planning attorney, the “trust funding” (title transfer) process is typically straightforward and quite manageable. Nevertheless, if this is not done or is not done correctly, it can result in considerable hassle and tens of thousands of dollars in unnecessary probate fees and costs to loved ones.

2) Neglecting to submit beneficiary designations on retirement plans and life insurance policies: Retirement plans, such as 401(k)s and IRAs, are legally owned by the plan participant; not by the participant’s Living Trust. Fortunately, probate is avoided on the death of the plan participant because the beneficiary(ies) who are designated and on file with the retirement plan custodian are entitled to the retirement account. The same concept applies to life insurance contracts.

Myopia occurs when a retirement plan participant or life insurance contract owner: a) never submits a beneficiary designation form to the retirement plan custodian institution or life insurance company; or b) designates a primary beneficiary but no secondary/alternate beneficiary; or c) doesn’t designate new beneficiaries when desired; or d) fails to integrate these beneficiary designations with his estate plan (e.g. Living Trust).

It is very unfortunate when a retirement plan owner dies and there is no then-living designated beneficiary on file with the custodian. This sometimes occurs when the primary designated beneficiary is deceased and no secondary beneficiary is designated. In this situation, the account is subject to probate.

Another problem stems from this fact: many people don’t realize that beneficiary designations “trump” Living Trusts and Wills. Let’s suppose that Betty is the beneficiary of your Living Trust and Will, but Bill is designated as beneficiary of your retirement plan. Bill takes your retirement plan.

It’s ironic and sometimes tragic that people do not attend to their beneficiary designations carefully, even when large sums are at stake. Some years ago, I was involved in a case in which my client had been the designated beneficiary of a $3 million life insurance policy owned by her husband. They divorced. Fifteen years later, he died. She was entitled to, and received, the $3 million death benefit. It’s uncertain whether my client’s ex-husband wanted that result; however, it’s possible, if not likely, that due to his myopia, he simply never submitted a new beneficiary designation form (naming someone different) following their divorce.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

ESTATE LEGAL SERVICES: Need to find an estate planning attorney in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on Revocable Living Trust, Wills, Durable Power of Attorney, Advance Health Care Directive, Special Needs Trusts, and Irrevocable Trusts & Advanced Estate Planning, including Irrevocable Life Insurance Trust (ILIT), Qualified Personal Residence Trust (QPRT), Defective Grantor Trust (IDGT), Grantor Retained Annuity Trust (GRAT), “Crummey Trust”, and various types of Charitable Trusts.