By Mark T. Coulter, Esquire
Estate Planning Attorney

How common mistakes in asset titles and beneficiaries cause trouble 

The valuable assets which we enjoy to provide us with security, comfort and freedom in life are hard to come by, and harder to keep sometimes. With everything going on in our lives, it is easy to lose track of some of the background “details” about our financial lives, but when a death happens, those details can suddenly become very important. We at The Estate Planning Centers often see mistakes that families have made in the way they address the basic title or beneficiary designations in their assets, and the unfortunate-to-tragic results. The following examples show how families who don’t take the time to talk to their lawyer, financial advisor,  or another trusted professional can face hardship. 

Let’s leave client names out of it, but imagine my typical example couple, Bill and Mary Jones, and their two children, John and Susan. I always pick on the husband first, so let’s suppose Bill passes away. 

Bill had a bank account in his name alone at the bank. Maybe it was an old account he just never added Mary onto, or maybe it was a part of Bill’s former work as a carpenter. Does Mary get the account? Not automatically. Since the only owner is deceased, it now has to go through the probate system. Did Bill have a Will making Mary his beneficiary? If so, then after the probate process is undertaken, Mary can get the account. If not, then the law only gives one-half of the account to Mary, and one-quarter goes to John and to Susan. In the very least there is expense and delay, and a likelihood of it going to the wrong people. 

Bill also owned an old hunting cabin in West Virginia with his brother which they inherited when their own father died. No one goes there much, but the taxes are low and they haven’t paid much attention to it. What happens to the cabin? If the brothers owned it “jointly with rights of survivorship”, then with or without Bill having a Will, it goes to his brother under the title. If they owned it merely “jointly”, or as “tenants in common”, then one-half will pass through the probate process. That process, however, has the same problems as we saw with the bank account above. 

Bill and Mary had another property they loved; their vacation condo in South Carolina. They bought it for a bargain 20 years ago for $58,000, and today its worth over $250,000. They had heard about probate problems, so they solved that issue by “selling” it to the children for $1.00.  What they didn’t realize is that when the children someday decide to sell the condo, they are going to owe income tax on all the sale proceeds over the $58,000 that Bill and Mary paid for the condo. If they instead let it pass to the children because of a death of Bill and/or Mary, the children wouldn’t have had to pay tax on the capital gains built up throughout Bill and Mary’s lifetime, but no one mentioned that important fact to them. 

After Bill passed away, Mary wanted Susan to be able to help her with Mary’s banking, so at the advice of a bank teller, Mary added Susan to the account. Now, Mary and Susan own the account jointly. If something happens to Mary, instead of one-half of the account going to John, it all goes to Susan. If Susan has an accident and tragically dies first, then Mary has to pay inheritance tax just to get back her own money. I’ve heard people complain “my child was just on their for my convenience; I didn’t mean for the child to be an owner”, but the typical bank paperwork makes the child a joint owner. At least the inheritance tax rate between Susan and Mary is only 4.5% in Pennsylvania. Other people added for “convenience” bring higher tax rates upon death (Mary’s brother at 12%, Mary’s sister-in-law at 15%). 

After Bill died, Mary told John that he should get Bill’s golf trophy collection someday, since he enjoyed golfing with Bill, and she told Susan that she should someday get the train that always ran around the base of the family Christmas tree when they were kids. Later, forgetting this discussion, Mary gave the trophies to Susan to get them out of the house, and she gave the train to Bill’s children when they were visiting one year. When Mary dies, if the children have developed some friction between themselves, the issue of who gets what (and their differing views of who is being “reasonable” and who is being “a jerk”) is too often a problem. 

Mary saw that John was happily married and doing well in his career, but Susan’s spouse left her with two small children. Mary updated her Will to provide that 80% of her estate would go to Susan, and 20% to John. Unfortunately, Mary forget to revisit the beneficiary designations on the biggest part of her estate, her life insurance and her retirement accounts. These were directed 50% to each child years ago, and Susan is very upset when her brother won’t voluntarily give her the money Susan feels is rightfully hers. John, meanwhile, is still upset about the golf trophies…so you can see how seemingly small details can have a huge impact! 

Maybe Mary had just Bill listed as the beneficiary on her IRA, and didn’t add the children as contingent beneficiaries. Since Bill has already passed, upon Mary’s death, this makes her estate the beneficiary. If the children had been listed by name, they could have continued the tax-deferral of this valuable asset, and stretched the account out over their lifetime. With it passing to the estate, however, the account must be withdrawn more quickly, and the income taxes paid for the years of withdrawal. The children not only lose the tax-deferred growth opportunities, but the large withdrawals push them into higher marginal income tax brackets as well. 

If Mary’s life insurance listed Susan and John as beneficiaries, but Susan passed away before her, who gets her share? Does it go to Susan’s children? Does it go to John? It depends. It depends upon the language Mary wrote on the beneficiary form, and on the printed language on the form itself, and on the language of the insurance policy document which no one bothered to look at. Many people are surprised when it all goes to John, as most often occurs. Even if it goes to Susan’s children, what if they are still young? Under age 18, these grandchildren will need a court-appointed Guardian to watch over their money, at significant expense. If they are over 18 but still financially immature, they now have totally free control over an asset they didn’t work for, didn’t expect, and don’t know how to manage. This freedom often means the money will be spent quickly with little to show for it. 

When Mary changed her Will, she forgot that she had put some assets in a revocable living trust several years before, in order to avoid probate. The attorney who changed the Will didn’t know about the trust, and didn’t update it to reflect her new wishes. When Mary dies, the assets passing under the Will can get the intended 80/20 split, but the trust will still have to split those assets 50/50. 

After Bill died, Mary had rekindled a romance from her high school days. At age 70, she decided to remarry her old flame, Ralph. When Mary dies several years later, who gets what? The accounts she put Ralph’s name on jointly, because that is what she was familiar with during her marriage to Bill, go to Ralph. Her Will directs her other assets to her children, but Ralph has rights to demand approximately one-third of her total estate as the surviving spouse, unless they took the time to provide for a marital agreement waiving this right in advance. Without such a “prenuptial agreement” in place, the fact that Ralph never developed a strong relationship with Bill and Mary’s adult children makes it more likely he will enforce this right. If Ralph is incapacitated, his own children can often enforce the right for him under his Power of Attorney document. 

I wish I could tell you that these are just hypothetical examples, and that these types of things don’t really happen. My practice, however, has shown me that this is how life goes when people don’t take the time to plan. Is your family protected? Are your affairs in order? Do you even know? Perhaps. Perhaps not. If you want some professional insight on the strengths and weaknesses of your current estate planning efforts, please contact our office to arrange a complimentary consultation. The time to ask questions, get correct answers, make informed decisions, and take deliberate action is now, not later. 

About Our Law Office

At the Estate Planning Centers at Coulter & May, P.C., we devote our practice to estate planning and assisting families through such transition times with estate and trust administration counseling. We offer guidance and advice to our clients in every area of estate planning, and offer comprehensive and personalized estate planning consultations. For more information or to attend an upcoming seminar or to book a consultation directly, please contact us at (412) 253-7526 or visit us online at www.estateplanningcenters.com.

Disclaimer: The information presented in this article is a conversational summary of a complex area of law and should not be construed to constitute legal advice. No person should rely upon the content of this article for making any decisions, and should instead consult with appropriate legal and tax professionals.