A Major Decision To Make
When a person is informed by their medical professional that he or she is going to die soon, one of the major issues that he or she has to face is how to handle their bank accounts, retirement plans, real estate, and other assets.
This News Can Cause High Emotions
Receiving this news can cause some very high emotions for the family. The well-intended, but sometimes misguided, advice from relatives may cause the dying person to make some very bad decisions.
A Story In Minnesota
Let me tell you about a story here in Minnesota. We recently had a client whose mother we will call Audrey.
Audrey was told by her doctor that she had inoperable lung cancer. After the immediate shock wore off, she began to worry about her children's futures. She wanted to make sure that her children received as many of her possessions as possible.
Audrey's brother-in-law suggested that she should liquidate all of her assets and distribute the proceeds to her children while she was still alive. The brother-in-law told her that she should avoid probate at all costs.
Taking The Misguided Advice
On that advice, Audrey promptly cashed out her 401(k) program at work and gave away the proceeds to her four children.
She gave the deed for her $300,000 homestead in Bloomington to her children.
Audrey went to the bank and listed her son Ralph as a joint owner of her two bank accounts and mutual fund worth $80,000. Ralph promised Audrey that he would divide the accounts four ways between himself and his three sisters.
Shortly after that, Audrey passed away, feeling she had successfully taken care of her children and avoided probate.
The Cost Of Avoiding Probate
It is true that Audrey had avoided probate. However, the cost to her family for the things she had done was enormous.
For starters, her decision to cash out her 401(k) at work created immediate tax penalties on the proceeds.
Audrey owned her home outright, so the $300,000 gift she gave to her four children created a large gift tax of approximately $37,000, since it had occurred during her lifetime. If the home had been transferred by probate after the death, it most likely would not have incurred any taxes.
It turns out that Ralph had a number of creditors, who seized most of the two bank accounts and a large part of the $80,000 mutual fund she had given him. After Ralph's creditors took their shares, Audrey's children got very little of those investments.
When Audrey's oldest daughter, who we will call Anne came to see me, there was far less remaining in Audrey's estate for us to work with than we could have had if Audrey had planned properly. This was a very sad realization for the family.
A Better Scenario-Planning The Estate
Let's go back to when Audrey was first diagnosed with a terminal condition. If she had consulted with an experienced estate planning attorney, here is what could have happened:
A trust or a will would be created, which sets forth a roadmap of how Audrey's assets would be divided and who would administer her estate after she passed.
By using a trust, even Ralph's share of the estate could be protected from the hands of his creditors.
A plan could be made so that her home in Bloomington would pass directly to her children, and most likely with no tax consequences.
Her investments could be protected as well. A 401(k) distribution could be made in such a way that the taxes and penalties she incurred could most likely be avoided. What is more, in most cases a 401(k) can be rolled over so that taxes can be further deferred, and the 401(k) could be "stretched" to provide a partial retirement plan for Audrey's children.
The bank accounts could be preserved for the benefit of the children using a payable on death provision.
Obviously each estate plan is unique and the results can vary depending on the circumstances.
However, the message is clear. If you or someone you love is faced with end-of-life decisions involving your assets, it's a good idea to speak with an experienced estate planning attorney. This way you can be sure your wishes are carried out while maximizing the amount of the estate.
The contents of this article are for information only and are not to be interpreted as legal advice. For personal legal advice you should consult with an attorney who is experienced in probate law or estate planning.