365 Route 59, Suite 231 ~ Airmont, New York 10952
(845) 425-3900 info@haaszaltz.com

It’s Important to Have a Coordinated Estate Plan

June 15, 2021 by Steve Hartnett 

An Estate Plan includes various different moving parts. The Revocable Trust may be the keystone of the plan, but it’s important to consider how the other parts of the plan will work with…or against…the plan.

Let’s look at a simple example. John had three children and he wished to leave his assets to them equally. He had $6 million in various assets. John hired an attorney to help him with a Revocable Trust leaving everything equally to his three children. The Trust was wonderfully drafted. He had a Pourover Will which poured into the Trust. Would this achieve his goal?

Not necessarily. Some of John’s $6 million in assets might not be controlled by either the Trust or the Pourover Will. Let’s say John had an IRA. The IRA beneficiary designation would control who would receive that asset. If the IRA beneficiary designation were to John’s Trust, the IRA would pass according to the terms of John’s Trust. All too often, retirement accounts and other assets have beneficiary designations which predate the Trust and haven’t been updated. Often when the IRA is established, it has only a small amount. In John’s case, he opened the IRA with $5,000. He named the person he was dating at the time, Betty. He never changed that beneficiary designation. He never even thought about it years later when his spouse died and he did a spousal rollover of her retirement plan into his own IRA. Nor did he think about it when he left his job and rolled his 401k into his IRA. Now he has $3 million in his IRA. At his death, that asset would pass according to the beneficiary designation, to Betty.

Betty could take the $3 million and not look back. She’d be under no legal obligation to give it to John’s children. In that case, John’s children would be out half their inheritance. If Betty is cooperative, she might disclaim the $3 million IRA and it would pass to the contingent beneficiary. In John’s case, he didn’t name a contingent beneficiary. So, we’d look to the custodial agreement. In John’s case, the agreement provides, if the primary beneficiary isn’t there, and there’s no contingent beneficiary, the assets would go to his estate.

Passing through the probate process, the assets would pass pursuant to John’s Pourover Will to his Trust. This would get the assets to John’s three children. However, the IRA would have been unnecessarily diminished by the expenses of the probate process.

This turmoil could have been avoided if John and his attorney had coordinated the Estate Plan. John could have changed the beneficiary designation on his IRA. He could have named his children outright, if appropriate, or he could have named his Revocable Trust. Without coordinating the Estate Plan, a large portion of the assets could go in unintended ways, just like in this example.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.