July 8, 2008

Ways you can mess up your estate plan, part one

By Robert P. Bergman
Special to the Times

In the next several articles, I will present several ways that you can mess up your estate plan, either through improper planning, inadequate planning, or no planning at all. The list is not complete, and new opportunities to make mistakes occur almost daily. So let’s get started.

1. Failure to Understand How Your Assets will Pass on Your Death.

Many people think their wills control how their assets will pass upon their death, yet most assets today pass outside of wills. For instance, joint tenancy assets pass to the surviving joint tenant. If there is a surviving named beneficiary (such as on life insurance, annuities, IRAs or other retirement plans), or a “Pay on Death” beneficiary on assets such as brokerage accounts and bank accounts, then such assets pass to the surviving named beneficiary. It is only your other assets (sometimes called your "probate estate") that will pass pursuant to your will.

Example: Bill named his oldest son as the beneficiary on his life insurance. His will left his estate equally to his three children. The oldest son gets all of the life insurance and one-third of his probate estate. His other two children each get one-third of his probate estate, but none of his life insurance.

Another example: While still single, Don named his brother as the beneficiary on his 401(k) plan at work, and his life insurance. Don purchased his first home in joint tenancy with his brother, who shared the house with Don. Don later had a falling out with his brother and still later got married. Don changed his will to leave everything to his wife.

Unfortunately, because Don never changed his beneficiary designations on his 401(k) plan and his life insurance, and the joint tenancy on the house, the bulk of his estate passed to his brother on Don's death and not to Don's wife. An additional complication came in when Don’s wife sued Don’s brother to assert a spousal community property interest in Don’s 401(k) and the house.

This problem can be avoided by properly using a living trust as the basis of your estate plan.

2. Trying to Plan an Estate around Specific Assets

Unless there are compelling reasons why a specific asset should go to a specific person, you should not try to plan around specific assets.

Example: Bill had three children and wanted to treat them equally. His will even confirmed this. Several years before he died, he put his home in joint tenancy with his older son, added his daughter as the “Pay on Death” beneficiary of his savings account, and named his younger son as the beneficiary on his life insurance policy.

When he did this, all three assets were about equal in value. But then later he sold the home, put the sales proceeds in the savings account, and let the life insurance policy lapse. At Bill’s death, the saving account passed to his daughter, and his two sons received nothing. By planning around specific assets, he actually disinherited two of his children!

By the way, this problem often surfaces in a will as well. If an asset is no longer owned, the bequest lapses. Let's say your will leaves rental home #1 to your son and rental home #2 to your daughter, and the balance equally to both children. If you sell rental home #2, and then die, your son still gets rental home #1 plus he gets a full 50 percent of your other assets and your daughter gets the other 50 percent.

Again, this problem can be avoided by a properly drafted living trust as the basis of your estate plan.


Robert P. Bergman is a San Jose estate-planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for incapacity and the eventual transfer of their property to their heirs. He specializes in working with parents who have minor children. Visit his Web site at www.lawbob.com where you can learn more, get on his mailing list, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics that he has written. You can also reach him by e-mail at rpb@lawbob.com or telephone at (408) 247-0444. All inquiries are confidential. This column is intended to provide general information about estate-planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.