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Beyond Your Estate Planning Documents

It does not matter what your estate planning documents say about who gets what when it comes to certain types of assets, property ownership, and beneficiary designations. State property laws and contract laws will control. Badura & Wintz law helps clients coordinate these into their Estate Plans.

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Beyond Your Estate Planning Documents

Your Estate Planning documents may not control the disposition of all of your assets after your death (or even during your lifetime). Ownership of some of your assets may be controlled by state property laws or the law of contracts. These laws will control disposition of your property regardless of what your estate planning documents say. Therefore, you need to carefully review how you own certain properties; whom you have designated as beneficiaries for life insurance, annuities, and retirement accounts and benefits; and how account opening/signature cards for financial and investment accounts read. At Badura & Wintz Law, we work with you to assure that your estate planning wishes are going to be followed after your death, and to assure that there aren’t unexpected unhappy situations that could occur while you are still alive.

It's Important to Review Your Assets

Here are a few examples that we hope will illustrate how important it is for you to review how you own assets, how you have set up accounts, and your designated beneficiaries.

Joint Tenancy

Joint tenancy ownership between spouses of an asset such as a home is common but it is not always appropriate in every case. Sometime, such as in the case of a second marriage where one or both spouses have a child or children of a prior marriage, joint tenancy with right of survivorship means that the estate plan of the surviving spouse controls who will get the house (or the proceeds of the sale of the house) when the second spouse dies. If the estate plans haven’t been coordinated properly, the children of the first spouse to die could be effectively disinherited with respect to that asset; not necessarily because of meanness on the part of the survivor but because of inadvertent, incomplete, and incorrect planning and titling of the asset.

Joint tenancy ownership with a minor child is a very bad idea because, if you want to sell or refinance the asset, you will likely have to get a Conservator appointed by the court for that child to give valid consent to the transaction. Joint tenancy ownership with an adult child (or children) can also result in problems.

Multiple-Party Accounts

Many parents add a child as a signatory to checking, savings, and other accounts so that the child can pay bills for the parent when the parent is unable to do so (sometimes this is done at the suggestion of a bank employee who is helping a customer in filling out their account card.) A recent Nebraska Supreme Court case illustrates how this seemingly benign arrangement can lead to unintended results. In Estate of George Edward Balvin, Sr., 295 Neb. 346 (December 16, 2016), a father opened a bank account so his son could be a signer and marked but did not initial two lines that read, “[X] Multiple-Party Account ___” and “[X]Multiple-Party Account with Right of Survivorship___”. The father marked these lines so his son could be a signer on the account. Although the father did not initial the line that there was to be a Right of Survivorship, the Nebraska Supreme Court held that by establishing a Multiple-Party Account, a Right of Survivorship was automatically created under Nebraska statutes. Dad’s other son would not receive anything from the account (of course, the two surviving son’s did not get along, there would be no sharing of the account, and that’s why there was this litigation).

Payable on Death & Transfer on Death Accounts and Deeds

These are also called Totten Trusts or Poor Man’s Wills. They are neither trusts nor Wills. Money in a bank account or securities in an investment account have instructions that upon the account holder's death, whatever is in that account will pass to a named beneficiary. Sometimes there are multiple named beneficiaries. These arrangements can have many of the problems associated with joint tenancy accounts. While not subject to claims of the beneficiaries’ creditors while the account owner is alive, once the owner passes, a beneficiary’s interest is subject to claims of creditors. This risk can be eliminated or minimized through the use of a real trust with a Spendthrift provision that provides that a beneficiary’s inheritance is not subject to creditor claims until actually distributed. This frustrates the beneficiary’s creditors and often results in them going away or settling their claims for substantially reduced amounts.

If only one beneficiary is named, there can be issues with post-death “sharing” according to the original account owner’s wishes; and even if there is post-death “sharing,” inheritance tax will be calculated with only one beneficiary possibly resulting in higher taxes than would otherwise be imposed. And, if there are multiple beneficiaries, there is the risk of the “wrong order of death” possibly disinheriting a beneficiary’s children.

There are also similar concerns about a beneficiary being disqualified for needs based governmental benefits. Another possibly unintended result is that these designations shift the burden of paying your bills, expenses of your last illness and burial to other heirs or beneficiaries because these accounts are generally unavailable to pay these bills and debts.

Life Insurance & Annuity Beneficiaries

Some insurance companies will not permit you to designate beneficiaries to receive proceeds per stirpes. That means, if a designated beneficiary predeceases the insured or the annuitant, no death benefit will be paid to the deceased beneficiary’s children.

If there is no designated beneficiary who survives the insured or annuitant, almost all life insurance policies and annuity contracts provide for default payment to the insured’s or the annuitant’s estate.

This can create a disastrous situation because life insurance proceeds and the first $100,000 of annuity death benefits payable to anyone or anything other than the decedent’s estate are generally exempt from claims of the decedent’s creditors. These default life insurance/annuity contract beneficiary designations erase the valuable creditor protection that is otherwise provided by Nebraska law.

Retirement Plan & IRA Beneficiary Designations

Without careful planning, the Internal Revue Code provides that all of a decedent retirement and IRA account balances must be distributed within 5-years of the account owner’s death, and many retirement plans, such as 401(k) plans, require all distributions must be taken in a single sum payment. This may cause highly taxed bunching of income to occur in one tax year. Fortunately, the Internal Revenue Code also contains very valuable continued income tax deferral opportunities for a surviving spouse and other beneficiaries of retirement accounts and Individual Retirement Accounts (IRAs), if the beneficiary designations are prepared correctly (and, if a trust is named as the beneficiary, assuring that it qualifies as a “conduit trust,” if appropriate).

A surviving spouse as beneficiary may have multiple options to stretch out payments; however, as with joint tenancy, the surviving spouse’s beneficiary designation(s) will control who receives the remaining account balance when the second spouse dies. If the surviving spouse’s beneficiary designations haven’t been coordinated and completed properly, in a remarriage situation, the children of the first spouse to die (the original account owner) could be effectively disinherited from the remaining account balance; not necessarily because of meanness on the part of the surviving spouse but because of inadvertent, incomplete, and incorrect planning and beneficiary designations for the account.

Non-spouse beneficiaries may also have options to stretch out payments and receive Required Minimum Distributions as a beneficiary that are calculated based on their own life expectancies but only if account beneficiary designations have been properly completed. If done properly, a beneficiary could stretch IRA distributions and tax-deferred growth throughout his or her lifetime. However, as with some life Insurance and annuity designations, the IRA custodian will not permit you to designate beneficiaries to receive proceeds per stirpes. That means, if a designated beneficiary predeceases the account owner, no death benefit will be paid to the deceased beneficiary’s children, effectively disinheriting them from the account.

In 2014, the United States Supreme Court in Clark v. Rameker ruled that inherited IRAs are subject to claims of the beneficiary’s bankruptcy creditors. As discussed in the Payable on Death and Transfer on Death section, if a trust with a Spendthrift provision were designated as the beneficiary for the benefit of the person, the IRA’s assets are not subject to creditor claims until actually distributed. Also, if a Supplemental Needs Trust is designated as the beneficiary instead of a person who would otherwise qualify for governmental needs based benefits such as subsidized housing and other benefits and services, qualification for benefits can be retained while providing the person with supplemental benefits and extra care over and above what the government provides. And, because this trust is created by you rather than the recipient, it is exempt from Medicaid recovery claims. In these situations, “accumulation trusts” rather than “conduit trusts” need to be created.

Business Ownership Agreements

Most corporate By-Laws, LLC Operating Agreements, Partnership Agreements, and Buy-Sell Agreements (and Stock Options and Restricted Stock Awards) specify what happens if a business owner becomes disabled or dies. Because non-family business partners usually do not want to have a deceased owner’s estate, spouse, or possibly multiple family members as co-owners with them after an owner dies or is disabled, these arrangements specify who will be paid, how much, and when. The arrangement may say that your estate will be paid, your surviving spouse will be paid; your surviving children will be paid, etc. Any of these possibilities may not properly coordinate with your wishes, intentions, and lifetime and estate planning documents. For these reasons, it is extremely important that you share these documents and agreements with us during the Estate Planning process to assure that they are integrated into your lifetime and estate planning and that your wishes are going to be followed in the event of your disability or death.

REMEMBER: It does not matter what your estate planning documents say about who gets what when it comes to certain types of assets, property ownership, and beneficiary designations. State property laws and contract laws will control. Incorrect types of ownership and beneficiary designations will over-ride even the best estate planning documents. Failure to take into account Business Ownership Agreements may produce results you do not want unless their provisions are properly integrated into your planning during your lifetime and at your death. For this reason, it is important to review and discuss how you own all of your assets, review your financial and investment account cards, and review and discuss your life insurance, annuity, retirement plan/IRA beneficiary designations, and business ownership agreements with us both at the times of making or changing your estate plan, and when you open or change accounts of financial institutions, change forms of property ownership, make beneficiary designations, or enter into or change business relationships.

Peace of mind is possible

Let Badura & Wintz Law help you get there