Coordination in Estate Planning

Originally Written By: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.

Edited By: Andrew T. Slaton-Freeman, J.D., Attorney, Slaton Schauer Law Firm, PLLC

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Lack of coordination. This is one of the most common problems we see in estate planning. It primarily consists of a failure to consider 1) the different aspects of an estate plan and 2) how those components may (or may not) work together. Let’s examine this problem further:

I. Beneficiary Designations

An ever-increasing share of an individual’s wealth is controlled by beneficiary designation.

These designations may take the form of:

• Real estate controlled by beneficiary deeds
• IRAs
• 401ks
• Life insurance plans
• 529 plans
• Brokerage accounts (with beneficiary designation)
• Bank accounts (also with beneficiary designation)

Clients may think they are being proactive by putting beneficiary designations on their assets. But how does it really play out? Let’s create an example. Bill and Antonia execute a beneficiary deed on their house with their daughter, Susan, as the beneficiary. Bill’s brokerage account designates their son, George, as the beneficiary of the account. Their IRA names their other son, Bobby, directly. So far we have Bill and Antonia– the parents– and Susan, George, and Bobby.

Years later Bill and Antonia decide to get a will, so they consult with a well-recommended attorney. The couple tells their attorney they want a simple will leaving everything to their son, Bobby, because he’s been caring for them for years now. The attorney then drafts a will that leaves all the couple’s assets to Bobby. Let’s say that the will is beautifully crafted, and even keeps the assets in a testamentary trust for the son. It even includes provisions such as divorce or creditor protection. Sounds good so far, right? But what does Bobby actually get?

Nothing but the IRA. Further, the IRA going to Bobby would not have creditor protection under federal law. If he’s fortunate, it could have some protection under state law– depending on the jurisdiction.

II. Avoiding the Headache

It is crucial for clients to tell their attorneys about their prior estate planning. Be sure to discuss what you’ve done in the past and consult with your attorney before moving assets around in the future. If their attorney had drafted and funded the assets into a trust, Bill and Antonia’s family would likely have avoided the problem. Of course, there could still be problems regarding assets not funded into the trust or later acquired in the client’s name individually.

Keep in mind that, while drafting the will, Bill and Antonia’s attorney may not have known about all their assets… or the beneficiary designations! A will only controls the items which are in the client’s name upon death. What about IRAs, bank accounts, and similar items? Keep the contractual aspects of these items in mind. Items with a beneficiary designation transfer to the beneficiary upon death and are not part of the probate estate. This means that they are not controlled by the will. Similarly, items in joint tenancy pass to the surviving joint tenant by operation of law and are not controlled by the will.

III. Takeaways

A well-drafted will or trust is only one aspect of a good estate plan. There’s nothing wrong with using beneficiary designations where appropriate– but keep the overall picture in mind. The designations on these assets must be coordinated with the rest of your plan.