When it comes to planning for emergencies, every good financial plan needs to be “stress-tested” to make sure it performs as expected. The same is true for an estate plan. But in this context, what matters even more than your legal documents, is making sure that your assets are properly aligned with your estate planning goals. Here are several examples to consider:
Example One: Tax Planning Subverted
Mike and Carol Brady have revocable trusts that were designed with tax avoidance provisions. Instead of all of Mike’s assets passing directly to Carol upon his death (or Carol’s passing directly to Mike upon hers) their trusts create a tax-sheltered trust to mitigate against a 50% estate tax assessment when the second spouse dies. But this plan depends on Mike and Carol owning property separately from one another, and over time, as they have consolidated accounts, everything has become owned by them jointly-with-rights-of-survivorship, because they believed that this would be easiest for the survivor. Now, even though the trust contains the right legal instructions to shelter assets from future tax, none of those instructions will apply, because joint ownership supersedes the written instructions carefully described in the trust documents.
Example Two: Everything is TOD
Ally McBeal’s Will makes several special gifts to the important people in her life and to some very important causes. First, she wants her condominium to go to her nephew. He’s an artist and would be able to spend more time painting if he had a place to live and work. She also wants to make gifts to the Humane Society and the ASPCA, because she deeply cares about animals. She has promised both organizations $20,000 in her Will. Ally meets regularly with her financial advisor, her college roommate, and over time, has added her niece and nephew as the transfer on death (“TOD”) beneficiaries on her 401k and investment accounts. (She wants to make sure that these accounts are transferred as simply and expediently as possible.) But having done so, Ally’s future “estate” is in trouble. There is no source of funds to pay the condo bills and expenses. In fact, the condo won’t be able to go to her nephew anymore, it will have to get sold to pay out the gifts to the Humane Society and the ASPCA. Ally’s efforts to simply transfer assets using beneficiary designations had backfired and those designations supersede her Last Will and Testament.
In both examples, small day to day decisions made on financial accounts have a profound effect on the efficacy of the instructions contained in estate planning documents. That is because estate planning can never be separate from how assets are titled. Does this mean a husband and wife should not own assets jointly? Of course not! Joint ownership can accomplish many goals. But it may not accomplish YOUR SPECIFIC GOALS. TOD beneficiary designations can likewise be used with great effectiveness. But those beneficiary designations need to be reviewed regularly in the context of your full estate plan to make sure that they do what you want them to do.
We recommend that every estate plan be “stress-tested” every three years to determine if assets are correctly aligned with the goals of your estate plan. If you have not stress-tested your plan recently – please call us to schedule an appointment.