When most people think about their estate planning, they usually focus on whether they should have a will or living trust as their primary estate planning document. This “debate” (which has raged in the estate planning community for years) misses a fundamental point: if assets are not owned by, or if beneficiary designations are not made payable to, the appropriate person, trust or other entity, then the estate planning documents will be rendered largely ineffective.

Here’s an example of this problem:

Assume Jerry and Sidra, a married couple with a non-taxable estate (e.g., their combined assets are below New York’s’ 2019 estate tax threshold of $5,740,000) have as primary planning goals to ensure: (i) the financial well-being of the surviving spouse, and that (ii) after the second spouse’s death the assets will pass to their two children and subsequent generations of their “bloodline.”

The couple executes separate revocable living trusts that provide that after the first spouse’s death, the deceased spouse’s assets will pass into a protective “marital trust” for the benefit of the surviving spouse, and after the second spouse dies, the couple’s total assets will pass into “lifetime protective trusts for the benefit of each child. These children’s trust are specifically designed to provide the children with access to the trust assets for their needs, while protecting the assets if a child were to (x) divorce, (y) be sued, or (z) have a chronic or catastrophic health condition that requires long-term care.

Sounds like a winning plan? Well, it should be, but far too often what happens in the “real world” causes the plan to fail.

Unless Jerry and Sidra and their professional advisors take the further important steps of having ownership of their assets changed to one or either of the living trusts, and changing beneficiary designations for their retirement plans and life insurance policies, the estate planning documents are likely to control few if any of their assets.

For example, assume Jerry and Sidra’s assets consist of: a house worth $250,000 owned jointly with rights of survivorship, Jerry’s IRA of $250,000 (Sidra is the beneficiary), a jointly owned brokerage account of $250,000, and Jerry’s life insurance policy of $250,000 (Sidra is the beneficiary). Unless the couple and their advisors work closely to retitle these assets (a process called “funding”), then assuming Jerry dies first, the entire $1,000,000 of assets would pass to Sidra automatically by operation of law.
This result sounds appealing: there is no probate or trust administration, and Sidra has immediate access to all the assets.

The downside, however, can be huge. What if Sidra remarries without having the new spouse sign a prenuptial agreement? What if Sidra’s negligent driving causes a serious car accident, or she has other creditor problems? What if Sidra needs to go to a nursing home or has other long-term care needs? Or, perhaps as Sidra ages her mental capacity were to decline and she is scammed out of tens of thousands of dollars? Since in the above example upon Jerry’s death all the assets would be Sidra’s name alone, each of these common occurrences would leave the estate assets exposed to Sidra’s “creditors and predators.” Under any of these scenarios Jerry and Sidra’s children may lose a significant part of their inheritance.

A similar result would occur if Jerry and Sidra relied upon wills as their primary estate planning documents. Wills control only those assets individually owned by the decedent and which do not have designated beneficiaries; since in the above example none of the assets meet that criteria, upon Jerry’s death his will would be rendered effectively useless and would not control the disposition of any of the assets. While there would be no need to file for probate, this “convenience” comes at a serious cost–the spouse who dies first ultimately loses complete control of all the couple’s assets!

Instead, had Jerry and Sidra retitled their assets so that roughly one-half were owned by or made payable to Jerry’s revocable living trust (or are owned outright by Jerry if the couple used wills as their primary document), and the other half are owned by or made payable to the Sidra’s revocable living trust (or owned outright by her if wills are their primary planning documents), then their assets could be protected for the surviving spouse and ultimately for the children.

The root cause of this problem is that in far too many cases the law firm does not take responsibility for the funding process, with the client remaining clueless as to the importance of funding and how to go about ensuring it is completed. When completing your estate plan, make sure that your attorney takes responsibility for ensuring that the plan is properly funded.

Richard J. Shapiro, Esq., is a Certified Elder Law Attorney by the National Elder Law Foundation, as accredited by the American Bar Association, and has been designated a “Super Lawyer” in Elder Law, and has the highest (AV) rating from Martindale-Hubbell. Mr. Shapiro, who is accredited to practice before the Department of Veterans Affairs, is the author of “Secure Your Legacy: Estate Planning and Elder Law for Today’s American Family.” He is a partner with the Goshen law firm of Blustein, Shapiro, Frank & Barone, LLP. Mr. Shapiro is a member of WealthCounsel, ElderCounsel, the National Academy of Elder Law Attorneys, the New York State Bar Association (Trusts and Estates and Elder Law Sections), and the Hudson Valley Estate Planning Council. You can reach him at (845) 291-0011 or at rshapiro@mid-hudsonlaw.com.

The information in this article is for general information purposes only and is not, nor is it intended to be, legal advice.