Often Overlooked Inheritance Planning Pitfalls

“There’s many a slip twixt the cup and the lip.”    English proverb

“Begin with the end in mind.” Dr. Stephen R. Covey

Many assume that once they have signed a personal Will or Living Trust, they have completed their estate planning. This assumption is often incorrect. A will or a trust are only two of the numerous ways assets are transferred at death. Other pathways override a will or trust when controlling the transfer. A failure to understand and carefully coordinate these methods with your will and trust can result in significant loss to your family when they inherit.

These problems must be identified and corrected while a person is still alive. Once he or she has died, accounts must be transferred exactly as stipulated in the beneficiary and ownership documents. Significant losses can occur unless these other methods are carefully coordinated with the will and trust documents.

What follows are four examples of how failure to coordinate ownership and beneficiary designations can derail an inheritance plan.

While I now work primarily as a fee-based financial-life planner, I was fortunate to begin my career in financial services in one of two life insurance agencies in my city that trained agents to understand these issues. The trainer in the other agency, Dick Byberg, was my mentor when I was the trainer in my agency. Most of my “competitors” on these topics began their careers in one of these two agencies. My boss asked me to promise that if he would train me to understand and prevent these problems, I would always use this knowledge to help my clients. I have honored that promise.

Note: I’ve included a glossary of legal terms at the end of this article.

Problem 1: Failure to complete transfers into a Living Trust

A living trust avoids probate (the process of transferring an inheritance through the courts) for assets owned by the trust. Over half of the living trusts I have seen in my career have nothing in them. It’s as if you purchased a bucket to carry water but never put water in it. For the trust to avoid probate, assets such as real estate, bank accounts, or investment accounts must be retitled in the name of the trust while you are alive. Without these transfers during your lifetime or beneficiary instructions in your accounts that direct the accounts to the trust upon your death, the accounts will need to be transferred through probate to get to your trust after you have died.

One of my neighbors recently asked me to help her with her deceased mother’s estate. Her attorney, now retired, was one of the most respected trust and estate attorneys in Denver. The deceased, who lived in Colorado, owned a farm in Illinois that had been in her family for generations. When a person owns real estate in a state other than their residence, upon their death, there are two probates to transfer, in this case, one in Colorado and the other in Illinois. The lawyer had drafted a living trust to avoid this problem, but the farm was never transferred into the trust. Now, this estate will be probated twice, in Colorado and Illinois. If my neighbor’s mother had completed the farm transfer into her living trust during her lifetime, the farm would have passed with no probate in either state. The extra probates will cost the heirs thousands of dollars in additional legal fees and court costs, which could have been avoided had the transfers to the trust been completed during the deceased’s lifetime.

Problem 2: Failure to Coordinate Beneficiary Designations

I was recently called in to help with another estate. The deceased’s son had referred me to his father years ago. The father was the client of another financial planner and felt everything was in order, so he had no interest in my offer to review his inheritance plan. The father has now passed, and significant issues have been caused by his planner’s failure to coordinate. The father had wills and trusts drafted by an attorney, who had corresponded with the planner with instructions to change ownership and beneficiary designations on several accounts. The planner never followed through. Because the lawyer’s instructions were not followed, and beneficiary designations on these accounts directed them to go to places and people other than the trusts drafted by the attorney, his surviving widow did not inherit everything he intended.

Problem 3: Joint Tenancy trumps Pay on Death Designation

Joint tenancy overrides Pay on Death (POD) for bank accounts or Transfer on Death (TOD) for investment accounts.

One of my clients grew up in a very small town. He had an uncle who never married and had no children. The uncle had 13 nieces and nephews. He had a POD designation on his bank account so they could inherit his $110,000 checking account equally. However, he had also named one of the nieces a joint tenant, so she could sign checks and help him pay his bills. Joint tenancy overrides POD. When he died, this niece immediately owned 100% of the entire $110,000. She decided to keep it all for herself. This went on for a week or two until she realized that the rest of her life in this tiny town, where she encountered relatives weekly at the one grocery store and church, would be unpleasant if she didn’t share the inheritance as her uncle intended. Fortunately, the estate was small enough so she could give the money to her fellow heirs without paying gift taxes (in 2025 this would be up to $19,000 for each recipient). She shared the inheritance with the intended beneficiaries and restored family peace. It’s easy to imagine the niece keeping the money for herself had she not lived in such a small town with so many of her relatives.

A better approach would have been for the uncle to give his niece a Durable Financial Power of Attorney to sign for him without sharing joint ownership. Then the POD would have paid all his nieces and nephews without drama.

Problem 4: Outdated IRA or 401 (k) Beneficiary Designations

“Old Beneficiary Form Gave His Ex $1 Million” Wall Street Journal Headline June 12, 2024

IRA and 401 (k) accounts are the most significant assets in many people’s estates. In most cases, having your personal Will control the inheritance of these accounts creates significant losses to otherwise avoidable income taxes.

In the above-reported case, the deceased had named a girlfriend as beneficiary of his 401 (k) decades before his death. He had never updated his beneficiary designation, so his former girlfriend inherited the account “almost 40 years after they broke up.” The heirs of his probate estate sued and lost. Beneficiary designations trump wills and probate. The court found that the deceased easily could have changed the designation anytime he wanted. Since they couldn’t ask his intent, the court followed his most recent written instruction, made decades earlier, before he and the girlfriend broke up. She got the money.

In addition, there are increasingly complex rules regarding the timing of income taxation on accounts left to heirs. It is essential to ensure that provisions are up to date with your current personal situation and the ever-developing tax regulations.

The Strategic Inheritance Plan

For a small $225 fee, I will review your current inheritance plan. I will meet with you to ask questions in plain English that will help you clarify who you want to inherit from and why. I will then review your investment, bank, life insurance, IRA, 401 (k), and annuity accounts to see if any coordination problems could cause a loss of assets to your heirs. This usually takes 2 hours of your time and up to 10 hours of my time.

If I find no problems, the review is free.  Otherwise, you will pay me $225 after my review is delivered.

If there are no problems, you will have confirmation that your inheritance plans are already in order. If I do find problems, I will explain what it will take to fix them and commit to an additional fixed fee to do the additional work.

I do no marketing or advertising beyond this website. The Strategic Inheritance Plan is my way to introduce myself to you as an expert problem solver in matters of importance to you that other planners seldom cover.

If you would like to schedule a time to learn more, in person or online, e-mail me at russ@strategicexit.com  I look forward to meeting you.

Glossary of Terms

• Probate

From Latin for “to prove.” The court process of transferring property to the heirs of an estate. In Colorado and many other states, there are levels of probate. If real estate is transferred by probate, or the probate estate exceeds a minimal amount, the court costs and attorney fees can be significant.

 

• Personal Will (Last Will and Testament)

People often assume that a Personal Will avoids probate. It does not. It guides probate.

 

• Living (Intervivos) Trust

A trust that is set up to manage assets while a person is living. However, assets must be transferred (retitled) into the name of the trust for the trust to have effect.

 

• Durable Financial Power of Attorney

A document which gives another adult, often a spouse, the right to complete financial transactions for you, without actually owning the account with you.

 

• Pay on Death Designation (POD)

A beneficiary designation on a checking or savings account at a bank or credit union. Accounts that transfer by this method avoid probate. This trumps your Will and/or Trust.

 

• Transfer on Death Designation (TOD)

Same as POD, but on a taxable investment or brokerage account. This also passes outside of probate.

 

• Beneficiary Designation

This applies to IRA, 401-k, life insurance and annuity accounts. Like POD and TOD, the assets pass outside of probate.

 

• Joint Tenancy with Right of Survivorship

This is usually (but not always) an ideal way for spouses to inherit from each other. However, it can be problematic, especially if it overrides your intent expressed in POD, TOD or Beneficiary designations.