Many times clients think they have solved their division of assets (after their death) by making up an informal estate plan of their own device. They may name their most responsible child as Personal Representative or Trustee in their estate planning documents, and title assets in that responsible child’s name or left him as the sole beneficiary in their estate planning documents. They tell me that they know that person will be “fair” to his siblings. The client may believe that he has avoided probate by adding their child on the title to property and bank accounts.
This informal estate plan practice is not advisable for a number of reasons.
First, it puts the child in the position of trying to determine what “fair” means. It may mean equal or it may mean something else. A particularly kind responsible child may shortchange himself in an effort to be “fair.”
Second, with and informal estate plan the responsible child may have adverse tax effects due to this distribution.
If the assets are left to him alone, and the “fair” distribution that the responsible child would like to effectuate involves someone receiving more than $15,000, the responsible child may have to use part of his own lifetime exemption to distribute to the siblings.
Third, with such and informal estate plan, the funds could be unintentionally diverted from the siblings if the “responsible child” has creditors or is involved in lawsuits.
Parents are sometimes the last to know about such problems. Instead of being able to distribute to the siblings, the creditors may collect the entire inheritance. This would likely lead to a lifetime of hard feelings among the siblings. The responsible party would also live with a great deal of guilt. A similar concern would arise if the responsible person happened to be involved in a divorce; if so, their spouse would have a claim for part of the assets.
Fourth, death of the responsible party would cause this type of plan to fail.
If the responsible child were to die before making the distribution, then his or her own estate planning documents would control the distribution. It is unlikely that these documents would contemplate the distribution of the parents’ funds.
This type of informal estate plan sometimes comes about because of the special needs of a sibling. The parents may be trying to protect the government benefits that their special needs child receives. This problem is better addressed through a special needs trust which can be established in the documents and would avoid the pitfalls outlined here. Through the use of a special needs trust the government benefits are preserved while still allowing the child with special needs to receive supplemental help from the inherited funds. The trustee of a special needs trust needs to become aware of the stringent rules regarding SSI payments, if the special needs child receives SSI.
Alternatively, this type of plan may be used because the parents are concerned about the spending habits of one of the children and want the responsible child to help manage the problem. This problem can be solved with a trust which will give guidance to the responsible child about when and how to make distributions.
An appropriate estate plan is a cohesive set of documents which explain the proposed distribution of assets. Informal arrangements can lead to misunderstanding and unfairness. Sometimes trying to be your own lawyer can end up with unfortunate consequences.