INTRO: The estate planning "game" is one every adult plays, but some play more actively and more intelligently than others. The challenge lies in understanding how all the rules work, and thus the optimal way to play. This can be pretty tricky and difficult without expert professional advice.
Let's explore the harsh unintended consequences on the death of Judy and on the death of Bob:
1) Judy's $1 Million house. Joint tenancy carries with it the "right of survivorship" ("R.O.S."), which trumps a Will. This means that at the death of one joint tenant, title vests fully in the name of the surviving joint tenant. Since Judy added Bob as a joint tenant she took out a home equity line, the R.O.S. feature results in Bob automatically becoming the sole legal owner of the house on Judy's death. Even though John and Jane are in Judy's Will to receive all of her assets, they receive no interest whatsoever in their mother's house.
2) Judy's $200,000 bank account. Judy didn't understand that adding John as a signer meant that he would be the legal co-owner of this account. She also didn't know that she could have instead established a Power of Attorney to give him access to the account if she became incapacitated. Even though Judy's Will provides that John and Jane are to share equally in all of Judy's assets, the joint account acts the same as a joint tenancy - on Judy's death, John becomes the sole account owner. Though Judy wants each of her children to receive $100,000 from the account, John is entitled to all $200,000. John dislikes his sister, so when he becomes the legal owner of the account, he doesn't feel any obligation to share half, or any at all, with Jane.
3) Bob's $1 Million 401K. ERISA (federal law governing 401K plans) dictates that the spouse of a 401K owner has rights to it on the death of the plan participant, regardless of what the beneficiary designation states. If Judy had signed a written waiver, formally consenting to Bob designating his kids as the beneficiaries, Bill and Betty would each receive half of Bob's 401K on his death, as he intended and as set forth on the beneficiary designation on file with the custodian. But no such waiver is on file, so Judy is automatically entitled to 50% of it.
It would not have required a large investment nor been difficult for Judy and Bob to obtain legal advice from an experienced estate planning attorney. Had they done so, they would not have made the innocent, but damaging mistakes they made.
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.
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