The Poor Man’s Estate Plan

The biggest mistake people make when “planning” their Estates is adding someone else’s name to their bank accounts or erroneously relying on account beneficiary designations. The problems that arise with doing so expose you to creditor liability, negative taxation and the like. Here is an example of the issues that could arise:

Tiffany lost her checking account to her father’s creditors.  She had put her father on her checking account so he could pay her bills while she was traveling. He had several creditors, however, and one of them filed a lien on the account. The bank was forced to pay her father’s creditor $75,000 of Tiffany’s money.  When he was added as a signer, he legally became a co‑owner of the account. He had the legal right under California law to withdraw the entire account, and the creditor “steps into the debtor’s shoes.”

In addition, Tiffany was deemed to have made a taxable gift under IRS rules to her father at such time as the creditors withdrew money from the account. Interestingly, if Tiffany had had a Living Trust, she could have had her father as a co-trustee with herself. As such, he still could have paid her bills from the account, but his creditors could not have attached the account. He would have been only a trustee and not an actual owner of the account.  Tiffany could also have given her father a General Power of Attorney allowing him to pay her bills while she was away on vacation.

When you simply add someone’s name to your account, you are subjecting that account to his or her creditors. You don’t have to be a bad person to be sued these days or to be subject to a tax lien. A California Living Trust can protect your assets while still allowing another person to pay your bills.

A beneficiary designation is a very simple form of estate planning which does not handle contingencies very well. For instance, if you name your son and your daughter as the beneficiary on your life insurance policy or your bank accounts, and your daughter predeceases you, do you think the institution will pay the proceeds all to your son, or do you think the institution will pay your daughter’s half of the proceeds to your daughter’s children or will your daughter’s portions go to your probate estate?

Most of us would like to think the proceeds would go to your daughter’s children.  Unfortunately, each financial institution has its own fine print when it comes to beneficiary allocations.

Further, if your children are very young, these beneficiary designations will not be your best method of transferring the assets to them.  You could potentially subject the money to the children at too young of an age – thus exposing the money to the child’s immaturity.  Can you imagine what an 18 year old can do with $500,000?!?

By titling your bank accounts into the name of your California living trust or naming your living trust as the beneficiary of your life insurance, your living trust can control exactly how the proceeds will be distributed, including such contingencies.  The trust can also name who will manage and distribute the money for minor children or grandchildren.

To learn more about California Estate Planning, contact Fremont Estate Planning Attorneys at The Singh Law Firm at (510) 742-9500 or visit us at singhlaw.wpengine.com.