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Do Not Plan Your Estate Around Specific Assets! – The case of Jim.

Unless there are compelling reasons why a specific asset should go to a specific person, you should not try to plan around specific assets.

We are repeatedly asked why do I need a trust? I want to add my kid’s names as beneficiaries to my accounts and add them to the title of my property. There are severe tax and creditor exposure issues with this type of thinking.  The following is a fictional case study of a client named Jim.

Jim had three children, eldest son, middle child daughter and the youngest was a daughter as well.  Jim loved his three children equally and wanted to leave his estate to his children equally.  Jim had three main assets, a house, a life insurance policy and two bank accounts. The values of these assets were as follows:

  1. House – $1MM
  2. Life Insurance Death Benefit – $1MM
  3. Total Balance in Bank Accounts – $1MM

Several years before Jim died, Jim thought, “Since my assets are equal in value, I will assign each asset to the kids separately.  This way the kids will get an equal share of my estate.” Jim opted not to create a living trust.  Jim, added his son’s name to the title of his home as a joint tenant. Secondly, he made his middle daughter the sole primary beneficiary of his life insurance policy, and he made the youngest daughter the sole Pay on Death (POD) beneficiary of his bank accounts. In Jim’s mind, each child was to receive approximately $1MM each.

Unfortunately, a few years later, Jim had to sell his house, as he spent the remaining years in a nursing care facility. The proceeds of the sale of the house went to the savings account he had. Jim let the life insurance policy lapse as the premiums were too much for him to pay. Now, Jim’s original estate was dwindled down to one type of asset, bank accounts – valued at $2MM.  The POD beneficiary of these accounts was his youngest daughter. At Jim’s death, the bank accounts passed to his youngest daughter, and his two elder children received nothing.

Jim created several problems for his children. At his death, his original intent remained, he still equally loved his children. However, in practice, by way of inheritance, two children received nothing – Jim disinherited them.  Secondly, if the youngest daughter was ever so kind to share the bank account balances with her siblings, she would be making a “gift” under IRS rules and would be subject to a gift tax.  Thirdly, if she chooses not to share the money, there may very well be sibling rivalry and potential issues with their relationships.

What Jim needed to do was set up his Living Trust. He would have funded his trust with the bank accounts, the house and made the primary beneficiary of the life insurance his trust.  Even with the above scenario, with only the two bank accounts remaining at the time of Jim’s death, the trust would have stated that all assets remaining in trust at the time of his death were to be split equally between all his children.  Thus, fulfilling Jim’s intent and not creating problems for the children.

The moral of the story here is, unless there are compelling reasons why a specific asset should go to a specific person, you should not try to plan around specific assets.  You should always speak to a qualified Estate Planning Attorney when planning your Estate to understand all the tax and other related issues that could arise.


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