By Rodney S. Retzner
Visualize the standard process of “estate planning.” The attorney meets with the clients, discusses assets, possible tax planning and then works with the client to design documents that will implement the decisions made. Wills and/or revocable trusts are drafted, possibly with continuing trusts for young children, but ultimately designed for the overall disposition of all assets of the clients. Most discussions also include protection of the client from the possibility of incapacity prior to death and the use of powers of attorney to avoid guardianship. At the end of it all, the client has a “book” of estate planning documents, including a last will and testament, maybe a revocable trust, general durable power of attorney, health care power of attorney and a living will. At that point “step one” is completed.
Most clients, and indeed more than a few attorneys, believe that once step one is completed, so is the client’s estate planning. The file is closed and, maybe a reminder to check back with the client in a few years for any updates. Maybe there is correspondence discussing “step two,” but in too many cases nothing is done. Step two, however, is by far the most important part of the estate planning process.
What is step two? A last will and testament and/or revocable trust only govern assets that are directed to the individual’s estate or to the trust, respectively. Today’s clients have the vast majority of their wealth held in accounts that are controlled by contract law and never pass under the probate code or trust code. Without a review and rearrangement of the joint tenancy assets, beneficiary designations or implementation of such strategies, the will and/or trust drafted for a client is effectively worthless. Step two, therefore, is making sure that the ownership of assets and beneficiary designations on assets are set up to work in concert with the documents put in place.
I was once presented with the estate of an individual who had been in the military. The military had provided him with free legal services and established a last will and testament and powers of attorney. Included in the last will and testament was a continuing trust for his young son, which trust would hold any assets passing to that child until the child reached the age of 25 years. The military also provided an insurance policy to this client in the amount of $250,000, which was, effectively, the sole inheritance for the child. Unfortunately, the beneficiary designation on the life insurance directed that the policy proceeds be paid to the son directly, not to the individual’s estate or to the trust for his son under the last will and testament.
Under this set of facts, the life insurance was placed in a guardianship for the son and, when the son turned the legal age of an “adult” (at the age of 18), those assets were turned over to the child. I wish him well, but it would be the rare 18-year-old who would avoid being “ruined” by receiving a quarter of a million dollars on his 18th birthday. The father had attempted to avoid this by establishing the trust in his will, but that “second step” to review and rearrange the beneficiary designations on the insurance was never completed. The will, and the trust thereunder for his son, was an effectively worthless document for ensuring the main goal of holding assets for the son until the age of 25.
Most assets can be structured with a beneficiary designation or to have the ownership of the asset itself changed to ownership directly by a revocable trust. There is also the possibility of joint ownership, as well as Indiana’s very broad law allowing transfer on death designations. The use of any of these mechanisms can direct the flow of assets to pass in a manner intended by the client at his or her death, either directly to a beneficiary, or to and through a trust for a beneficiary under a will or revocable trust. Again, however, unless that second step is taken to coordinate the ownership or beneficiary designation on assets with the plan put in place, the documents themselves can be partially or totally worthless as they will not govern the assets they are intended to govern.
When meeting with clients for estate planning, it is critical to get a complete list of assets, approximate values of each asset, the title on each asset, and whether that asset has a beneficiary designation. After step one, the attorney must then work with the client to coordinate the ownership and/or beneficiary designation on all of these assets. In addition, the attorney should instruct the client on ownership or beneficiary designation on future assets.
Special rules exist with certain assets, such as the income tax considerations attendant with rearranging beneficiary designations on retirement assets. Regardless, doing nothing with those assets, or any other, may result in accomplishing none of the goals of the client’s estate planning.
Make sure you take the “second step.” It is truly as important, if not more important, than the first.•
• Rodney S. Retzner is partner and chair of the estate planning and administration practice group at Krieg DeVault LLP. The opinions expressed are those of the author.