Estate Planning Done the Right Way
By Bernard A. Krooks, Certified Elder Law Attorney
Just like in life, there can be many short-cuts in estate planning. Let’s face it: estate planning is not something we look forward to doing. It forces us to think about things that are unpleasant such as who will make decisions for me if I cannot make them myself and who do I want to inherit my property when I die. Thus, there is the tendency for some to procrastinate or to take a short-cut when it comes to estate planning. Be careful: in estate planning, short-cuts usually do not get you where you want to be.
For example, clients often feel a great sense of relief after they have gone to their lawyer’s office and executed all the appropriate documents. However, that does not necessarily mean that their estate planning is complete. A critical part of estate planning is ensuring that all beneficiary designations, joint accounts, in trust for accounts and related items have been taken into account to ensure that your wishes are carried out on your death or incapacity. Moreover, if you have created a trust as part of your estate plan, you need to make sure that the appropriate assets have been re-titled into the name of the trust. While these may seem like simple concepts, I cannot tell you how often we hear stories of people who neglected to do the follow-up work necessary to complete their estate plan. To accomplish this in the most efficient way, we suggest that you work with your estate planning team, including your attorney, accountant, trustee, and financial and insurance advisor.
Here is a common scenario: Mom and dad create a revocable living trust because they want to avoid probate and make it easier for their loved ones to manage their affairs in the event they became incapacitated. Their daughter Lisa has a developmental disability and lives in a group home. On the death of the survivor of mom and dad, Lisa’s share of their estate is supposed to go into a supplemental needs trust (SNT), with Lisa’s brother Joe serving as trustee. By setting up the estate plan this way, Lisa will be able to maintain her public benefits such as Supplemental Security Income (SSI) and Medicaid when mom and dad pass away. In addition, she will have a source of funds in the SNT to pay for things that are not provided for by her government benefits and which will improve her quality of life.
Sounds like a great plan. So, what could go wrong? First, mom and dad named Lisa and Joe as beneficiaries on their IRAs. Second, the house and some other assets weren’t transferred into the trust. Mom and dad continued to hold these assets as joint tenants with rights of survivorship.
By naming the children as beneficiaries of the IRAs, the funds in those accounts never make it into the SNT created for Lisa’s benefit. Whenever you have a beneficiary on an account, whether it is an IRA, life insurance, bank account, brokerage account, etc., the named beneficiary of that account inherits those assets outright and they do not go into the trust as intended. Thus, Lisa’s SNT will not have any assets in it to help improve her quality of life and she will lose her much-needed government benefits. It will likely be necessary to have a court proceeding in order to help re-establish her benefits and place her inheritance into a different type of SNT. This SNT, however, will not be as beneficial as the one that mom and dad had set up since all or a portion of the assets in this SNT will have to be paid back to Medicaid on Lisa’s death instead of going to other family members.
Moreover, since the house and other assets were not transferred into the trust, they will have to go through the probate process on the death of the survivor of mom and dad. Even if other assets have been successfully transferred into the trust prior to death, a probate proceeding will be necessary for those assets that did not make it into the trust. In addition, the trustee of the trust won’t be able to manage assets not held by the trust in the event mom or dad becomes incapacitated during their lifetimes. Thus, even though the trust was successfully created, it will not serve its intended purpose since it was not fully funded. Funding a trust is a term lawyers use to describe the process of transferring title of the assets from the individual’s name to the name of the trustee. Certain items, such as a house or bank or brokerage accounts, are fairly straightforward to transfer to the trust. Others, such as cooperative apartments, can be a real pain in the neck since the coop board and its lawyers must approve the transaction and this can take months or it may not even happen in some cases.
Moral of the story: make sure you finish the job. No short-cuts. While you certainly deserve credit for taking the initiative and signing your estate planning documents, don’t forget to take that very important next step. Coordinate your beneficiary designations with your overall estate plan and, if you have a trust as part of your plan, make sure it is fully-funded.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP. He was named 2021 “Lawyer of the Year” by Best Lawyers in America® for excellence in Elder Law and has been honored as one of the “Best Lawyers” in America since 2008. He was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils (NAEPC). Krooks is past Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.littmankrooks.com.