Attorneys spend several hours preparing customized Wills, Trusts, and Durable Powers of Attorney. But do they prepare a flow chart that shows where assets will go under their client's estate plan? Some attorneys summarize key provisions for their clients. Yet, these carefully crafted estate plans lack any basis in reality and your assets might not go to the individuals as planned if there is no flow chart outlining the details. In this post, I explain how a flow chart can prevent this unintended consequence.
Here are a few examples of when assets might not go where they are intended to go:
- If one child is designated as the beneficiary on a retirement plan, but the Trust says all assets are to be divided equally between all the children, guess what will happen? In this situation, the Trust provision is irrelevant. That one child gets the entire retirement plan.
- If a life insurance policy is designated to go outright to a spouse, it does not matter that the Revocable Trust contains a credit shelter trust that will save on estate taxes. The life insurance proceeds will never get to this tax-saving Trust because the Revocable Trust is not designated as the beneficiary of the life insurance policy; all of the fancy estate tax planning will have no effect without the correct beneficiary designation.
- If Mom has a bank account held jointly with one child so that the child can write checks for her, the Will provision giving all property equally to the 4 children will have no effect. The money in that bank account will go outright to that one child unless the other children can prove, in court, that Mom intended that account to be divided equally among all her children.
When clients have significant assets, the absence of a Flow Chart, showing which assets go to the revocable trust and which assets pass outright to loved ones, creates considerable uncertainty. Without a flow chart, the attorney cannot be certain what asset will go to whom and what asset the trust will control. Preparation of a Flow Chart forces both the attorney and the client to review each asset and determine “the flow” of where each asset will go.
A flow chart can reveal mistakes in an estate plan. John and Mary have two children, Paul and Anna. Paul and Anna are in their early 20's and are without children. John and Mary jointly own a lovely home in East Lyme, have a large 401(k) plan at Electric Boat with the spouse as primary beneficiary and the kids as contingent beneficiaries. They have a $750,000 Prudential life insurance policy leaving everything to the spouse and, provisionally, to the children. They also have $100,000 in investments at Merrill Lynch with the spouse as beneficiary and the children as contingent beneficiary.
John and Mary’s attorney drafts a Will that pours over to a Revocable Trust for each of them with everything going outright to their spouse and held in trust for Paul and Anna. He has them sign a deed conveying the house to John’s Revocable Trust. John’s brother, Michael, will serve as Co-Trustee with Paul and Anna to assure that they will make prudent investments and wise distributions after the trust is funded. John and Mary think their estate plan is all set. But, without a Flow Chart, John and Mary have no idea what property Michael will oversee as Trustee. If John and Mary die, Paul and Anna will likely receive only the house in trust; the life insurance, the retirement plan, and the investment account will go outright to them instead of through the Trust. Michael will have no power over the bulk of the estate; and, the life insurance, retirement plan and investment account will be subject to the children’s creditors.
Here's what a Flow Chart of John’s estate plan looks like:
By preparing the flow chart, both the attorney and his or her clients are forced to determine which assets (e.g. – a business, real estate and bank accounts) will go to each person and which assets will go to each trust. It becomes necessary to review the beneficiary designations for each asset. If an asset does not have a designated beneficiary, the attorney must determine whether the asset is jointly owned with rights of survivorship, jointly owned as tenants in common, or solely owned.
Close examination of the beneficiary designation has deep importance for knowing who will get those assets when you die. If you do not go through the exercise of creating a Flow Chart showing each asset, your estate planning documents could be irrelevant or misleading. A Flow Chart is usually one page and is frequently the only document easily understood by the client.
When John and Mary and their attorney review this Flow Chart, they would discover that little property will go to the children in trust because all of the assets, other than their home, are passing outright. They would then have a conversation about how the life insurance, retirement plans and investment account will get to their children’s trust when John and Mary are gone. Some options might be that they could name Mary’s Revocable Trust as the beneficiary of the life insurance policy. They could add conduit trust language to the children’s trust and have the contingent beneficiary of the 401(k) plan changed to 50% to Paul’s Trust and 50% to Anna’s Trust. They could change the investment account to a transfer-on-death account that names Mary’s trust as the beneficiary.
We believe in Flow Charts and their power to show what will truly happen upon a client’s death. Make sure it becomes part of your Estate Planning process.
