Heir-or in Judgment #6: Adding Your Adult Children to Your Assets

A large number of individuals feel that adding their adult children to their banking accounts and property is a great way to keep those assets from passing through probate.  This usually causes more problems than it does by solving them.  Some jurisdictions will not allow an automatic transfer of those assets just like there is not always an automatic transfer of assets from a deceased spouse to the surviving one.

Additionally, the adult child has assumed some ownership of the account or property by having their name added.  This opens up those assets to any potential problems the adult child may run into.  A bankruptcy would open subject those assets to a possible seizure or dissolution.  The assets could also be subject to liens and/or garnishments if the adult child was involved in a serious automobile accident lawsuit.

Placing adult children’s names onto assets may also be looked upon as a gift by the IRS which could open up the gift of those assets to a hefty gift tax and could also reduce the total estate tax exemption.  There are estate planning tools which can accomplish the transfer of assets to children without subjecting those assets to the numerous problems discussed above.

Heir-or in Judgment #4: A Will Disposes All of Your Assets

A Will only controls property that you own in your name alone.  Property that is jointly owned with rights of survivorship will pass to the joint owner.  Additionally, in most states spouses have marital rights in property owned and can elect certain shares of that property even if the spouse is left out of the Will.

Beneficiary designations in retirement accounts, insurance policies and banking accounts will also trump a will.  I recommend to my clients to have a beneficiary audit performed to ensure they are up to date.

This is the ninth entry in a series I will be featuring about celebrity estate planning mistakes and what they could have done to prevent the problems that arose.

Name: James Brown

Age: 73

Died: December 25, 2006, Atlanta, GA

Cause: Congestive heart failure due to pneumonia

Family: Six children named in will; many others contending paternity

Estate Mistake: Although he was known for keeping a very tight beat, he left a very loose will and sloppy estate planning, which led to multiple lawsuits and severe tax implications.  His will was contested by several parties, partly because he had not updated the document since 2000.

He also left his mansion and music rights to an irrevocable trust to benefit underprivileged students.  However, the trustees and family are still battling over it.  His assets were not well sheltered so an auction of his personal affects was ordered to help settle the tax bill.

This is the eighth entry in a series I will be featuring about celebrity estate planning mistakes and what they could have done to prevent the problems that arose.

Name: Howard Hughes

Age: 70

Died: April 5, 1976 (somewhere over Texas)

Cause: Heart failure while on a plane from Mexico to Houston for medical treatment

Family: No wife or children, but 22 cousins

Estate Mistake: Famed aviator/industrialist/film producer/eccentric left a $2.5 billion estate.  Thousands of people filed claims against the estate once it was in probate.  The estate lingered in probate for years as Mr. Hughes died without a valid will.  The estate was eventually spread among all 22 cousins and several other extended family members who filed valid probate claims.

Among the dozens of wills that surfaced after his death was the handwritten “Mormon Will” with misspellings and mistakes that inspired extreme skepticism.  The will, which named the church as a beneficiary, was produced by Melvin Dummar, a Utah service station owner who claimed to have rescued Howard Hughes out of the desert.  Dummar’s claim was finally thrown out of appeal in 1998.

This is the seventh entry in a series I will be featuring about celebrity estate planning mistakes and what they could have done to prevent the problems that arose.

Name: Warren E. Burger

Age: 87

Died: June 25, 1995, Washington, D.C.

Cause: Congestive heart failure

Estate Mistake: Even though Warren Burger was once the Chief Justice of the United States Supreme Court, the 176-word will he left his two children failed to empower his executors and did not plan for estate taxes.

His $1.8 million estate lost $450,000 in federal and state estate taxes.  The estate was tied up in probate of which court costs and attorney’s fees took more out of the estate.  Additionally, even more money was spent because of expenses in going to empower the executors in probate which could have been avoided if the will had granted those powers automatically.

I receive lots of questions on a daily basis.  I am the token family attorney so I get lots of questions covering broad areas of law.  I don’t always know these answers, but I can answer most of the questions regarding estate planning.  By and far the most the questions I receive about estate planning are about trusts.  Revocable trusts are the most common and preferred trusts.  I have taken my most frequently asked questions about revocable trusts and answered them here. 

WHAT DOES A REVOCABLE TRUST DO?

A revocable trust, like any trust, holds an asset and determines to whom or where that asset goes, when it goes there and how it goes there. 

ARE REVOCABLE TRUSTS NECESSARY IF I DO NOT HAVE AN ESTATE TAX PROBLEM?

Yes.  Only irrevocable trusts can reduce estate taxes.  Revocable trusts, however, still have the following very important purposes:

• all assets in the trust avoid probate
• trusts help avoid accidental disheritances with second marriages and blended families
• trusts hold and distribtue money for minor children and grandchildren
• the management of assets in the event of a disability

DO I LOSE CONTROL OF MY ASSETS?

No.  You are still in control of your assets so long as you name yourself as trustee and are competent.  You can also determine who the trustee will be in the event of incompetency or death.

ARE THERE ANNUAL COSTS OR CHARGES ASSOCIATED WITH A REVOCABLE TRUST?

Not usually.  There are no fees if you are serving as your own trustee.  A corporate trustee does charge a small fee.  Trusts, like all estate planning documents, should be reevaluated every 5-10 years to determine whether or not they are still in accordance with local laws and statutes and to ensure they still do what you want them to.  Additionally, you need to update your documents, including trusts, anytime there are changes in your family’s circumstances.

WHAT OTHER DOCUMENTS USUALLY ARE PREPARED WITH A REVOCABLE TRUST?

• documents transferring your property into your trust
• a pour-over will
• durable financial power of attorney
• durable medical power of attorney
• living will

IS A POUR-OVER WILL NECESSARY IF I HAVE A REVOCABLE TRUST?

Yes.  A pour-over will directs that any assets not placed in your trust should be distributed into the trust upon your death.  The pour-over will is a safety net.  This safety net ensures that all assets get into trust.  Sometimes assets are forgotten and not transferred into the trust or an asset in the trust (such as a home) is replaced and new asset does not get transferred.

A person executing their Last Will and Testament (the testator) can prevent their will to succumbing to attacks by “self-proving” their will when it is signed.  Heirs and other family members can challenge the validity of a will in Arkansas.  Will contests often occur after an heir or family member perceives some inequity or unjustness in the distribution of the assets of the estate.  Heirs and family members can challenge a will by filing a Petition to Contest the Will for some very specific reasons:  the testator was under the age of 18, the testator was under the influence of a drug or intoxicant that clouded their decision making, the testator lacked mental competence to sign the will, the testator was under undue influence or constraint of another party or there was fraud involved in the execution of the will. 

Testators in Arkansas can prepare for a potential will contest during the execution phase.   As with any area of law, there is nothing to completely prevent a lawsuit or will contest no matter how frivolous it may be.  However, ensuring a will is properly executed can severely limit the ability for a will contest to succeed.  An experienced elder law or estate planning attorney can assist with this process and verify that a will is executed according to the law.

Estate planning attorneys often place clauses within the Will to discourage a heir or family member from challenging the will.  These clauses, commonly referred to as “no contest clauses”, are provisions which would elimintate the inheritance from anyone who contests the will. This usually prevents a disgruntled family member from challenging the will if there is a chance they would lose their inheritance.

A Proof of Will Affidavit is the best way to prevent challenges to a will as the testator and the witnesses each sign an affidavit swearing the will was properly executed.  The testator will affirm that he/she is over the age of 18, that he/she was not under the influence of a drug or intoxicant that clouded their decision making, the he/she was mentally competent to sign the will, that he/she was not under undue influence or constraint of another party and there was no fraud involved in the execution of the will.  An estate planning attorney may even enlist the help of a physician to assure competency if there is a chance the testator may lack mental competence.  The Proof of Will Affidavit needs to be witnessed by at least two disinterested parties just as the will does.  The Affidavit is made part of the will and is introduced into probate just as the will is.

This is the first entry in a series I will be featuring about celebrity estate planning mistakes and what they could have done to prevent the problems that arose.

Name:  Elvis Presley

Age:  42

Died: August 16, 1977, Memphis, TN

Cause: Drug overdose

Family: daughter

Estate planning mistake:  Elvis is probably the most notorious example of a porrly planned estate.  Of his $10 million estate, about 73% was lost in the probate process to estate taxes and other settlemtn costs.  His case illustrates why a trust is often the best way to protect an estate.

A revocable living trust can be used to avoid the costs and delays associated with the probate process and in most states keeps the disposition of the estate out of public view.  The estate plan must also focus on estate taxes in order to not only minimize them, but also to avoid the untimely liquidations in order to pay the tax.  Of course, Elvis did get the last guffaw because he has earned far more money dean than alive.

1! Ha, ha, ha...

I give out a lot of advice and pointers on what to plan for and what to include in your estate plan.  I wanted to change it up a little and help families avoid the mistakes that can lead to disasters in the future.  There is nothing worse than thinking you have your planning in place which takes care of everyone you love and then realizing it is worthless.

#1.  The Total Package

The number one mistake planners make is having a will only and thinking that is all they need.  A will is only one part of a complete estate plan.  Trusts, power of attorneys, living wills and memorial plans round out a complete estate plan. 

#2.  The Do-It-Yourself Kit

I have re-written numerous estate plans for families after they paid money for a do-it-yourself kit bought off of the internet or at a bookstore only to realize it did not take care of their needs.  Every state has different laws and these kits will not always create documents that will stand up to attack in your state.  Furthermore, they are designed only to handle the simplest of estates.  I have yet to see one take care of a situation in a blended family where both parents are divorced, have children together and children from a previous marriage.

#3.  Hiring The Wrong Professional

You would not hire an electrician to handle your plumbing problems.  Be sure you do your research and hire an attorney who focuses in estate planning.  Estate planning laws are fluid.  Bankruptcy laws are as well.  You would NOT want to hire me as your bankruptcy attorney.

#4.  One Trust Fits All

Trusts are very important estate planning tools.  However, trusts are not appropriate for all families and situations.  Avoid the estate planner who suggests a trust every time.  Also, avoid the estate planner who charges a flat rate for trusts.  Some trusts take an hour to create while others can take many, many hours. 

#5.  Trusts for Minor Children

Trusts are very appropriate for families with minor children and minor grandchildren.  Minors cannot legally own anything.  The guardian of the minor ends up “owning” the property and money.  This can lead to problems in and of itself.  Also, most families do not want to ”dump” a large amount of money on an 18 year old.  I know I probably would not have saved much of it when I was 18 if several hundred thousand dollars fell into my lap.  I would have driven a really cool Lamborgini, though.   

#6.  Not Declaring Guardians for Your Children

Most families do not realize that you can declare who you want to take care of your chidren if something were to happen to both parents.  This is one of the most important decisions you will ever make.  Do not exclude it from your planning.

#7.  Designate Your Beneficiaries

All of your accounts (banking, investment, retirement and life insurance) have beneficiary designations that you need to complete.  You state where you want your money to go to.  These accounts will avoid probate if you take care of the beneficiary designations.  You can even designate the money to go to your trust if you are leaving it to a minor child or grandchild.

This list could have been entitled “100 Estate Planning Mistakes You Do Not Want To Make”.  That would have been a tough read, but it hammers the point home that you need to meet with the proper estate planning attorney to ensure that your plan is exactly what you need.

Have you ever had to take on the tedious process of probating an estate of a loved one?  Do you know there are ways to avoid the costly attorney fees, heartache and months and even years that come along with probate court?  Placing property inside a trust that would normally have to be probated is a great way to avoid probate court.  There are a multitude of reasons families create trusts.  Avoiding probate is one of the most popular.  Trusts can be complicated, but I try to make them as simple to understand as I can.  Additionally, make sure all of your accounts have the proper beneficiary designations.  Most accounts can pass outside of probate directly to your beneficiary if you have them set up the correct way.