3 Mistakes Parents Make in Estate Plans
Family structures have evolved beyond the nuclear family unit over the past few decades. With notable rates of divorce and re-marriage, more parents serve in the roles of step-parent and co-parent. For many remarried individuals, estate planning decisions must take into account not only one’s biological children, but also step-children, future children, or a new spouse. In revising their estate plan to incorporate these considerations, parents might utilize planning methods that unintentionally expose family and assets to risk:
- Joint accounts. Aging parents might name an adult child as a signatory on an account to help manage finances. Sometimes the account owner does not clearly define the change to the account and, rather than name the child as co-signatory, instead names the child as joint owner. Several problems can occur with a joint account owned by an adult child and elderly parent. First, if the child becomes the target of a lawsuit, the assets held in the account could become vulnerable to a judgment. Secondly, adding a child to an account could cause family conflict if one sibling is chosen over another. Along the same lines, if not planned for properly, an adult child jointly owning an account with a parent generally receives all account assets upon the other owner’s (the parent’s) death. If the parent intended to provide for multiple children with the assets in that account, this planning move fails to satisfy that goal and leaves the other siblings empty-handed. A better planning technique would involve naming an adult child as Attorney in Fact under a power of attorney. A General Durable Power of Attorney (GDPA) allows an individual to grant another person authority over finances, property, insurance, taxes, and other matters should the individual become incompetent. Alternatively, assets intended for multiple children can be held in a trust of which the children are named beneficiaries. Thus, the parent can ensure that the children each receive a share of the asset while naming a successor Trustee to manage the asset should the parent become incapacitated.
- Beneficiary designations. Parents should consider several factors before designating a child as the beneficiary of a retirement account, insurance policy, or other asset. Assets transferred to minor age children create complications and require court appointment of a guardian. For example, if a minor inherits an IRA, they will not have the legal ability to manage Required Minimum Distributions, which must start one year following the account owner’s death. Other mistakes parents might make include failing to include children on beneficiary designation forms or neglecting to update forms to reflect new children, whether through birth, adoption, or re-marriage. In a similar vein, divorced parents should review designation changes with an estate planning attorney ensure that assets later intended for children or a new spouse are not unintentionally left to a former spouse. Provisions in a will that disinherit a former spouse are ineffective if the beneficiary designations on file still name the ex-spouse.
- No estate plan. Delaying creation of an estate plan or not updating a plan to address children’s inheritance does not ensure the parents’ wishes will be carried out. Furthermore, parents of children who have not yet reached the age of majority should address guardian appointment in their estate plans. Guardianship terminates at age 18 in North Carolina; the appointment is decided through a court process, although the court typically appoints the individual nominated by the parent if a provision is included in the parent’s will.
A comprehensive estate plan can help families address important issues, ensure loved ones are provided for, and minimize family conflicts. An individual becoming a parent for the first time has different estate planning needs than one who wants to provide for adult children later in life. An aging parent with adult children will not be as concerned with guardianship, and will have elder care planning decisions to balance along with preserving assets for children. Create a dialogue with other parents to shed light on additional concerns, and discuss these matters during an estate plan review with an attorney. Regular plan reviews are important, but if an individual notices a significant issue they should address it immediately.