Last month’s blog post pointed out the pitfalls of considering document preparation as the main goal of an estate planning engagement. It pointed out that the value of the attorney-client face-to-face interchange cannot be overemphasized and it set out areas which require consideration of alternatives in light of the clients’ goals for disposition of an estate. Below, in a question and “consider this” format, the areas of guardianship appointments, payable on death designations, ownership of real property in another state, retirement account beneficiary designations and the impact of an inheritance, are addressed.

Have you considered changed circumstances in the lives of your appointed guardians? In a will, a client can appoint a guardian for his or her minor children. It is customary for a single parent or each of a couple with minor children, in the event they are the survivor of the couple, to designate an individual or individuals to serve as guardian for their minor children. This guardianship appointment is in reality merely a request to the Clerk of Court who holds the authority to make the appointment of guardian, but it is important to all clients with minor children that the requested appointment be clearly made because the Clerk will strongly consider the parent’s wishes. Often, the appointment is made to one couple, perhaps to a sister and her husband or to a brother and his wife, then to another couple.  An important follow-up question for these clients is whether they desire the same appointments if either of an appointed couple is deceased. They also should consider what appointment they would make if the couple divorced.  Often, the parents will confirm that the couple appointed should serve only as an intact couple. If one of the couple is deceased or the couple is divorced, the desire may be that the second couple serve instead.

Do you know what your payable on death agreement directs if the beneficiary you have named does not survive you?   Clients often make payable on death designations on bank and brokerage accounts for the purpose of eliminating the need for those assets to pass through probate (supervision of the Clerk of Court as the transfer of ownership occurs) at death.  Although such designations can often make things easier, problems can arise if circumstances change between the time of designation and the death of the account holder. For instance, many banks and brokerage companies allow payable on death designations to direct transfer on death to a primary beneficiary, then a secondary, if the primary beneficiary predeceases the account holder.  A careful review of the payable on death documentation is necessary to confirm that the division among all beneficiaries is correct when circumstances change.

I recently assisted with the administration of an estate where the decedent died owning a joint bank account with her daughter (passing to that daughter at her death) and a brokerage account which designated five beneficiaries.  If a designated beneficiary of the brokerage account predeceased her, that beneficiary’s share was to be paid instead to that deceased beneficiary’s living children.  One beneficiary predeceased the account holder without children surviving.  The decedent’s intent would have been that the share of that beneficiary be divided among the other designated beneficiaries; however, the agreement with the brokerage company stated that the share of a primary beneficiary for whom no secondary beneficiary was named passed under the accountholder’s will.  An administration proceeding was commenced solely for the purpose of distributing the deceased “payable on death” beneficiary’s share among the same people who would have received it if it had been divided among the living beneficiaries named in the payable on death designation.  Had my client periodically reviewed the payable on death designation, as I would have recommended she do, she would likely have eliminated the deceased beneficiary and, in so doing, the need for an administration proceeding at death.

Another issue with payable on death designations among a number of different beneficiaries arises if the account holder becomes incapacitated and his or her attorney-in-fact (under a durable power of attorney) needs to access the accounts to satisfy obligations of the account holder. Unless the agent is aware of the need to treat all accounts equally, he or she may deplete one account before another, reducing, if not eliminating, the amount which was intended to be given to a beneficiary. Example: Mother  makes each of her three children,  A, B and C, separate payable on death beneficiaries of accounts held in First Bank, Second Bank and Third Bank. Mother then becomes incapacitated and, to provide for her care, her attorney-in-fact (her agent under her power of attorney) needs to access her funds to pay her expenses.  Not knowing that there are payable on death designations on the accounts, the agent may pay all those expenses from First Bank and eliminate the intended gift at death to be made to child A. Alternatively, the agent may know of the payable on death designations, but choose to use accounts other than the account designated as payable to that agent to satisfy Mother’s obligations.

Have you considered whether your named beneficiary will be entitled to continued tax deferral? Correct designations of beneficiaries on retirement accounts are the subject of a substantial number of continuing legal education courses offered to practitioners each year; however, many account holders give limited thought to the designations they make. Without appropriate counsel, the account holder may not realize the importance of clear directions regarding the beneficiary or beneficiaries named and the need for periodic review of the designations.

For example, in order for an individual beneficiary to be able to use his or her life expectancy to calculate required minimum distributions from an inherited retirement account, the individual must be entitled to a separate portion of the account. Any designation must make clear the portion of the account which is given to the beneficiary.  An interest in a retirement account should not flow through the account holder’s estate under his or her will (by a designation of the estate as beneficiary of the account) to the beneficiary or the ability to use the beneficiary’s life expectancy to calculate required minimum distributions may be lost. In other words, the designation of beneficiary on the account should not be to the estate of the account holder, with reliance being made on the will directing the division of the account among the beneficiaries named in the will.  In order to allow continued deferral of taxes earned on the beneficiary’s share of the account, the designation also cannot be to a trust beneficiary unless the trust is one drafted properly to allow a “flow through” to the beneficiary.  If the designation is improper, all the taxes on the account may need to be paid within five years of the death of the account holder. Any retirement account owner should confirm that there are correct primary and contingent beneficiaries listed for the account. He or she should also perform periodic review of beneficiary designations to assure that changes are made in the event of divorce or other change of circumstances.

If you die owning real property held in your individual name in another state, are you aware that your Executor will need to offer your will for probate in the other state after your death and after it has been offered for probate in North Carolina? The need for the administration proceeding in the other state can be eliminated if you place the real estate in the name of a revocable trust during your lifetime and use the revocable trust as the document which disposes of your estate.

If you inherit funds, will your desires regarding the disposition of your estate change? If you will be receiving a significant distribution from a parent’s estate, are you satisfied that the provisions of your current documents will control the disposition of the inherited funds and properties? For example, if you have directed that your entire estate is to be distributed to your spouse at your death, is it your desire that your spouse, not your children, receive those funds at your death? If not, you will need to remember to change your documents when a change in your financial situation such as this occurs. As a safeguard, you may want to include ways in which to refine your estate plan to cover the contingency even before it occurs.

As you can see, there is much more than document preparation needed in order to provide good estate planning services to a client. It is an engagement, and both parties need to be totally engaged in the process which is one of shared information, goals, alternatives, and decision-making.

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