Estate Planning: Are You Sure You Know Who is Going to Get Your Money?

by David Straus, CEO Legacy Logix

This is a cautionary tale. Let me start by acknowledging that nobody likes creating an Estate plan consisting of wills, trusts, and powers of attorney. And once that Estate plan is created, nobody likes thinking about it again. But the reality is you need to pay attention to your plan to make sure it remains valid and consistent with your wishes. 

Almost nothing in life remains fixed after it is created. 

Lesson 1: Keep Your Will and Trust Current

This seems obvious, but it is surprising the number of people who create an Estate plan and then ignore it, even when life changes around them. Many things can change that requires your plan to be updated, and failure to keep it current can have a range of implications.

On the less critical end, that failure could result in losing some of the benefits you had been promised in establishing your plan, such as the privacy of a trust (versus a will) and avoiding probate. If a significant asset is not moved under your trust (titled correctly), it may force that asset through a public and costly probate process.

On the other end of the spectrum, failing to update/maintain an Estate plan can have dire consequences. Let me share one painful example.  Steve created a family trust with his wife in 1994.  In 2001, he and his wife divorced.  In 2005, Steve remarried.  Steve unexpectedly passed away in 2022.  Steve failed to change his original trust document, and when he passed, all of his financial accounts held in his trust were given to his ex-wife, leaving his new wife of almost 20 years without financial support.  The best case in this situation is an expensive legal process.

Lesson 2: There are beneficiaries, and then there are beneficiaries

One key element of a will or trust is the beneficiaries. Those persons or organizations that will be given some amount of the Estate after the Estate holders(s) have passed away.

For example, a trust might say that once my wife and I pass away, our Estate should be split evenly between our three children. 

But there is another place a beneficiary can be defined, and that is where Estate plans can go awry.  The account owner can define beneficiaries in most financial accounts from a brokerage account to a life insurance policy.  The problem is that these often get out of sync with what is written in the trust document.  When that happens, the financial institution will honor the beneficiary defined on the account and ignore what is stated in the account owner’s trust. 

Let me share an unfortunate example.

The Kids

Linda and Daniel have three children, who are adults but still young. Linda and Daniel had a substantial Estate worth over $8M. They stipulated in their trust document that their children would get an annual income of $75,000 starting at age 24 if they passed away. When the youngest child turns 40, the remainder of their financial assets are to be distributed evenly to their three children. They did this because they wanted to make sure their children had some meaningful life experience before they got multiple millions. 

Then comes the conflict. Their Schwab account has beneficiaries named, showing that once Linda and Daniel die, their account will be split evenly between their three children.  Linda and Daniel passed unexpectedly when their kids were 19, 22, and 24. Despite the detailed instructions they outlined in their trust document, Schwab honored the beneficiaries outlined in their accounts, and their children received millions of dollars. Utterly counter to the plans laid out in their well-considered trust.

We have encountered worse situations than Linda, Daniel, and their kids. These situations involve a beneficiary defined directly in the account who is no longer involved with the Estate and was specifically excluded from the instructions outlined in the trust.

The lesson here is to make sure that your financial accounts define your trust as the beneficiary. This ensures that those accounts move under the trust and that the instructions in the trust remain as the guide.

The bottom line

You are not done once you create an Estate plan consisting of a will and often a trust. There are a number of steps you need to take after these documents are created and signed. One is 'funding' your trust. That is the process of putting your assets, such as your home and financial accounts, in the name of your trust, not in your personal name. Another is checking to ensure the beneficiary named in these accounts is the trust itself.