I was quoted extensively in this article on wills and estate planning. The article deals with whether assets should be left to children “equally” or “equitably.” Equally of course meaning that everyone gets an equal share. Equitable is little more fuzzy, and deals with what is “fair,” considering such things as who has received more help from mom and dad during their lifetime, who spent more on mom and dad’s care when they were in their elder years, etc. Here’s an excerpt from the full article, found at Investopedia, written by Amy Fontinelle.

Could a Child Sue for More?

If you decide not to divide your assets equally among your children, understand that you’re putting your plans and your children at risk of going through a lawsuit. How significant is this risk, and how likely is it that the result will be a different division of assets than the one you desired?

“Children can always sue, but there generally needs to be a valid basis for a will contest,” says Jeffrey R. Gottlieb, an estate planning attorney in Palatine, Ill. With careful estate planning, however, you can mitigate any challenge. The first step is to draft your will with the assistance of an estate planning attorney, while you’re of sound mind and memory, and without undue influence from one of your children. (For related reading, see Do You Need an Estate Planning Lawyer? and How to Reduce Estate Planning Attorney Fees.)

“Undue influence” means that one of your other children believes – or at least thinks it can be proved in court – that you were manipulated during the process of creating your will. As a result, that child contends, you expressed wishes that you otherwise wouldn’t have or that weren’t really what you wanted.You won’t be there to defend yourself against such a claim so you need to make sure no one can successfully argue it.

“Lack of capacity,” another way a will can be challenged, means that you didn’t understand what you were doing when you created or changed your will, perhaps because of your age or because a physical or mental illness had deteriorated your ability to make sound decisions. A child could also try to argue that your will isn’t valid because of fraud or because your signature wasn’t witnessed.

There are ways to minimize the chances of a less-favored child contesting your will in court, and ways to minimize their chances of winning if he or she does. “A no-contest clause paired with at least some nominal gift can create a disincentive to challenge,” Gottlieb says. The no-contest, or non-contestability clause, is, basically, language in your will stating that any inheritor who takes your will to court forfeits any bequests. That’s where the nominal gift comes in – for the clause to be effective, your child has to have something to lose. You’ll need to leave the less-favored child enough that he or she likely has more to gain by keeping quiet than by going to court.

It’s an unpalatable option, to be sure, but it might mean the best chance of keeping your will intact. The enforceability of these clauses varies by state, however, so check your state’s laws before considering this option.

Estate-planning experts say other ways to avoid challenges to your will include:

  • using a trust to provide structure for a child who might not be able to manage an inheritance responsibly on his or her own (learn more in Advanced Estate Planning: Using Trusts)
  • having your doctor be a witness when you sign your will to invalidate claims of lack of capacity
  • excluding all children from the will-writing process to invalidate claims of undue influence
  • discussing your will with each child to avoid surprises and explain your reasoning

A lawsuit of this type is always most likely to end in a settlement, Ruce says. “That settlement will in some way vary your estate plan because funds will likely end up in a different place or with a different person than you had hoped.”

The Bottom Line

“The most important thing to remember when dividing up an inheritance is that it is your money, and you have a right to do with it what you choose,” Ruce says. That said, an equal inheritance makes the most sense when any gifts or financial support you’ve given your children throughout your life have been minimal or substantially equal, and when there isn’t a situation where one child has provided most of the custodial care for an aging parent.

“When there is actual or perceived inequality,” Ruce says, “the likelihood of someone looking for legal remedies increases substantially.” You have to decide how significant that risk is given your children’s temperaments and their relationships with each other, and whether any risk in leaving an unequal inheritance is worth what you’re trying to accomplish. (For further reading, see Tips for Family Wealth Transfers.)

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees, available at Amazon.com in paperback or Kindle edition (free chapter available here!). He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

A complete financial plan has many moving parts, many of which are handled by separate financial professionals. A financial advisor likely does not sell property and casualty insurance, but she’ll want to know and understand that a client’s home and property are protected. An advisor does not sell mortgages, but she’ll need to understand a client’s debts and liabilities in order to create a better plan. An advisor also does not create will, trusts, or other estate planning documents, but he or she needs to understand what the client’s plan looks like since so many of a client’s priorities can be gleaned from a look at their “end-game.”

But for financial advisors, it can be much larger than that. Not understanding a client’s estate plan can (and does) result in big losses . . . to relationships, to families, and to an advisor’s bottom line. Let’s look at three easy ways to lose clients by ignoring estate planning:

Loss #1:  Not funding the client’s revocable trust.

Money in the air.If a client already has an estate plan or has planning performed because of an advisor’s recommendation (a good recommendation, generally), the client may end up with a probate-avoidance tool called a revocable trust. A revocable trust more or less adds beneficiary designations to assets that would not ordinarily have them — real estate, cars, boats, furniture, personal property, etc. Because of this, the assets held by the trust avoid the probate process (and all of the probate-associated expenses, heartaches, and inefficiencies).

But this only works if the client’s assets are actually held in trust. Too often a client will have their revocable trust created, and then never actually add anything to it. This creates problems because if the assets aren’t held in the trust, then the assets are not controlled by the trust document and will likely have to go through the probate courts. Meanwhile, the client has paid for an estate plan which has become useless.

The attorney will do his or her best to give the client the proper tools to get these assets transferred. For example, the attorney will create and file the necessary real estate deeds and will draft assignments of closely-held business interests. But it’s the financial advisor who will be meeting with these clients regularly. By working with the client to make sure assets are titled correctly (including that beneficiary designations are accurate and valid), the advisor ensures that the plan works. When a client passes away, the advisor is the one often holding the bulk of the assets . . . if the advisor has involved himself in the estate plan, the family transition will more likely happen smoothly and without a hitch. This gives the advisor a chance to work with the family closely and, hopefully, gain their trust and confidence for another generation. For advisors who are less inclined to work with estate planning, a rough and frustrating legacy transfer can be a deal killer for retaining assets.

Loss #2: Not considering the effects of income taxation on estate planning.

We know and understand that estate taxes can be a problem when a client passes away. But what about income taxes?

When a client dies, their appreciated assets receive a step-up in cost basis. Briefly, this means that if that any stock, real estate, or other asset that would ordinarily get sold and have capital gains tax liability will instead transfer to the beneficiary with a new cost basis determined on the client’s date of death. The beneficiary can then sell these assets without incurring capital gains taxes. This is a really big deal for assets with substantial appreciation. Note that this only happened for transfers on death — if the client were to gift appreciated assets to a family member during the client’s life, the family member would take the client’s original basis and any sale could result in the realization of any capital gains tax liability.

What this means is that appreciated assets are a great thing to pass on to family members after death rather than during life. It also means that if a client is considering making charitable gifts, perhaps there are other assets that might make better sense to give. A great example is qualified money.

As you are aware, qualified IRA and 401K dollars are taxed as ordinary income when distributed to a beneficiary. This is also the case for beneficiaries of the next generation. If a client’s child has the choice between taking stepped-up, tax-free appreciated assets or assets that are taxed at the child’s effective income tax rate, you can guess which they would likely prefer. If there is one class of assets that are perfect for charitable donations, it is those assets that are taxed the highest — qualified money.

A client’s family member who realizes these savings is much more likely to want to work with the professionals who helped to make these savings a reality. Likewise, a huge, unnecessary tax hit will help to ensure that the client finds new professionals when creating their own family legacy.

Loss #3: Not considering tax-deferral for minor children: IRA trusts.

Little Boy Getting Money From An ATMFirst, it’s important to understand that minor children can’t own property, which means they can’t inherit property. This makes most beneficiary designations to minors invalid. There are some beneficiary designation forms which allow for a custodian to be appointed, but even these fall short because the child will typically get a full distribution of the funds at age eighteen (thereby creating a while other set of problems).

This problem is solved using a minor’s trust, which can be written directly into a will or revocable trust plan. A trustee is appointed who can accept property on a child’s behalf — the client then names the trust as the account beneficiary on the relevant beneficiary designation forms.

The big red flag with these trusts is that they must be written in a very specific way if they are going to be receiving qualified retirement assets. The trust must be a “see-through” trust for IRS purposes — it must be able to use the child’s life expectancy when calculating the required minimum distributions which all beneficiaries of inherited IRAs must take. If the trust does not meet IRS requirements for see-through trusts, or if a beneficiary of the trust is a non-human entity (like the estate or a charity), then the IRA must be cashed out within five years. Not only does this destroy the opportunity for tax-deferred growth, but the cash-out will likely be taxed at the trust’s astronomical tax rate (a trust hits it’s maximum tax rate at less than $15,000 in ordinary income per year).

Fortunately, the advisor is the ideal professional to make sure minors are not named directly as IRA beneficiaries. For those who miss this planning opportunity, a client’s tax hit may be all that is needed to ensure the next generation goes elsewhere for their planning needs.

A team-approach is the best approach to any financial plan. Financial advisors, CPAs, attorneys, banking specialists and insurance brokers all have an important role to play. Ensuring the plan is a cohesive one is a surefire way to make the client’s legacy a powerful and effective one — and to ensure a client’s family sees the value your firm adds for generations to come.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees, available at Amazon.com in paperback or Kindle edition (free chapter available here!). He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.


You know estate planning has a lot of moving parts . . . guardianships and trustees for children, real estate and deeds, incapacity planning, charitable giving, business succession, and estate taxes are just a few concerns that clients have when putting together their plan. But one of the biggest problem areas comes from something entirely within the client’s (and their financial advisor’s) control . . . beneficiary designations.

Beneficiary designations operate independently of a will or trust document because these beneficiaries are named under a contractual agreement with the financial company. Life insurance, IRA accounts, brokerage accounts, and any other financial asset that allows the client to choose his or her beneficiary does so under contract law. At the client’s passing, these beneficiaries will receive the client’s funds regardless of what the client has written into a will or trust agreement. If a client has an ex-spouse listed as a beneficiary under a life insurance policy, but leaves everything to the current spouse in a will, then guess who gets the life insurance—the ex-spouse, unless the contract specifies otherwise

Last Will and Testament PapersAnd we like it that way! Beneficiary designations allow a convenient way to augment an estate plan. The assets are kept out of the probate courts and are paid to beneficiaries quickly and privately. Remember, probate is public—a will file can be pulled from the court records any time, along with any documents filed along with it. Probate is also expensive and emotionally draining. Non-probate beneficiary designations make this process easier and less expensive.

But this simplicity is a double-edged sword. Because these designations are simple and straight-forward, they are often taken for granted. Using the wrong beneficiary designations can cause an asset to go to probate when it would not have otherwise. It can cause adverse tax consequences. It can cause someone to receive money when they are in the midst of a divorce or bankruptcy proceeding, causing them to lose their inheritance. Beneficiary designations throw a wrench in estate plans specifically because they are so easy to change.

What are the biggest problem areas with beneficiary designations? Let’s look at the top five that I have experienced. The first is, hopefully, common sense:

Mistake #1: Not Keeping Beneficiary Designations Up to Date
Because beneficiary designations are a creature of contracts rather than estate planning law, they operate completely independently of a will or a trust agreement. If a life insurance policy has an ex-spouse listed as the sole beneficiary, then that is where the money is going. The current spouse can certainly sue the ex for the funds, but the chances of winning are slim . . . the benefit of the doubt goes to the person who made the beneficiary designation (and that person, now deceased, is typically not available to testify). If the beneficiary designation is so easy to update, and the client listed his or her ex, then clearly the client meant for these assets to go to his or her ex, right?

And we want to keep it that way. If angry would-be beneficiaries were to sue financial companies and win, those companies would probably stop letting us use beneficiary designations altogether. So it remains that if a client’s will says “leave everything to my spouse” and the life insurance beneficiary designations say “leave everything to my parents,” it’s going to the parents.

On that note, consider if the beneficiary designation were written so as to give the assets to a beneficiary who is not allowed to own property:

Mistake #2: Naming a Minor as Beneficiary
People who are under age eighteen can’t own property, which means they also can’t inherit property. This might seem like common sense when you think about it, and yet many (if not most) young families name their children as the secondary beneficiary on their financial assets. This beneficiary designations will fail, and an asset that otherwise
Little girl with moneywould have skipped the probate process will now go to probate court. An attorney will
work to get these assets into a conservatorship for the beneficiary, which is itself an expensive process. Perhaps even worse, the child will received the assets outright when they are still very young, typically at age eighteen. Have you seen an eighteen year old receive a lump sum of $100,000? I have. It doesn’t go well.

Some policies allow a custodian to be appointed when there is a minor beneficiary involved, which allows the custodian to accept the funds on the minor’s behalf. This solves the problem of the minor not being able to inherit property, but it does not solve the problem of the beneficiary receiving a very early inheritance.

The solution is often a simple one . . . a testamentary trust can be created directly in the client’s will, and the trust can be named by the client as the beneficiary of his or her financial assets. The trust only exists on paper unless it is needed, at which time it springs into existence and can accept funds on behalf of the beneficiary. The client can determine the terms of the trust . . . does the beneficiary get a lump sum at age twenty-five? Thirty? Never? While in trust, what can the trust pay for? Often college and health expenses are a top priority, with funds to pay for a first home or for a small business sometimes allowed as well.

Testamentary trusts solve all kinds of problems, and they’re not just for children. Trusts can be created for spouses, for charities, or for adult children with special needs. But sometimes the client doesn’t know who he or she wants to leave their money to, so they make a big mistake:

Mistake #3: Naming The Client’s Estate
First, let’s revisit the fact that assets with beneficiary designations skip probate, which means they skip the whole “estate” court process. This is often a good thing . . . though there are some merits to probate (particularly when there is a dispute), probate is expensive, time consuming, emotionally draining, and inefficient. Having a valid beneficiary designation makes this process easier because that entire asset skips probate altogether. Nonetheless, clients often want their life insurance policy, IRA, brokerage account, or other asset to just go to their heirs, so they write in that the assets should go to their “estate.”

This may seem convenient because the asset will now be controlled by the client’s will . . . which means it is now a probate asset. Not only does this cause the asset to go through probate, it can also has the effect of generating a lot of tax liability. If an IRA or other qualified asset lists anyone other than an individual as a beneficiary, then that entire asset must be paid out within five years. This can be caused in more ways than one . . . by naming an estate, or by naming a trust that is not a “see-through” trust for IRS purposes. If the trust does not qualify for this treatment, it accepts the entire IRA over five years. Tax-wise, this can be disastrous (note that if the trust does not make income distributions, this will be taxed at the much higher trust level).

And that brings up the next big point. Beneficiary designations have many consequences, not the least of which can be caused by:

Mistake #4: Lack of Tax Planning
To reiterate, leaving tax deferred, qualified assets to a non-individual can be murder on the100 Dollar money packs pocket book, since assets left to non-individuals must typically be paid out within five years. For tax-deferred money, this means the beneficiary’s effective tax rate can hit the stratosphere. Estates and trusts—or at least, trusts that weren’t drafted in anticipation of receiving qualified funds—are taxed at an astronomically higher effective rate than individuals.

Fortunately, trusts (including will-based testamentary trusts) can be drafted to be “see-through” trusts, which avoid the five-year distribution problem by allowing the trustee to collect required minimum distributions from inherited IRAs on the beneficiary’s behalf. This treatment is not available for assets left to an estate or if the trust has a non-individual as a beneficiary, such as a charity.

But on that note, consider a beneficiary who is charitably inclined. If there is one asset that should likely go to a charity, it is qualified funds. A qualified charity won’t have to pay taxes on funds received from tax-deferred sources like IRAs or 401Ks. A beneficiary will . . . IRA and 401K assets don’t receive the “step-up” given to appreciated non-qualified assets. If there is an opportunity to take advantage of the step-up in cost basis of other assets while leaving assets that would otherwise be taxed as ordinary income to a charitable beneficiary, it could be an incredibly effective tax strategy. Speaking of taxes:

Mistake #5: Forgetting About Credit Shelter Trusts
Minnesota has an estate tax exemption of $1.4 million per person in 2015, rising to $2 million by 2018 (though as of this writing, other proposals are in front of the legislature). The issue with the Minnesota estate tax exemption is that it is not portable . . . if one spouse dies and leaves their assets to the surviving spouse, the surviving spouse does not get to inherit the deceased spouse’s exemption, and therefore can’t “stack” the deceased spouse’s exemption on top of their own. This means the survivor could die with assets above and beyond his or her own estate tax exemption, paying tax on the difference.

The solution is to leave assets to a trust for the benefit of the surviving spouse (called a credit shelter trust). If drafted property, this trust will allow the deceased spouse to use his or her exemption, while still providing assets that can be used if the survivor needs them above and beyond the survivor’s own assets. This can save hundreds of thousands in estate taxes.

But this only works if the trust is funded. Too often clients pay an attorney to draft an effective credit shelter trust, and then they forget to leave assets to it. If the credit shelter isn’t given any assets, it’s going to be tough for it to shelter anything from estate taxes. Even financially savvy clients can sometimes forget about this aspect of their plan when there are dealing with the myriad of other aspects of their financial planning.

Of course, even proper planning doesn’t guarantee it will work if the client doesn’t keep up with it. Creating an effective testamentary or revocable trust only works if it is funded properly and if the assets with separate beneficiary designations are coordinated with the rest of the plan. A proper financial plan is broad, and estate planning is only one part . . . with the financial advisor as the captain, make sure the task of estate planning is given to a capable co-pilot who can make sure the client sees the big picture.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees, available at Amazon.com in paperback or Kindle edition (free chapter available here!). He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.



Do-it-yourself estate planning tools are everywhere; whether we see a commercial for LegalZoom or a CD of legal forms at the local Office Depot, we are told that
Nol Nonsense Skeptical Judgelegal drafting is something we can do without outside help, for minimal cost, just by filling in a few blanks on a form.  Probably the biggest attraction to this idea is the issue of expense . . . if a will can be drafted online for minimal cost, why consider an alternative?

The simple answer is that the cost is minimal . . . today.  Talk to any experienced attorney who brings estate planning documents to probate court, and ask him or her what it’s like to probate a do-it-yourself will.  The answer will likely revolve around the thousands of dollars that attorney earns by unraveling ambiguous language and missed planning opportunities.  Both the money to pay for these services and the heartache that goes along with it lies squarely with the heirs to your estate.

Part One of this blog series discusses the over-arching problem with do-it-yourself planning: there are no do-overs.  By the time the mistakes are uncovered, it is too late.  Part Two discussed an all-to common problem with online document: improper execution.  Part Three deals with the common misconceptions about “simple wills;” unfortunately, there is no such thing, particularly for those with minor children.  This brings us to Part Four:

Misunderstanding Probate and Non-Probate Property

My clients are often surprised that a will always goes through probate, which is the court proceedings by which your debts are paid and your assets are distributed to those you specify in your will (or, absent a will, you assets are distributed according to your state’s intestacy statute).  A will is not a probate-avoidance tool; a properly drafted and executed will replaces your state’s intestacy statute and tells your personal representative and the probate court what to do with your probate property.

Note those last two words: probate property. Your will only controls probate property; it does not control non-probate property.  Probate property is property held in your name only (not jointly with another person), which does not have a beneficiary designation or other pay-on-death designation.  If you house is titled in your name alone, or titled as tenants in common, it is guided by your will.  Same for banking or investment accounts without beneficiary designations and your tangible personal property (your “stuff,” like furniture).

Assets that are held jointly with another person or that have beneficiary or other pay-on-death designations (such as most retirement accounts and life insurance policies) are non-probate property.  Not only do these assets skip the probate process (assuming the beneficiary designation is properly drafted), these assets are not controlled by your will unless you fail to provide a beneficiary designation or if you designate your estate as your beneficiary (the reasons to never do this are numerous).  If you name your spouse as your 401(k) beneficiary, then write in your will that your 401(k) goes to your church, your church is out of luck.  The beneficiary designation governs.  The same applies to jointly-owned property.

If you wanted to skip probate altogether, there are estate planning tools that would allow you to do so, such as a properly drafted and properly funded revocable trust (with special emphasis on “properly”).  A revocable trust takes your tangible property, real estate, cars, bank accounts, and anything else without a beneficiary designation and turns it into non-probate property.  Do not attempt this on your own.

An understanding of the different types of property and different types of property rights is inherently a key part of a proper estate plan. An estate planner can guide you through this process and will understand what the probate court will be looking for, and what will cause probate and non-probate property to pass correctly (and incorrectly).   Minor beneficiaries, for example, cannot inherit property because they cannot legally own it; consider how many people have named their minor children as the beneficiaries of their IRA and 401K plans.  This will create big problems because these non-probate assets have improper beneficiary designations; what would have been a non-probate asset will now likely go through the probate court system, and the attorney bills for this work will be paid from the assets.

Talk to an estate planning attorney about what is right for your family.  No two families are the same, and no two estate plans will be the same either.  An estate planner doesn’t just draft documents; he or she will also guide you through proper disposition of all property.  Let me know how I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Everyone has heard of some sort of do-it yourself estate planning software; whether it’s
Rocket Lawyer of LegalZoom, we’re lead to believe that writing your own will is a simple task that can be done online without any outside assistance.  Sadly, when these legal
Discussion between husband and wifedocuments are actually needed, it almost always results in financial and emotional headaches for family members.  In Part 1 of this blog series I discusses the nature of estate planning as it applies to “do-overs” (there are none).  In Part 2 I discussed one of the most common mistakes with do-it-yourself estate plans, which is the failure to follow your states laws for proper execution—improper signatures make your will as enforceable as a pile of scrap paper.  This week’s topic is the failure to understand the probate process, often dismissed with the following phrase:

It’s Just a Simple Will

I once heard an attorney say that “simple wills are for simple minds.” I don’t think that was meant to be as dismissive as it sounds . . . I think the message there may be if you think a will is a simple document, you may be lacking some imagination.  Consider this (absolutely true, non-hypothetical) example: An elderly mother has her basic plan in mind: she wants to divide her estate, which consists of a $300,000 house and a $300,000 bank account, evenly among her two adoring adult children.  She drafts a will where she leaves the house to her son (where he can live) and the bank account to her daughter.  That’s $300,000 each, which means things are completely equal, right?

Even if her estate plan were carried through properly, I would argue that an illiquid asset that requires maintenance and upkeep, taxes and utilities, and a real estate commission if sold is not an equal gift when compared to $300,000 in cash.  But even so, on its face, the math seems to work—it’s an even split between the two kids.  But what the mother did not take into account are the expenses she would require at the end of her life.  She spend the bank account down substantially.  At her death, the son wanted the house, and was entitled to it under the will.  The daughter believed her mother’s intent that the estate be divided equally had been defeated.

Imagine family members suing each other over a “simple” estate plan. That super-simple will became a super-awful lawsuit among family members.  It was a very easy mistake to make, a very common misconception among those trying to draft a do-it-yourself estate plan, and it’s a completely true story (Cf. Matter of Estate of Tateo, 338 N.J. Super. 121 (App. Div. 2001)).

A competent estate planning attorney will advise the client that there is no such thing as a “simple will.”  Even when a young couple comes to me and asks what I charge for a “simple will,” I have to make sure they understand that if they have minor children, they will need to appoint guardians, and they will need the will to create a testamentary trust that can accept property on their children’s behalf, since children can’t inherit property.  Add to that the desire to get favorable tax treatment for your kids from IRA and 401K plans, and you have already gone past what most consider to be a “simple will.”  There is no such thing.

An estate planning attorney will guide you and your family through what is a highly technical process.  Your intent, though simple on its face, is rarely so when it actually needs to be put into a legal document.  I love working with folks on their “simple” plans, and I promise to make the complex less so.  Let me know how I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Do-it-yourself estate planning and document drafting is something that’s gotten a lot of attention lately; it was one of the first things I wrote about on this blog.  I revisited the issue in Part 1 of this blog series, where I discussed the big problem with do-it-yourselfers ?????????????????when it comes to estate planning documents: there are no do-overs.  If you make a mistake with your plan, the obvious nature of estate planning is that you will not be around to fix it.  This can cause expensive court proceedings and put additional emotional and financial pressure on your family during a time when they are already under an enormous amount of stress.  It also can completely capsize your planning goals.  These mistakes are the rule, not the exception; most probate attorneys will have more stories about do-it-yourself catastrophes than successes.

So what are the big things that trip up a do-it-yourself plan?  Some are obvious, some less so. This week I’ll discuss one of the most common (and most obvious) problems with these documents:

Improper Execution

A frequently cited case about do-it-yourself estate planning kits is In Re Will of Feree (369 N.J. Super. 136).  In this case, a man created his will from a do-it-yourself kit he purchased, and signed the document.  After he died the will was presented to the probate court; because the will did not have proper witnesses, it was deemed invalid, and was set aside.  The family tried to appeal what seemed to them an obviously incorrect probate court outcome; tens of thousands of dollars later it was affirmed that an improperly witnessed will is less valuable than the paper it’s printed on.  This is a typical case, and you don’t have to do a lot of legal research to find similar situations.  If you take an hour to observe some probate proceedings in Hennepin County, you won’t have to wait long to see a judge set a will aside for not having the proper signatures (but I wouldn’t recommend this as an efficient use of your time).

If an estate planning document does not have the correct signatures and witnesses, it is not an estate planning document.  A will without witnesses is not a will.  Consider if I created a “contract” for services, the gist of which is that you owe me a million dollars.  Assuming you never signed such a thing, and I tried to enforce it against you, would I succeed?  Probably not.  Intricacies of contract law aside, if you haven’t agreed to the terms of the contract, the contract doesn’t exist, even though I am holding a piece of paper that says “contract” at the top of it.  The same applies for your will: you can call it a “will” if you want to, but without the right formalities, it’s just a pile of scrap paper.

Improper execution is probably one of the easier mistakes to avoid, yet is one of the most misunderstood and one of the most common reasons a will is set aside by the probate court.  After all, the logic goes, if I put my wishes in writing, that’s what my family will do, right?  But of course it’s not up to the family — the probate process is a legal one, and in our country of laws, the rules created by the legislature are what governs.

There are a few states that recognize “holographic” wills — these are wills that are typically hand written and don’t have any witnesses at all.  Minnesota is not one of these states.  If your will is not witnessed properly, then the probate court will set it aside and will apply the Minnesota intestacy statute.

Improper execution of estate planning documents is just one of the problems probate attorneys see every day, and is probably one of the easiest problems to avoid.  Of course, an estate plan with proper signatures is still only as strong as the plan itself, and most people who write their own will tend to confuse estate plan with estate document.  They are very different things; a properly executed document that represents a poorly conceived plan could actually cause more problems than no will at all.  I’ll discuss this further in my upcoming additions to this series.  Until then, please let me know if I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

I’ve written before about the risks of do-it-yourself estate planning and document drafting.  Since then, as I’ve given more presentations and had more conversations with those who have either tried drafting their own documents or considered using a “document service” (such as Legalzoom or Rocket Lawyer), I’ve noticed a pattern of errors and misunderstandings when it comes to the basics.  Since these issues come up so often, I thought I would address them directly; this is part one of a five-part blog series on the risks of creating these complex documents without the assistance of an estate planning attorney.  The first problem on my list for do-it-yourselfers:

There Are No Do-Overs

Re-Do Red Button Redo Change Revision ImprovementI admit it, I’m a do-it-yourselfer when it comes to certain things.  As I’ve gotten a little older, I’ve learned some unfortunate truths about my handiwork.  I know, for example, that I don’t know how to put a new roof on my house.  I know that if I were to try, it would probably look ok, and it would probably mostly keep the water out.  But after one or two rains, I know I would grow frustrated and I would end up hiring someone who knows what they are doing to just re-do the whole project.  This means I would likely pay for this project twice . . . once on the cheap, and once for quality work after I realize it my own roof job didn’t turn out how I had hoped.

And who could blame me?  Why would I want to pay someone thousands of dollars to re-roof the house when I could just read a book and do it myself?  Why would I hire someone to build a fence around my yard when I can just rent the tools at Home Depot?  Why have someone sand and stain my floors when I can just do it over a summer on my own time?

The problem with this anecdote as it applies to estate planning is that once you or your family realizes the roof is leaking, it’s too late.  If you thought your health care directive would help someone make health care decisions for you, but it wasn’t executed properly, it’s too late to fix it by the time you need it.  If you draft a will and you leave money to your minor children, it’s too late to fix it once the will is probated and it’s pointed out that minors can’t own property, or that your IRA and 401K beneficiaries aren’t drafted to match the rest of your plan.  It’s too late when the probate court sets aside your documents because they had the wrong signatures (in Minnesota, if you don’t have two witnesses to your signature, your will becomes someone’s scrap paper).  It’s too late when your family realizes you didn’t update your will after your divorce, or after the birth of your new child, or after you had grandchildren.  It’s too late once it’s realized that your distribution plan has an ambiguity, and your family will be spending thousands of dollars on a formal probate proceeding, or that the person you appointed as a guardian for your children is unable to act, and you didn’t appoint a backup.

There are ways to make your estate planning goals a reality, but there is no getting around the fact that this area of law is highly technical and is fraught with ways to make things very, very difficult for your family.  Your family doesn’t need the added dose of confusion and heartache that bad legal documents will bring.  Consider carefully the benefits of having your estate planning “house” roofed properly the first time; your family will know the difference.

Stay tuned for Part Two of my blog series, where I’ll talk about the next big misunderstanding about do-it-yourself planning: Kids Can’t Own Property.  If you have any questions about your plan, I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

I’d like to think my wife and I are on pleasant enough terms where I am never going to ask
Marriage and money concept of high wedding cost and divorcemyself this question: can I disinherit my spouse?  But the decision to disinherit somebody doesn’t always come about because you don’t like each other; there can be other reasons why it makes sense to leave your assets to someone other than your spouse.

One such reason might be that your spouse simply has enough assets in his or her own name and you have both agreed that your assets are best used somewhere else . . . perhaps in a trust for the education of your grand kids, or maybe for a charity that you support.  Another reason could be estate taxes — by leaving assets to another person (or to a trust), you prevent your spouse’s estate from getting so large that estate taxes will be due on his or her passing.  Yet another reason may be a concern that your spouse will be taken advantage of when you are gone, and you want assets to be held for him or her by a trustee.  So: can I disinherit my spouse?

Spousal Rights

The most important part of this answer is this: in Minnesota, you cannot — ever — disinherit your spouse through your will or trust document (by itself).  In Minnesota your spouse has a guaranteed right to his or her spousal share.  This means that even if your will is drafted to give all of your money goes to charity, and you change all of the beneficiaries of you IRAs and life insurance (your “non-probate” assets) to the names of your children, your spouse still has certain rights including the right to live in the house for his or her life and for some monthly support from the estate.

According to Minnesota law, your spouse also has a right to a percentage of the augmented estate.  The augmented state is (simplified) the value of your stuff plus the value of your spouse’s stuff.  If you and your spouse have been married for only a year, your spouse has a guaranteed right to three percent of the augmented estate.  This percentage increases every year of marriage until year fifteen, in which your spouse has a guaranteed right to fifty percent of the augmented estate — regardless of what you’ve written in your will or other planning documents, and regardless of how you’ve written your beneficiary designation for your non-probate accounts.   It follows that if at the fifteen-year mark the surviving spouse has more than fifty percent of your combined assets in his or her name already, then those assets already exceed half of the augmented estate and there is no additional claim to a spousal share.

Waiver of Rights

So, your spouse has a guaranteed, inalienable right to get a portion of your estate, right?  Not so fast.  There are three ways your spouse can forfeit his or her share.

  1. Pre-nuptial agreement:  Properly drafted, a pre-nuptial agreement can allow you and your spouse to disinherit each other.
  2. Post-nuptial agreement:  Your spouse can agree after you are married to forfeit certain property rights. This includes the right to his or her spousal share.
  3. Consent to will:  Your spouse can sign an acceptance of the terms of your will, including a will that completely disinherits him or her.

You’ll notice that all three of these options involve your spouse affirmatively giving permission to you to give his or her share to someone else.  This makes sense, since the spousal share is at its core a property right, and we can give away our property as we choose.  Your attorney should use extreme caution when drafting any of these three documents: your spouse should have his or her own attorney review the terms of the document to make sure he or she understands what is being given up and any consequences of doing so.

Disinheriting anyone is a big decision that can carry big legal consequences.  Make sure you contact an attorney who is experienced in estate planning before making any major decision that affects your loved ones.  Done properly, there are ways your assets may better serve your family than if they are all left to your husband or wife.  Please contact me so I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

The executor of your will is the individual you appoint to guide your estate through the probate process, which is the court proceedings by which a judge supervises the division closeup of a Last Will and Testament documentof your estate.  Commonly called a Personal Representative, this fiduciary will see to it that your wishes are carried out and that the instructions you leave in your will are followed.  But make sure your affairs are in order with a properly drafted plan; attorney John O. McManus points out in this Daily Finance article that “a common adage in the industry is to name your enemy as your executor as a means of revenge.”  Being an executor can be a tough job.

First and foremost, if you are married, you should consider appointing your spouse as your executor.  Your spouse has the biggest stake in your life and your death, and it makes sense that he or she is in control of the finances.  Your spouse is also most likely to be the person around whom the rest of your family — such as children and your surviving siblings — will revolve at your passing.  Strong family relationships are an important consideration for an executor.

If you do not want to appoint an immediate relative or your spouse, you might want to consider someone you know with an accounting or law background.  The settlement of an estate is a legal process that may require some tax knowledge.  If your executor does not have this background, he or she can always hire a professional.

Be careful when appointing an executor who is also getting some of your assets — there is an inherent conflict of interest when you appoint an executor who is also a beneficiary.  If the individual is trustworthy and enjoys good relationships with the other beneficiaries, this may not be a problem.  But it’s a situation where disputes can be common; after all, the executor is going to be interpreting the language of the will, and if it is perceived that the beneficiary-executor is interpreting ambiguous language in his or her favor, this can pose a problem.

Do you own a business?  Your executor will be in charge of this business interest while the estate is being administered.  If your interest is silent or if winding the business down is an easy task, then this may not be an issue . . . but if it is a labor-intensive operation with employees and specialized knowledge, the executor is going to have a tough time while he or she continues to run things.  It is very important that you have a succession plan in place for your business . . . consider appointing an executor who is familiar with running your company.

In short, your executor should be someone you trust, who is familiar with your assets, and who can maintain positive relationships with the beneficiaries of your estate.  This person can certainly be a beneficiary of the will, but this really works best when your will has been drafted appropriately and unambiguously . . . make sure you have consulted with a professional so that your plan is coherent and thorough.  Put another way by attorney McManus, “If you appoint someone you love as executor, get your house in order.  Otherwise, appoint someone you do not.”  Let me know if I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

If you’re like most Americans, the bulk of your liquid assets are held in retirement plans such as a 401(k) or an Individual Retirement Account (IRA).  These are great places to stash retirement funds — company matches and tax-deferred growth (or tax-free growth, in the case of Roth plans) jump-start these savings plans in a way not available for non-retirement assets.  If used properly, this will create a comfortable retirement nest egg that will carry you through your post-career life.

401k - Nest EggBut what happens after that?  There is a good chance that at least some of these assets will outlive you, and you may have other family members to care for (such as a surviving spouse).  The tax-deferred nature of qualified retirement funds presents unique challenges and opportunities for your family as you contemplate your estate planning.  The biggest thing to consider is who you will list as the beneficiaries of these plans; as far as taxes are concerned, all beneficiaries are not created equal. Speaking strictly from the standpoint of tax liability, the best beneficiaries are charities, followed by a surviving spouse, then other family members, and lastly (and definitely least), outright to your estate.

First, understand that marketable assets such as stocks and bonds receive a step-up in cost basis at the death of the owner.  Consider if I bought a share of stock for $1, and then the value of that share few to $100 and I sold it.  During my life, I would have to pay capital gains tax on the $99 gain I received from this sale (the sale of the stock at $100, less my cost basis of $1).  If instead I died and left the share of stock to a child, the child gets a new cost basis of the value of the share of stock when I died. If that value was $100, then the child gets that share of stock with a cost basis of $100.  If he or she then turned around and sold that share for $100, that child has received the stock completely tax-free, assuming my estate is below federal estate tax levels.  The step-up in basis erased any capital gains and the tax liability that would have gone with those gains.

Those same assets held in a tax-deferred retirement plan such as a 401(k) or IRA do not receive this step-up in cost basis . . . all distributions from these retirement funds, whether they be to you or to a beneficiary, are taxed as ordinary income when they are withdrawn from the retirement plan.  If I make $50,000 from my job, and I receive $10,000 from a tax-deferred retirement fund, then I pay taxes as if I made $60,000.  That’s going to be much more tax than if I instead received an inheritance from assets that are not taxed as ordinary income (such as an after-tax brokerage account).

Because these gifts contain built-in tax liability, tax-deferred retirement assets are the best assets to give to charities, if you are charitably-minded.  Because qualified charities do not pay any taxes on gifts they receive, they are the ideal beneficiaries of any estate asset that carries income or capital gains tax liability because your gift to goes further than if it were given to someone who will have to use a part of that gift to pay taxes.  This makes qualified charities the perfect beneficiary of high-tax assets such as tax-deferred retirement assets.

For those not so inclined, you should next consider leaving these assets to your spouse.  Your surviving spouse will be able to treat qualified retirement assets as if they were part of his or her own retirement account . . . this typically means he or she could defer taking distribution (and owing income tax) until the spouse 70 ½ years old, which is the age at which individuals are required to begin taking their required minimum distributions (RMDs) from qualified plans.  Even then, they will only be require to pay taxes on the required minimum distribution amount (an amount that is calculated based on the surviving spouse’s life expectancy), and will enjoy continued tax-deferred growth for the assets that remain in the retirement plan.

If you would prefer to leave your qualified tax-deferred plan to another individual such as an adult child, understand that unlike your spouse, a child will not be allowed to defer the RMD distributions until he or she turns 70 ½; the child will be required to begin taking RMDs from the plan immediately.  This can pose some problems if the child is in a high income tax bracket because your gift to them will be diminished substantially by the income taxes he or she incurs at his or her effective tax rate.  But assuming the child does not take large additional distributions from the account (which would incur even more taxes), the majority of the assets will continue to enjoy tax-deferred growth.  You can also work with an attorney to set up a trust which, if properly drafted, can accept the RMDs from the account on behalf of the child, which can then me managed by a trustee.  This is a great option if the child requires assistance in managing money.

The least preferable option, and one that occurs all too often, is to either leave the assets outright to an estate, or to a trust that is not properly structured to receive retirement distribution for a beneficiary.  If this happens, the entire account must become payable to the estate or trust within five years.  Estates and trusts have much smaller tax brackets (resulting in much higher effective tax rates) than individuals, and income tax liability can be devastating. A substantial distribution to an estate or improperly drafted trust could result in half of the gift disappearing into the hands of the tax man.

This is not to imply that someone should turn their nose up at a gift of retirement assets from a family member!  Speaking personally, I would certainly take a taxable gift over no gift at all.  But it’s worth talking about the ideal recipients of gifts from tax-deferred retirement plans so that you can maximize the gifts you make to your family members. Proper primary and secondary beneficiary designations are a key part of any estate plan, and part of what you are paying your estate planner to do.  Ensuring that you select the proper beneficiaries for your plan will give you and your family the peace of mind you deserve from your years of hard work and saving.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

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