Estate Planning Thoughts

People don’t consume their lives thinking about what happens to their “estate” after they pass away, but some thought must be given at some point so that unwanted results don’t occur. By way of example, let’s look at a family with both parents alive and two children. If the children are minors, or even in their twenties, they should not get a large chunk of money if the parents suddenly die. Their inheritance is best put into a trust that can be used for them and continues for their benefit until they get to an age where they have the maturity and experience not to waste the money. That differs based on each child.

A key decision is who should be the trustee to invest and use that money for the children. It can be an older relative, an attorney, or a trust institution. Most people choose an older relative, if there is one who is reliable, has good judgment, and the ability to say “no” if an adult child wants to get money for unwise purposes. Sometimes it is difficult for family members to say “no” to adult relatives, and that is where a non-relative may be better suited to handle the trust funds. In most cases, there should be an age cut off, where the trust is terminated, and the rest of the funds given to the adult child.

It is not enough to create a trust. The parents must put assets into the trust or do a will that sends assets into the trust, and must review their assets to see if there are automatic beneficiary designations which would bypass the trust. Beneficiary designations are easy to do, and often very useful. They also avoid probate. But the law of unintended consequences can rear its ugly head if careful thought is not given, because people have changes in health, marriage status, and financial situations. What makes sense today may be the exact wrong thing tomorrow. For example, if parents leave assets directly to an adult child who is facing a probable divorce or whose spouse is suffering from a debilitating illness, the assets may not end up helping that child. Maybe that child’s share should go to the grandchildren or a trust that protects the assets. So the next time a bank teller says “you should make someone your beneficiary on the account” think before you act. Get competent advice. The beneficiary designation may be wise, or it may be exactly the wrong thing to do.

One advantage of a revocable living trust for many families is that it could be changed if circumstances change and could be changed without revising wills as children age or are faced with their own family problems. A second advantage is that assets in a trust do not go through probate. While this is usually a good thing, it is not the full story. In Connecticut there is still a probate fee, whether or not the assets pass through probate, because the so called “probate fee” is not based on “going through probate.” It is based on the inheritance tax return which has to be filed, even though the tax exemption is so high that almost no one in Connecticut owes inheritance tax. Your heirs will not be able to sell your real estate if the return is not filed and a tax clearance letter received and put on the land records. If someone tells you a living trust avoids probate, they are telling only half the story, because in Connecticut it does not avoid the probate fee.

Another thought on a beneficiary designation is important. Your family will age and go through life changes. When inheritances need to change due to marriage, divorce, death or simply aging, those designations may need changing to avoid unwanted results. Sending money to an adult child who will waste it does not help that child, or that child’s children. We often say that we plan for the worst and hope for the best. With proper planning, even if the worst does come to pass, your life savings will be protected to the maximum extent possible for the benefit of your loved ones.