A Huge Estate Planning Error

The other day a client of rather long standing died. He had not only used our services to set up and update his estate plan, from time to time, but had hired me to become the Trustee of his trust upon his death.

During our estate plan meetings, he always insisted that a list of individuals and charities should get about half of his estate, in cash. There is nothing wrong with that idea. These are all people he had great respect for and hoped that the money would add something significant to their lives.

Against my advice and over my stern objections, he insisted, also, that the bequests be made in dollar figures rather than percentages. Theoretically, there shouldn’t be a problem with that practice, either; as long as there is enough cash to cover the gifts.

BUT, people giving away their money never worry about how to manage the trust. How is the funeral going to get paid for? Where will the money come from to pay the Trustee? Are there car payments due, utilities to pay, a house payment coming up?

In my friend’s case, he had forgotten that the value of his estate included an annuity, which has a face value but may have a different residual value. He also forgot that it is not subject to distribution through the trust because it has its own beneficiary. In other words, it’s not a trust asset.

Consequently, he gave about a quarter million dollars more gifts than he has cash to cover.
Which could have been cured with one simple decision-back calculate the amount he wanted each person to get as a percentage of the entire estate and put the percentage in the trust. That would have solved everything.

In another instance, many years ago, I had an elderly lady consult with me about the fact that, when her late husband died in 1948 he had left her a stipend of $600.00 per month. That was a lot of money, relatively, in the late 40’s, but not so much post Carter.

I asked her what assets the trust held? She said she wasn’t really sure, but it did hold her house and stocks of some kind. I asked to see them. When she brought them in, a few days later, they looked very strange. They were bigger than normal, beautifully engraved and bore the company name of the Bank of San Diego.

Well, I had never heard of that bank, but soon found that it had been merged, many years prior, into the then-new Bank of America. My client was sitting on millions of dollars of Bank of America stock and living on $600.00 per month. Her trust should have mandated that all of the income be distributed to her each month, but someone chose a dollar figure.

So, when you complete your estate planning (yours is up to date, isn’t it?), remember to use percentages, not dollar figures.

Categories: Estate Planning