Families, especially children and grandchildren, can have a lot to lose if estate planning is not done properly. As financial advisors working with families on a regular basis, you may be the first to spot potential pitfalls and to be in a position to address those issues before it is too late.
First, you should review beneficiary designations and titling of assets. Although your client’s will and revocable trust may be updated, those documents do not control the disposition of assets that have beneficiaries associated with them, such as IRAs, life insurance, annuities and payable on death accounts. Those assets pass to the beneficiaries designated with the asset, not to the beneficiaries named in the will. Accounts registered in joint name pass on death of the first joint owner to die to the surviving joint owner, not to the beneficiaries named in the will.
It is very common for a client to execute a will or a revocable trust stating to whom his assets are to pass, only for the beneficiaries named in the will to discover after the client’s death that those assets that are titled as joint accounts or have beneficiaries associated with the asset will not pass to the beneficiaries named in the client’s will. Instead, those assets pass to the beneficiary designated on the beneficiary form or to the surviving joint owner of the account. This problem can sometimes be corrected after the client’s death with the use of disclaimers if all of the interested parties are cooperative. However, the additional time and expense associated with fixing the problem can be considerable, especially considering how the client could have fixed the situation before death by merely preparing a new beneficiary designation form or changing the title on the account.
Second, you should encourage your client to avoid probate with a revocable trust. Probate is court proceeding whereby the heirs prove the decedent’s will is valid and transfer the assets out of the name of the deceased to the heirs named in the will. Such a proceeding will take a minimum of six months, or much longer in more complex estates. A revocable trust takes the place of the will; it designates who is to receive the assets upon the decedent’s death much like a will, but the assets pass from the trust to the heirs without the need for probate. The revocable trust will also avoid ancillary probate proceedings in other states where the client owns real estate. Without the revocable trust, the client’s estate would have to go through probate not only in the state of his residence but in every other state where he owns real estate.