Financial Planning: Wills And Other Ways

When you think about leaving money to heirs, the process seems simple. You put your decisions in your will (you have one, right?). When the will is read, your family and friends bless your sainted memory. If you yourself are an heir, you expect to collect your promised share.

Think again. That picture is from the movies (old movies). Nowadays your will may affect only a fraction of what you own. Most of your serious property will probably pass outside your will, through joint ownership, living trusts or the beneficiary forms attached to life insurance and retirement accounts. If the forms aren't in sync (and they're often not), the wrong person might inherit or an adult child (maybe you) might get less than the parents intended. Risks multiply with divorce and remarriage. An ex-wife might still be named on an old insurance policy. A new husband might inherit and cut his stepchildren out.

Errors, omissions and greed can rend family relationships for generations. Forget polite Thanksgivings--get ready for angry phone calls and lawsuits. What can you (and your parents) do to help everyone walk away reasonably happy? Here's a guide:

Give yourself heirs. Your will tells the family how you want your property distributed when you die. But here's something you might not know: your will?and your wishes?can be overridden by other forms you've signed and forgotten about. Take the beneficiary form that came with your life-insurance policy. If it names your two children as beneficiaries and later a third child is born, only the first two will get the money. To include the third, you'll have to change the form.

Then there's your 401(k) retirement plan. If you're married, your spouse automatically inherits the whole amount even if the marriage is just one day old, and even if your will and the beneficiary form say something else. If both of you think the 401(k) should be left to someone else say, to the kids; the spouse has to file a notarized statement waiving his or her rights.

And take the beneficiary form for an Individual Retirement Account. That, too, trumps the will. In a typical story, an unhappy young husband e-mailed Ed Slott, author of "Your Complete Retirement Planning Road Map." His wife had died. The IRA she'd opened before their marriage named her sister as beneficiary of her $80,000 account. The wife had intended to change it but tragedy intervened. The sister got the money and wouldn't share. Was there anything the husband could do? In most states, no, Slott replied. IRA trustees look only at beneficiary forms, not wills or spousal "rights." (But spouses have rights in community-property states.)

The same kinds of problems can occur with living trusts, says attorney Robert Fleming, author of "The Elder Law Answer Book" ? especially those bought hastily, through insurance agents at "senior seminars." Property put in trust avoids probate, if that's a problem in your state. But all too often, seniors vary the beneficiaries of their trusts?accidentally leaving property to their children in unequal amounts. The attorney who does your will or trust should look at all your beneficiary forms to be sure they coordinate.

The modern family mix. Put multiple marriages, children and stepchildren into the brew and steam can rise. That's especially true when you marry at a later age, when grown children feel entitled to inherit from their natural mom or dad.

Depending on where you live, your spouse may be legally entitled to one third or one half of your estate (excluding your IRA and, in some states, your living trust). Official domestic partners and people in civil unions are entitled, too, says Mary Randolph, author of "The Executor's Guide." Often, couples sign prenuptial agreements, waiving this right, so that each can leave property to the children of their previous marriages.

To be sure that the kids do indeed inherit, don't go on promises alone, says Sherman Doll of Capital Performance Advisors in Walnut Creek, Calif. Doll knew a man who left his money outright to his second wife, with the understanding that she would pass the remaining assets to his children when she died. But her will leaves everything to the children of her own previous marriage and?guess what?her kids think she shouldn't change a thing. Planner Tom Bentley of Truepoint Capital in Cincinnati advises that expert lawyers compare your prenup with your estate plan, so they'll fit.

There's one huge problem that a prenup doesn't solve. The moment you say "I do," your 401(k) automatically goes to your spouse. If that's your chief asset and you want it for your kids, your new spouse should sign the plan's waiver of spousal rights while you're walking back down the aisle.

Couples starting divorce proceedings should instantly remove their soon-to-be exes as beneficiaries from all possible assets, says Truepoint's president Michael Chasnoff. If the final settlement sends some of that property back to your ex, you can easily change the forms again. What if you divorce and then die, with your ex still named as heir? The laws in most states automatically remove exes from wills if you don't get around to doing it yourself. Exes also may be excluded from insurance policies, IRAs or joint tenancy, says law professor Robert Danforth of Washington & Lee University. In other states, however, the ex will indeed inherit?like it or not. One exception: if you remarry, your new spouse can get the 401(k), even if the ex is listed as beneficiary.

Who's got the power. Lawyers advise that you give someone your durable power of attorney. It names an agent to pay your bills and handle other financial matters if you can't act for yourself. But whom should you pick? You need someone the family sees as honest, capable and fair. When there are rifts among siblings, name an outsider as your agent?a friend, an uncle, a bank trust department (to take on this role, banks usually want your account to be worth $250,000 to $500,000 or more). The same thoughts apply to choosing future trustees for a living trust.

Problems sometimes arise when a sibling takes care of an ailing parent and also holds the power of attorney. He or she may decide to take "wages" or "gifts" in return for doing the work. When the parent dies, the cash may be gone and the sibs will start using words like "embezzlement." Payment for caretaking is fair, says attorney Sebastian Grassi Jr. of Grassi & Toering in Troy, Mich., but caregivers aren't supposed to help themselves. There's a trend toward families' writing "caretaking agreements" that set a wage for the sib on the job. Otherwise, only a court can order payment.

This gallop through inheritance risks leaves out other issues that could upend your plan. My best advice is to get advice, not from a buddy but from a lawyer who specializes in estates. That's what will keep your memory on the "sainted" list.