HOW EDNA’S ESTATE PLAN COULD DESTROY HER FAMILY

Last week we were discussing how Betty’s estate plan actually destroyed family harmony.  This week I’ll share with you Edna’s mistake, one that I see so often.  Edna has 3 children, all of whom she loves equally.  She came to see me because she wanted to discuss her will.  She owns a home and investments totaling approximately $450,000.  Edna explained that she wants to leave her house (or really the proceeds from the sale after her death) to her children equally.  I then asked about the rest of her assets and she said, “Don’t worry, I’ve taken care of it”.

 I asked her how she had done that and she replied that she has her investments in laddered CDs naming each of her children as the payable on death (POD) beneficiary on 1/3 of the total investment so that each child will receive $150,000 when she dies.  I then posed to her a number of scenarios under which that won’t happen, meaning there could very well be an uneven distribution, leading to the same problem that Betty’s family experienced.

 Edna has made a common mistake I see frequently.  She assumes that the amount of money she has and where she has it will remain unchanged.  That is very unlikely.  For example, when  a CD matures she may roll it over to a new one or she may decide not to, either because she needs the money to live on or because she has decided to investment elsewhere.  So what happens if the money is sitting in her checking account when she dies and that CD happened to be money that would have passed to her son, Bob?  Well, Bob won’t receive that money unless he was a co-owner of the checking account.  He’ll receive less than his siblings.  In fact, if his sister, Mary, becomes a co-owner, because she lives nearby and pays Edna’s bills, then Mary will receive “Bob’s share”.   Now, you might say that Mary can just give that money to Bob if everyone agrees that this is what Mom wanted.  Yes, that’s true but assumes that everyone is aware and agrees on what Edna wanted.  It also requires Mary to make a gift to Bob that may have gift tax consequences to Mary.

 Perhaps a bigger concern is long term care, which Edna is completely unaware of.  As she ages she may need assistance at home, in an assisted living facility or even a nursing home.  If so, and she has done no planning for it, she will need to spend down huge chunks of assets towards that care.  Again, that will completely destroy her nice neat division into 3. As each CD comes due and she spends it, her estate plan becomes unbalanced.  And if Mary is managing Edna’s care and she happens to take one of “Bob or brother Joe’s” CDs  that’s a sure way to destroy family harmony.  And that’s clearly the last thing that Edna wants.