Monday, February 27, 2017
Summary: Estate planning-related court cases can teach a lot about what are good ideas, and bad ideas, in planning one's estate. They can remind us, as one recent case did, of the substantial and often needless risks involved in adding co-owners to your assets for the purpose of convenience or probate avoidance, as well as educating us that, if your estate planning goals change, it is vital to get your plan updated to reflect those new objectives.
Real-life estate planning scenarios spelled out in the pages of court decisions can provide valuable insight into planning techniques, including what worked... and what didn't. Take for example, a case from Michigan from late summer. A father, who had four children (three sons and a daughter) executed an estate plan in 2002. His will stated that his assets should be distributed evenly between his four children.
The father's assets including several bank accounts, including one with Bank of America with a substantial balance, as it contained the proceeds of the 2006 sale of the father's house. The bank account listed the father as a co-owner of the account. The other co-owner was his son, Mel. Mel considered his status on the account to be one of mere convenience for his father. Mel only used his status to manage the account, and never utilized any of the money in the account for his own benefit. Sometime later, though, Mel's sister, Mary, was added as another co-owner. Mary did use the money for her own needs, taking it for both herself and her daughter. According to the daughter, her father had given her oral approval to use the money for her own benefit, once telling her that she did not need to ask permission, but simply to take the money, as he planned on disinheriting his sons upon his death, anyway.
After the father died, Mel, as his father's executor, sued Mary on behalf of the father's estate. Mary was accused of improperly taking funds that belonged to the father and using them for her own gain. Mary asked the trial court to throw out the lawsuit, arguing that, because she was listed as a co-owner of the account, there was a legal presumption that she was allowed to use the money on herself and the estate had not submitted enough evidence to the court to prove that she acted wrongfully. The trial court ruled in her favor. The estate took the case to the court of appeals, and that court reversed the lower court's ruling. That court ruled that there was no legal presumption in favor of the daughter and that the estate had presented enough evidence to the trial court to raise the possibility that the father never meant for the bank account funds to be used for the benefit of anyone other than himself during his lifetime.
Regardless of whether the daughter acted legally or not, the father's plan offers a clear example of a plan gone awry. This was, in no small part, the result of multiple mistakes. If the father wanted the bank account money used only for his benefit during his lifetime, but wanted some of his children to have certain abilities regarding the account, there were better tools available to him. For one, he could have created a financial power of attorney and included the management of the bank account in the powers assigned to his agent. Alternately, he could have funded the bank account into a trust, and given one or more children authority as trustees to manage the trust. In either situation, the father would have had the protection that comes with the fact that both an agent under a power of attorney and a trustee of a trust has what's called a "fiduciary duty" to handle the assets they manage in a proper way.
Simply naming another person as a co-owner of a bank account, much like simply "adding" someone to the deed of your home in order to avoid probate, creates some significant and arguably needless risk. A co-owner of an asset often has wide freedom in making decisions regarding that asset. Furthermore, this plan potentially exposes this asset to claims made by creditors of the person you've added to the account.
Additionally, the father's estate plan may have been out-of-date and needed an update. If the father sincerely had a goal to distribute all (or even a larger-than-one-quarter portion) of his wealth to his daughter, then his 2002 will would not have accomplished this objective. A new or amended will would have allowed him to change the distribution pattern of his estate, updated to reflect his current wishes regarding the amount that each child should get.
Regardless of what your goals are, potential pitfalls exist when you try to use the wrong the wrong technique to achieve an objective. By working with experienced estate planning professionals, you can protect yourself from falling victim to choosing the wrong tool for the job at hand.
This article is published by the Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services-company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at www.legacyassuranceplan.com.
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