When it Comes to Estate Planning, Put your Wishes on Paper and Leave Nothing to Chance
Often, clients tell me, “I’m going to leave everything I have to my son John, and he knows to take care of the other kids.” People assure me that their families are extremely close, and there’s no question that the one child has the best interests of the others at heart. This thinking usually comes from a good place. The clients have a child who is irresponsible with money, or collecting government benefits, or has outstanding judgments. They’re right that it’s probably not a good idea to leave these loved ones a direct inheritance. However, leaving the inheritance to one child on paper with the expectation that they will pay the others is essentially leaving it up to chance.
Even if the child you’re counting on to split their inheritance with their siblings or other “unstated beneficiaries” is a person of the highest integrity and competence, there are significant flaws with this plan. The first is that the child could survive you and then die shortly thereafter. In this event, the assets would go under his/her estate plan and likely pass to his/her spouse or kids. The spouse or kids may then see it as their own money, and they would be entirely right. They have no obligation to share this with others if it is not written on the page. The “unstated beneficiaries” are simply out of luck.
Further, the child you’re counting on could be disadvantaged in his/her own estate planning because of this structure. Often, people die when their children are, themselves, senior citizens. If a child is being counted on to continually use their inheritance make gifts to their siblings who were “unstated beneficiaries” of the parents’ estate plan, that child will be putting their own Medicaid eligibility at risk. Medicaid has a five-year look-back period on all gifts and uncompensated transfers of assets. Medicaid is not going to show leniency because an applicant’s mom and dad told them to use their inheritance to take care of their siblings. These transfers will merely be viewed as gifts. The same is true in a tax context for higher net worth individuals. The IRS is going to view transfers as gifts.
The most fundamental problem with leaving the inheritance to one child with the plan that he/she will gift out and take care of the others is that, unfortunately, people just don’t always act as you would expect. Windfalls can change people. When you pass away and you leave your estate to that one child, on paper it all belongs to him/her. And that child no longer has to worry about what you’ll think. There are hundreds of reasons why that child may not want to share the inheritance–debts, business, recreation, marriage, kids, tuition, etc. There is no shortage of ways to spend money. If the child doesn’t want to share it for any number of reasons, he/she doesn’t have to. The other siblings will have little recourse. The argument that mom and dad always promised that the beneficiary would take care of the other siblings likely holds little weight in court if there’s nothing to that effect in the estate plan.
The solution here is often to create trusts for beneficiaries who might have problems with money. The instinct that you should not leave a direct inheritance to various people is often correct. You do not want to fund someone’s drug or gambling problem or leave money to a beneficiary that would disqualify him/her from essential government benefits. Trusts can be used to protect inheritance for beneficiaries from the vices of those very same beneficiaries. Trusts can insulate inheritances from creditors, lawsuits, and divorces, and keep the money in the bloodline when they die. Meanwhile, Supplemental Needs Trusts can allow disabled beneficiaries to receive an inheritance in a trust that enables them to continue to qualify for government benefits, such as Medicaid.
Trusts for inheritance can offer the best solutions for some beneficiaries. The money can still be managed by the most responsible child, but there’s going to be accountability and integrity in the process. The trustee is generally required to spend the money on the trust beneficiary. You can give the trustee broad discretion or very specific instructions about how you want disbursements to be made. The Trustee cannot spend the money on their own personal expenses, and the assets in the trust will not be considered to belong to the Trustee, individually, for their own estate planning, Medicaid, or tax purposes. It’s well worth it to spend the time and money to set up a trust for a beneficiary rather than allowing your true wishes to go unstated and essentially leaving it up to chance.
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This is not to be considered legal advice. You should contact an attorney to discuss your specific situation.
This article appeared in the December 30, 2022 edition of the Senior Gazette.
Michael Wagner is Partner concentrating on elder law and estate planning. He can be reached by phone 845-764-9656 and by email.