March 31, 2013

A client recently stated that he didn’t want his life savings “going to the outlaws.” He feared his son, an only child, would eventually divorce and his daughter-in-law would take half of what he would leave to his son. Another client once joked that she wanted to “bimbo-proof” the family house. Her point was if she died and her husband remarried, her replacement could end up with the family house instead of her kids. Though humorous in the way these scenarios were presented, they’re not so comical in real life.

Most people understand that dying without a will is a bad thing and that having a will that must go through probate is only slightly better. What we should also think about is how our homes, retirement plans, and insurance distributions are passed on since for most people, this represents the bulk of their estate. And guess what? They are seldom controlled by your will.

In Montana, most married couples own their residences as joint tenants with right of survivorship. And just as it sounds, when the first spouse dies, the house transfers by law to the surviving spouse as the sole owner. In practice, this trumps a will instructing otherwise. So what’s the problem here? There isn’t one, not yet anyway. The problem arises if your surviving spouse remarries, because guess what happens then? As an expression of commitment and reborn love, the same home you spent 30-plus years trying to pay off now gets titled to the newlyweds as joint tenants with right of survivorship. I hope you can see where this is going. If your surviving spouse then predeceases your replacement, then the house once again is transferred by law to the surviving spouse who now owns the property solely. But don’t worry, I’m sure this person will allow your children to visit on special occasions.

So what about those bank accounts and that other business I mentioned earlier? Well, most financial institutions require beneficiary designations on all of your accounts so that when the account holder dies, the bank doesn’t get dragged into the middle of a contested will proceeding and then subsequently sued by the losing party. Because remember, it’s all about the bests interests of you the customer, or isn’t it? On all of your financial accounts you have or should have listed a beneficiary for when the inevitable occurs. And like owning your home as joint tenants with right of survivorship, beneficiary designations typically trump your will. Back to my suspicious widower, if he leaves all of his financial accounts to his son via the beneficiary designations, then they will be completely vulnerable to a future property settlement resulting from a divorce. And there it goes, to the outlaws.

But the outlaws are not just limited to the in-laws. Future creditors, predators and impulsive spending decisions can also abscond with your hard-earned savings and family heirlooms. Your children’s liability to lawsuits, judgments, tax liens, bankruptcy and so on can deplete everything you leave to your heirs.

So now that you’re ready to take up arms against the outlaws, what are you supposed to do? The answer is simple, go see your estate lawyer and discuss your fears and wishes. There are ways to protect the assets that you leave behind. You can create trusts that potentially limit the future owners to your blood relatives, including adopted heirs. Even if sued, your heir’s creditors may be limited to only the income from the assets, not the assets themselves. And if you create such a trust, by all means have the trust listed as the beneficiary of your financial accounts, not your children. Because trusts typically do not get married, drive cars, borrow money, or operate businesses, they are much less likely to suffer the human pitfalls we’ve discussed thus far. The trust will own the assets and your children or heirs will be the beneficiaries of the trust.

I believe that good marketing is a lot like bad parenting. Or at least it appears that way. By that I mean the unapologetic overuse of fear and guilt as a motivator. And like a good marketer, a good lawyer often needs to sensationalize an everyday occurrence to illustrate a point. I do not mean to make light, but rather shed light on a topic that far too many of us would rather not contemplate. In closing, I ask for you to spend some time today thinking about your affairs and consider whether it’s time to revisit your estate plan. After all, the outlaws are out there.