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.