What estate planning horror stories have you heard?
It could be money going to the wrong person, incorrect people settling the estate, or other restrictions someone never intended.
I encourage folks to regularly review their estate plan, ask their estate planning attorney lots of questions to make sure they understand it, and consider putting contingencies in place for worst case scenarios.
I’m going to share one cautionary example story to highlight why it’s important to go back and forth with your estate planning attorney and ask questions. This is a hypothetical story. None of this is advice.
If you don’t ask questions, you may not get the result you want. You may get a boilerplate document that’s not customized to your situation.
Background of the Situation
This family has owned a mountain property for multiple generations. There has never been a formal structure or regular meetings. It’s worked surprisingly well for multiple generations.
The latest generation is three siblings who have always paid property taxes, made repairs, and contributed sweat equity when it was called for.
They split time at the mountain property, primarily in the summer. Friends are regularly invited to join, and it’s been a wonderful communal space for kids and grandkids.
The problem is that the next generation inheriting the property are not siblings.
In fact, here are the three family members and their respective family:
- Brother (Steve): only child (Kristy) with no children.
- Brother (Dennis): two adult stepchildren (Sarah and Jake) that he raised with his wife. Both of the stepchildren have two young children.
- Sister (Emily): late husband’s two adult children (Tim and Alan) from a prior marriage. Tim has two adult children and Alan does not have children.
Complicating the possible inheritance is that only one person lives within 2 hours of the property. A few beneficiaries live across the country.
None of these possible beneficiaries have a close relationship like the two brothers and sister who own it now.
If the possible beneficiaries inherited it today, some may want to keep the property, some may want to sell, and others may want to rent it out.
Without a formal structure about how decisions are made, the beneficiaries may end up disagreeing and consulting attorneys to sue to accomplish their goals. Or, property taxes and upkeep may not be paid, which often totals more than $25,000 per year. Each of the beneficiaries has different resources and may not want to pay more than $5,000 per year for the property they only get to use a few weeks per year.
If you think inheriting land with multiple people is easy, go read Reddit:
- Inherited property/sibling drama: any feedback is appreciated
- Inherited real estate with sibling – I want to keep it as rental property, she doesn’t. Help weigh my options.
- Inheriting a house with a siblings, they say they’re going to block the sale so they can live there
- Inherited land with my siblings…
- Legal rights to shared inheritance
The three siblings want to make it easier on the next generation while putting a formal structure in place, avoid disputes later, and continue to give themselves lifetime access to the property.
They consult an attorney who suggests creating a revocable trust that becomes irrevocable upon one of their deaths and quit claiming the deed to the property into the trust.
The three siblings give the attorney a rough outline of what they want, and the attorney fills in details without a consultation call. I’ll detail each draft the attorney prepared and the issues that came up.
Initial Issues After the First Draft
When the first draft came back, there were a few spelling errors and other issues, but there were other gaps that could cause issues later.
The problem with some estate planning is that people only assume one layer of possibilities. Everybody dies in a perfect order as expected and people live a “normal” life. The problem is that life can happen.
You need backups and contingencies in place for when life does happen.
Lacking Backup Trustees
The first issue is that besides the three siblings, only one beneficiary, Kristy, was named as a backup trustee.
If Kristy passed away or didn’t want to serve as a trustee, nobody was named as a backup. It’s normal to name a few backup trustees, such as other beneficiaries to serve as a trustee if one is unable.
They could have even named a corporate trustee as the last possible spot in case nobody could serve.
Possible Issue:
If they had not named backup trustees and Kristy couldn’t serve, it’s possible they may have needed to petition the court to consider a family member or other professional to serve.
Kristy may have been busy with work, taking care of a relative, or had something else going on that prevented her from wanting to be the trustee to hire a real estate agent, sell the property, and distribute the proceeds with the help of an accountant and attorney.
This could have resulted in additional legal expenses, which means less money going to beneficiaries, and someone in the role that nobody wanted.
Property Taxes Paid at Wrong Times
Another minor issue is that the attorney wrote random dates when the property taxes needed to be paid to the trustees. They had been paying twice a year at certain times and had been doing it this way for decades. They had an established routine.
It also called for an annual meeting to discuss repairs and other issues when the three siblings weren’t in the same location.
It’s possible that could have worked, but they normally had overlapping time at the mountain property during the summer, so they changed the dates for both the property taxes and annual meeting.
Lacking More Contingent Beneficiaries
Another huge issue was that there was no language that said what happened if one of the five beneficiaries were dead.
For example, if Sarah passed away, it didn’t specify if her share went to the four remaining beneficiaries, to Jake (her brother), to Sarah’s two children, or to Sarah’s husband.
This was a major oversight and should have been a question the attorney brought up.
Possible Issue:
It’s possible no beneficiary dies before the three siblings, but if they did, there was no clear line of what happens with their share of the property. You can imagine the possible legal disputes that could have arisen from the possible beneficiaries who may have thought they had a claim to that share.
Issues After the Second Draft
The attorney made a few changes and provided a second draft. If they had simply signed the draft, there could have been additional issues.
Included Per Stirpes Language for Each Beneficiary
To “solve” the question about where funds go if a beneficiary dies, the attorney automatically included “per stirpes” language for each beneficiary, meaning if that person was not alive, it would follow their lineage down (i.e. children).
The problem with this language is that Kristy and Alan, two beneficiaries, do not have children.
The other problem was that Emily didn’t want Tim’s full share to go to Tim’s two adult children if Tim passed away. She wanted a portion to go to a friend.
This language only worked for Dennis’ children, Sarah and Jake.
Possible Issue:
Once again, the per stirpes language was added without considering who had children. They could have been in a situation where one of the beneficiaries died, didn’t have children, and the question would remain of where their share should go.
No Language About Minors
Another piece that was missing is that there was no language in the trust to address minors inheriting money.
Sarah and Jake both have two young kids who are minors. That means there was four possible beneficiaries that could inherit money without saying who controlled the money, whether it went to a custodial account or trust, or any other provisions.
Possible Issue:
Minors can’t legally inherit funds, which means they may have needed to petition a court to appoint a guardian to manage the funds for the children.
It’s much easier to name someone to manage the funds. It’s cheaper and then there is less of a likelihood of the wrong person managing the funds.
Another issue is that the minor children would receive the funds at the age of majority, often age 18 or 21, depending on the state. Most people don’t want a young adult receiving a large inheritance at such a young age. People often set up trusts that make distributions at certain ages or at specific milestones.
Lastly, there was no language about if someone qualified for government benefits. Since these are young children, it’s impossible to say what happens to them between now and age 18. Many trusts have language that prevent distributions to people on government benefits to allow them to keep those benefits, except in certain circumstances that allow them to stay on those benefits.
They opted not to include trust language or language around government benefits, which as a financial planner, I would personally want in my own documents if I was in this situation, but personal finance is personal.
Issues After the Third Draft
You’d think we would be close at this point, but there were still problems. It felt like it was dragging on, and they just wanted to be done.
They kept slogging through the revisions because there were still issues that if particularl people died in a certain order, it could create problems later.
Language About Minors is Costly and Lacks Flexibility
The attorney added language about the minor beneficiaries, but it was a terrible way to handle it.
It said the following:
- Their share is held in trust until they turn 21
- It can only be invested in a CD or FDIC-insured bank account
- No distribution except by court order
Possible Issue:
This might require the trust to stay open for more than a decade, which requires an annual trust tax filing. That costs money that isn’t going to the beneficiary.
Plus, it can’t be invested. Some of the children are under 5 years old, so if the money sits for over 10 years, it’s possible that it could lose 15% to 20% of it’s purchasing power.
Lastly, not allowing any distributions seems overly restrictive. What if they need the funds for schooling, to pay for housing, or for training in a career?
They decided to have it go to a custodial account, named a guardian for the account, and decided a distribution at age 21 was okay. They didn’t want to “control the money from the grave” using a trust.
Personally, I would have preferred to see trust language because it provides more flexibility and guidelines, but they decided the custodial account would be okay.
Named Estate as a Beneficiary
Another issue in the third draft is that the attorney wrote that if Alan, who doesn’t have children, died, his share would go to his estate, ultimately going to whoever was named in his Will.
Possible Issue:
I was very frustrated by this language because if Alan passed away, and years passed before the mountain property was sold and his share was distributed, his estate would need to be reopened.
That’s not an easy process. It would require the executor still being alive, opening a new estate account, getting new letters of testamentary, tracking down the previous beneficiaries, receiving the funds, and then making distributions.
It also presumed that he made a Will. If he didn’t have a Will, it would have caused more issues and more court intervention to get the proceeds distributed.
Issues After the Fourth Draft
As you can imagine, by this time the three siblings really wanted to be done with drafting the trust.
There were still a couple of potential problems.
Doesn’t Address if a Beneficiary is Dead
This was a similar issue to earlier. They added another layer of contingent beneficiaries, but there was no language that addressed what happened if one was dead. Did it go to other beneficiaries, their children, or someone else entirely?
One beneficiary decided to name a charity as the last remaining beneficiary and another opted for it to go equally to their other remaining beneficiaries.
No Language About Disability
I wanted to highlight one last time that there was no language about if someone was on government benefits. What this meant is that if someone was on government benefits and they received their share of the proceeds, it would likely disqualify them from the government benefits to which they were accustomed.
It’s low odds that someone is disabled or on needs-based government benefits, but it’s a possibility. I prefer to see language within a trust document that handles it because it’s an easy clause to add and provides flexibility.
They opted not to include that language.
Summary of Problems and How to Avoid
Let’s summarize the main issues and how you can avoid them when you do your own estate planning.
Names Misspelled or Not Using Full Names
There were a few areas where names were misspelled or full names were not used. For example, Elizabeth being shortened to Lizzy.
Don’t trust that your attorney wrote everything correctly. They are human and can make mistakes.
Double check that you are using full names for everyone, or if they go by a nickname, you could include it in quotes.
Not Asking About Beneficiaries
Make sure your attorney is consulting with you. Don’t accept that you give them an intake form, they write a document, and you are done.
There should be collaboration and questions about who is important in your life, who is a minor, and who is responsible enough to fill certain roles.
If beneficiaries have a spending problem, gambling addiction, or a substance or alcohol use issue, it may not be the wisest to leave them money outright. You may want to consider a trust.
If someone in your family qualifies for government assistance or may later, you may need to do more trust planning.
It’s important to understand ages, abilities, and who to list as contingent beneficiaries if someone passes away. It should always be clear where funds go if someone predeceases you.
Don’t leave it as a question, which usually involves disputes, attorneys, courts, and more fees.
Not Asking About How Decisions Were Made in the Past
If there are multiple family members involved, which is often the case with multigenerational planning, a business, or property, it’s important for your attorney to understand how you’ve done things in the past.
It may not be the best way to do in the future, but it will help them draft a document that fits more in line with what you are already doing.
If you don’t carefully read the document, you may be stuck with a system people choose not to follow, which could open up problems later or a need to go back to the attorney to revise the document.
Not Putting Flexible Language
This is a big one where people get caught up thinking it won’t happen to them.
Legal documents and estate planning can be for the most likely outcome, but more importantly, it’s for the less than likely outcome.
The less than likely outcomes are the ones that tend to cause issues. You should put language in your document that can account for many different possible scenarios.
One of my favorite ways to do this is to play a hypothetical game of “Let’s kill XYZ person.” Go down the list of everybody in the document and kill them in a different order. Start to think through if they died or were disabled, what should happen to their share?
Finally, kill everybody. What happens if nobody is remaining? Where does the money go?
I know it seems silly and not an enjoyable exercise, but I’ve heard plenty of horror stories of relationships broken and high legal fees sorting out who gets what at death if it’s not clear.
Spending 30 minutes now could mean tens of thousands or more dollars don’t go to attorneys and go to the right heirs.
The same can be said for disability, divorce, substance use issues, and minors. Nobody wants to believe their child will have a substance use issue or get disabled.
But, what if they do?
Do you want your inheritance to lose them the benefits they’ve been accustomed to? Do you want them to possibly use the money for drugs?
I’ve seen both sides and their extremes. Some people don’t want to control any money after they die. Some want to control it too tightly.
It’s a balancing act. I like to think of it through the lens of, “If I was still here and controlled the money, how would I use it to best protect this person I loved?” That’s the language I include.
For some people, that means direct access with no restrictions. For other people, that might mean very restrictive conditions with an independent trustee. Or, it might mean something in between.
Estate planning can provide flexibility, but you need to consult with your attorney about how best to put language in the documents to provide that flexibility.
Don’t be afraid to consider those “wild and seemingly impossible scenarios.” They happen.
Final Thoughts – My Question for You
Good estate planning can set up your heirs and loved ones for success.
It can’t eliminate conflicts, but it can help avoid them and provide a path for how things should be done.
As you think about your own estate plan, consider as many “what if” scenarios as possible. Does your plan adequately address each one? If not, you may want to consult an attorney to discuss updating it.
Like any other service provider, some attorneys are wonderful and will pose important questions to you. Others won’t. You may need to consult a different attorney or be more proactive in speaking up for yourself.
In the example in this article, since the attorney wasn’t proactively bringing ideas to them, this family needed to be more proactive in bringing up issues and advocating for themselves.
I’ll leave you with one question to act on.
When will you go through the “what if” scenarios in your estate plan?
