Ten Problems with Your Estate Plan and How to Fix Them. Problem #7: Some Beneficiaries Can’t (or Shouldn’t) Manage Their Own Money

When designing your estate plan, you will answer many, many questions. The question first and foremost in the mind of most folks is – Who will inherit my estate? (Not coincidentally, this is why the first part of our series on estate planning covered this topic.) However, not all potential beneficiaries can manage their money and, unfortunately, not all should.

Problems

What happens if your intended beneficiary is under the age of majority?

The age of majority in the Commonwealth of Virginia is eighteen years of age. If your intended beneficiary is under the age of majority (or an incapacitated adult), the process is largely the same; those individuals cannot control their own property. [1]

Imagine a situation where a couple just recently had their first child. Of course, they do what all responsible parents do and seek out a local attorney to draft their estate plan. [2] The couple is just starting out, so they decided to go with a simple Will based plan. Their documents are what we in the industry refer to as “I Love You” Wills. “I Love You” Wills are reciprocal documents where both spouses name the other spouse as their sole beneficiary and, if the other spouse predeceases, then their child. Everything is great and the couple feel as if a great weight has been lifted from their shoulders. They have successfully planned for their future – and not a moment too soon. The couple is making their way back to their child when a sloth of wild bears suddenly appear and quickly gobble up the couple.

The couple’s individual Wills are admitted to probate with their minor child as the sole beneficiary. What happens now? Well, if the estate is over a certain size, someone will have to petition the court to be named Conservator in order to manage the child’s inheritance on the child’s behalf. Petitioning to be named as a Conservator is an expensive and time-consuming proposition. Not only will the Petitioner incur court costs, filing fees, and attorney’s fees, but there may also be other ancillary costs associated with the process such as fees for doctors and social workers. Once the Petitioner is named by the court as Conservator, the costs do not end either. The Conservator has an ongoing responsibility to provide the Commissioner of Accounts with periodic accountings illustrating the status of the minor’s funds. Fees are due with each filed accounting as well. How can we avoid a situation where we find ourselves petitioning a court for the appointment of a Conservator? We shall see.

What happens when a beneficiary receives an inheritance and is legally able to manage their inheritance, but should not?

We all have these people in our lives. They are the ones we love with all our hearts but, for whatever reason, they continually make less than stellar decisions. The genesis of their inability to manage their own finances could range from a general lack of financial acumen to a problematic, yet influential spouse to drug and alcohol abuse. If we were to leave an inheritance directly to our loved ones who meet this definition, they would likely spend their inheritance in a manner inconsistent with our wishes. How can we avoid a situation like this? The answer to this question, along with the previously posed question is the same – trust based estate planning.

Solution

With trust based planning, you, as the Grantor, can exercise a degree of control over your estate that is unlikely to be achieved through other means. It is helpful to think of a trust as a bucket. When you properly coordinate your assets with the trust, you put those assets in the bucket. You, as the Grantor, nominate who will control those assets in the bucket. Those folks are called Trustees. Generally, the Grantor serves as the initial Trustee. When making distributions to beneficiaries under a trust, the Grantor can also nominate Trustees to control the beneficiaries’ shares until certain criteria are met--usually a given age, but those criteria can also be milestones such as graduating from college.

A properly drafted revocable living trust will give you the peace of mind that is achieved by knowing your wishes will be fully executed upon your passing. With trust based planning, should your beneficiary be someone who is under the legal age of majority, the Trustee you nominated will be in charge of that minor’s share according to the parameters you set without the need to go to court to appoint a Conservator. Should your beneficiary be the kind that makes less than appropriate decisions, you can plan for that within the terms of your revocable living trust. Trust based estate planning allows you to exert control in efficient and effective ways not necessarily available with other estate planning methods.

If you have further questions regarding your existing estate planning documents or potentially implementing one, please contact the attorneys at Johnson, Gasink & Baxter, LLP to discuss your options.

Our next installment will focus on Problem #8: Spike (Your Idiot Son-in-Law).