Simple Estate Planning Mistakes Can Wreck Families

June 17th, 2020 by Jim Allen

Most people usually equate financial planning with investment management, but it is much more than that. Our comprehensive “Money Life” process takes a holistic approach to all aspects of your finances including taxes, insurance, retirement, budgeting, college planning and estate planning. When using this big picture approach, we commonly find estate planning is one of the financial items that has not been addressed by clients.

Even if the estate plan has been developed, it is frequently out of date or many times it is not well thought out. Unless a person’s true financial picture and goals are known, the estate plan may not have the end result the client thinks it will. This often leads to bad financial or tax results, family conflicts, or even a splintering of the family.
With the COVID 19 pandemic still raging, making sure right now that you have a well thought out estate plan is critical. We would like to share some real life case studies where well-intentioned estate plans had disastrous results.

John & Mary – 2nd Marriage
John & Mary were both in a second marriage and each had children from prior marriages. They had been married for over 30 years when John developed cancer and passed away. The estate plan was a typical “I Love You” will where everything passed to Mary when John died. Mary’s will stated that everything would pass equally to John’s two children and Mary’s son when she died. John & Mary were not wealthy people and the main concern was making sure Mary had enough to live off for the rest of her life.

Shortly after John passed away, Mary started telling John’s children that she was having money problems and was short on cash each month. John’s children started helping Mary financially but wondered where the money John had left her had gone. Mary ultimately confessed that she had given her entire nest egg to her son to buy a house, because he didn’t have one while John’s children did. John’s children were infuriated that they were supporting their step-mother because she had given her life savings to their step brother who was financially successful himself. This led to a falling out between Mary and her step-children, even though they continued to support her financially.

When Mary passed away a few years later, her son was the executor of the estate and stated there wasn’t anything left. So John’s children did not receive an inheritance from their father, including any of John’s personal mementos which were of most importance to them. Needless to say, John’s children and Mary’s son never spoke again.

While John never expected this result, and Mary probably didn’t intend to disinherit his children, this ended up being the result. Using a trust designed for second marriages with an independent trustee could have eliminated this result. Using a design like this would have provided Mary the income she would have needed, while preserving an equitable inheritance for all three children. A little planning could have saved this family much heartache.

Bill – Single, No-Family
Bill was a single man in his seventies without any living family. Since he didn’t have any family, he just tried to enjoy life as much as possible and live it to the fullest. His “family” were his many long-time friends. While Bill did spend his money freely, he still had a nest egg of several thousand dollars, much of that in his IRA. When Bill established his IRA, his financial advisor asked him who he wanted as beneficiary and he stated “What do I care, I’ll be dead.”

Years later as Bill aged, he started thinking about his estate plan and who he wanted to leave his estate to. Unfortunately, before he could get a plan in place, Bill had a stroke and passed away alone in the hospital because of the COVID pandemic. Since Bill did not have any living family, and his IRA did not have a beneficiary, 100% of his assets passed to the state. Bill had planned on leaving it to his friends and his college, but did not get it taken care of in-time. Bill’s wish clearly was not to have tens of thousands pass to the state of California, but that is exactly what happened because he did not have an up-to-date beneficiary designation and a simple will.

Betty & Mark – 2nd Marriage
Betty and Mark were in a long term second marriage of more than 40 years. Each had two children from prior marriages. As they entered into their 80’s both started to have failing health. Betty and Mark did have an up-to-date estate plan including a living trust where everything would pass to the surviving spouse and then down to the four children equally.

Betty passed away first and everything passed to Mark’s portion of the living trust. After Betty died, Mark developed a strong relationship with a neighbor who was helping Mark with some daily health issues. Since all of the children lived out of the area, they could not provide the same amount of daily care that the neighbor could. Over several months, Mark felt that his children were not giving enough attention to him and that he was going to adopt this neighbor as his legal daughter. The neighbor was married and had her own family. Eventually, Mark did adopt the neighbor and added her to the trust as an equal child. After another period of time, Mark ultimately wrote the four children out of the trust leaving everything to the adopted neighbor.

Like the situation with John & Mary, Betty never anticipated that her assets would not pass down to her children and step-children when Mark passed away. Regardless of the motives and intentions of the neighbor, Mark did have full control over all of the estate and made the decision to give everything to someone he had known for just a couple of years. Situations like this are usually never discussed when the estate plan was developed, but should, especially when there are children from prior marriages.

In this time of great uncertainty, making sure your estate plan is in place and meets your wishes is of critical importance. Because of this, we are in the process of scheduling estate plan reviews for all of our clients.