Warning: This article illustrates common scenarios that result in the wrong people inheriting or getting assets instead of the decedent’s loved ones. I recommend you print this article and read it when you have time or give it to your spouse or significant other so he/she can learn if she/he should adopt a will or a trust.
If any example applies to you then you must adopt a trust or a will to solve the problem and protect your loved ones. I recommend you save this message so you can refer back to it in the future. If you know somebody who might be subject to one or more examples please forward this message to that person.
Examples of How Loved Ones Can Be Harmed by a Failure to Plan for Death
In all of the examples below, the deceased person did not have a will or a trust.
Example 1 The Ultimate Nightmare – Decedent’s Assets Inherited by Decedent’s Spouse Who Gets Sued After Decedent’s Death: Derrick and Julie are married and have minor children. They own a home as community property (not community property with right of survivorship) with $300,000 of equity. Derrick has a $1,000,000 life insurance policy of which Julie is the beneficiary. They have a $300,000 car insurance policy.
Julie is driving the car and Derrick is a passenger. Julie is at fault and causes an accident that kills Derrick and a person in another car. Julie is sued by the family of the person who died in the other car. The plaintiff gets a judgment against Julie for $2,000,000. The car insurance company pays the plaintiff $300,000. The plaintiff gets the $1,000,000 of life insurance paid to Julie. Arizona’s homestead exemption protects the first $150,000 of equity in a resident’s home from creditors so the creditor only gets $150,000 from the home. The unpaid judgment is $550,000 and the creditor garnishes Julie’s wages and bank account. The creditor gets $1,150,000 from Julie.
Solution: Derrick and Julie should have created a trust that provided that when Derrick died a separate irrevocable trust (called a QTIP trust) would be created for Julie and all the life insurance and all of Derrick’s property would go into the QTIP trust. Julie would be the trustee and beneficiary of the QTIP trust. The QTIP trust would own the $1,000,000 paid to it by the life insurance company, one half of the home with a value to the QTIP trust of $150,000 and all of Derrick’s other assets. Because these assets are not Julie’s assets her creditor could not get any of the assets in the QTIP trust.
If Derrick and Julie had created this sophisticated estate planning trust Julie’s creditor would not taken $1,150,000 from her inheritance.
Note: This type of QTIP trust would protect the life insurance and all other assets owned by Derrick that he left in the QTIP trust regardless of how and when Julie got a creditor problem.
Example 2 Assets Don’t Go to Decedent’s Spouse: Dan and Michelle are married. The home they live in is Dan’s separate property valued at $400,000. Dan and Michelle do not have any children, but Dan has an adult son from a former marriage. Dan dies. One half of the home ($200,000 value) is inherited Michelle and the other one half ($200,000 value) is inherited by Dan’s son who demands that Michelle buy him out or he will move in with her. The result would be the same if Dan and Michelle owned the home as community property (not community property with right of survivorship).
Arizona law of intestate succession provides that when the decedent is married and has one or more children with a person other than the decedent’s spouse one half of the decedent’s separate property goes to the surviving spouse and one half of the decedent’s separate property and the decedent’s community property passes to the decedent’s descendants.
Solution: If Dan wanted Michelle to inherit all of the home and all of his other separate property he should have signed a will or a trust that left the home and Dan’s other assets to Michelle.
Example 3 Assets Go to a Minor Child: All of Joan’s property including her retirement plan is worth $500,000. Joan has one child, Allie, who is five. Joan dies. Allie inherits everything. This creates two problems: (i) Allie is a minor so she cannot deal with her inheritance so the family must pay $3,500 or more to hire an attorney to file a lawsuit asking the court to appoint a conservator who has the duty to manage Allie’s assets until she is 18, and (ii) when Allie is 18 she will have total control of her inheritance. It is not a good idea to give a young person control of a lot of money. The problem illustrated by this example arises frequently when a parent has life insurance that could go to one or more minor children. You don’t want an 7 year old to inherit $100,000, $500,000 or more of life insurance that will become owned and controlled by the 7 year old when he or she becomes 18.
Solution: Joan should have created a trust that named Allie as the beneficiary and a trusted family member or trust company as the trustee to manage the assets. The trust could make Allie the trustee when she is older and wiser.
Example 4 Assets to Unwanted Heir: Bob owns a company that operates a successful money-making business. Bob has a long time significant other named Jane. Bob dies. Under the law of intestate succession of Bob’s state of residence, Bob’s estranged brother who Bob had not seen in 30 years inherited the company. Jane inherited nothing.
Solution: Bob should have signed a will or a trust that left the company to Jane.
Example 5 Assets Go to an Heir Who Gets Divorced: Two parents have assets valued at $500,000. On the death of the second spouse their only child Tanya inherits the $500,000. Tanya is married when she inherits the $500,000. She uses the money to buy a home for $500,000 and takes title with her spouse as community property. Years later they get divorced and the ex-spouse gets one half the value of the home. The result would be the same if Tanya took all of the inheritance and put it in a stock or a bank account owned jointly with the spouse.
Solution: The parents should have created an estate planning trust for themselves that created an irrevocable trust for Tanya on the death of the second spouse. Tanya could have been the trustee and beneficiary of her trust. Tanya’s trust could have purchased the home for $500,000, which means her spouse would never have been on the title to the home and would not have any claim to it or any other assets in Tanya’s trust. Note: This type of trust can protect your loved ones’ inherited assets from their creditors (current and future), ex-spouses (current and future) and their bankruptcy.
Example 6 Assets to a Drug Addict Heir: Mary owns nine rental homes free and clear. the total value of the home is $1,000,000. Mary is single with two children, one of whom is a drug addict and unable to manage money. Mary dies without a will or a trust that left the properties to Mary’s children in a trust. Under the law of intestate succession of Mary’s state of residence, Mary’s two kids each inherited one half of all the real estate. The drug addict quickly blows through the inherited $500,000.
Solution: Mary should have signed a trust that created one trust for each child on her death and that caused $500,000 of assets to be transferred into each child’s trust. Mary’s trust would have named a corporate trustee as the trustee of the drug addict’s inheritance. The corporate trustee would invest the $500,000 and use it for the drug addict’s benefit, but not allow the funds to be wasted or spent on stupid things.
Example 7 Assets to an Heir with a Creditor Problem: Susan’s mother died and left Susan $250,000. Susan lost a law suit a year before her mother died, which caused Susan to be liable to pay a $500,000 judgment. The judgment creditor took all of the $250,000.
Solution: Susan’s mother should have created a beneficiary controlled trust for Susan and funded it with the $250,000. Because Susan would be the beneficiary of the irrevocable trust created and funded by her mother the assets in the trust would not her assets, which means Susan’s creditor could not take the $250,000. The money in the trust could be used for Susan’s benefit. If Susan did not have a creditor problem the trustee could pay money from the trust to Susan. If Susan had a creditor problem the trustee could use the trust assets for Susan’s benefit. For example, the trustee could buy a home titled in the name of the trustee and let Susan live in the home rent free.
Example 8 Assets to Special Needs Person: Homer and Marge have a special needs child name Bart who gets monthly payments of government benefits. When the second spouse dies Bart inherits $200,000. This causes Bart to exceed the asset limits of the government so he loses all government money. Another problem is that Bart lacks the capacity to manage his inheritance. The family is forced to spend a lot of money on a lawyer who files a lawsuit to get a conservator appointed with the power to manage Bart’s inheritance.
Solution: Homer and Marge should have created an irrevocable special needs trust for Bart and funded it with the $200,000 when the second spouse died. Bart would not be the trustee. The trustee could be a trusted family member or a trust company. Because Bart would not be considered the owner of the $200,000 put into the trust Bart would not lose is government benefits.
Example 9 Gift to a Child: Parents have a daughter Wendy who is married to a medical doctor Charles. The parents give Wendy $450,000 to buy a home. Wendy and Charles take title to the home as community property. Charles gets sued for malpractice and gets a judgment against him for $500,000. The creditor causes the home to be sold at a foreclosure auction that results in the creditor getting $350,000 and Wendy and Charles retain $150,000 because Arizona’s homestead exemption protects the first $150,000 of equity in the home of an Arizona resident.
Solution: The parents should have created an irrevocable trust and funded it with $450,000 cash. The trustee and sole beneficiary could have been Wendy. The trust would then have purchased the home that Wendy and Charles live in. Because the trust owns the home Charles’ creditor could not have gotten the home or any other assets in the trust. This trust would have protected the home and saved Wendy $350,000. Another benefit of putting the $450,000 in Wendy’s trust is that if Wendy ever gets divorced or has a creditor problem her ex-spouse and/or creditors could not get any assets in the trust.
If any of the above scenarios apply or might apply to your or your loved ones you need to adopt an estate plan with a comprehensive trust that creates life-time asset protection for your loved ones.
Schedule a Free Estate Plan Consultation
To schedule a free appointment with Arizona estate planning attorney Richard Keyt to answer your questions about an estate plan to protect your family go to Richard’s online appointment scheduler and select a date and time that works for you. You may also call me or Richard’s legal assistant Michelle (480-664-7413) to schedule your appointment.
If you have a question about wills, trusts or estate planning call me or my son estate planning attorney and former CPA Richard C. Keyt (480-664-7472). We don’t charge to answer estate planning questions.