Well that backfired (part 1)
We are all used to things that are short and sweet, but today’s topic is abruptly sour. I’m fortunate that it hasn’t been an issue with my clients, but it is top on the list of things to avoid at the moment.
The issue on my mind is how seemingly clever estate planning is mucked up because the planning ended with the oldest generation and a younger beneficiary unexpectedly dies first.
This situation typically doesn’t affect financial assets and their payable on death designations. Instead, it hits the hardest on real estate.
Clients frequently inquire about the best way to pass cabin property to their children and grandchildren. There are a variety of reasonable options: a few people choose to sell the property to their children, some gift it to the next generation, and others create trusts to get the job done. (Occasionally lawyers recommend forming LLCs now, but I have yet to take that approach.) Any of these methods can be appropriate; the choice is heavily influenced by available cash flow, anticipated medical needs, and goals for the land.
The problem arises when long-term planning results in the transfer of property — home, cabin, land, etc. — to someone who doesn’t have an estate plan addressing his or her new property. If the new owner dies, the property would be passed to her heirs at law (or perhaps to an unintended recipient from a decades-old will). This might include the original property owner’s grandchildren, but, in the event of a whole family accident, could easily result in the son-in-law’s parents owning part of the land as well. Ironically, property titled in unmarried children’s names often goes back to the person who was trying to pass it out of his or her estate to begin with!
Bottom line — when parents of adult children are planning for their estates, the children should also make estate plans that reflect those decisions.
*This is not legal advice, just food for thought.
**For my hungrier readers who need more food: One potential solution is to file a transfer on death beneficiary designation each time there is a new owner, which I often recommend, but you would be surprised how many people are “gonna sell it really soon” and never get around to it.