A Halloween Horror Story

Estate Planning Horror Story (our firm has represented numerous situations similar to the facts below, but this is not an account of any of those cases and is not based on any particular person): 

On one dark October night, John was the unfortunate and unexpected victim of a black widow spider bite.  John and his ex-wife, Jane, had three children together, all of whom were minors.  John and Jane had recently finalized their divorce, and John had transferred the house into his name pursuant to the divorce decree.  Nevertheless, John didn’t call his financial planner to talk about his One Million Dollar life insurance policy, so Jane was left as the primary beneficiary of the policy.  John and Jane had been diligent and finalized their estate plan while they were together.  While Jane was able to locate John’s will upon his death, John hadn’t updated the will after he and Jane got divorced.

When Jane first hired the attorney to probate John’s will, she was shocked to discover that the divorce decree had revoked her position as executor of John’s estate.   After contentious negotiations with John’s sister (whom Jane never liked), Jane was able to convince her to consent to Jane’s appointment as the Administrator CTA of the estate.  Jane soon realized that administering the estate was the least of her problems.  

Because John had decided to update his 401(K) beneficiary designation to split the retirement funds equally between his three children, Jane now had to petition the Court to appoint her as the Legal Guardian for financial purposes for all three children.  Prior to the hearing to appoint her as the financial guardian, her attorney told Jane to go ahead and get bond lined up for the guardianship accounts.  She nearly fell out of her chair when the bond agent quoted her $2,500 for the yearly bond premium as insurance that she would not steal from the One Million Dollars of retirement funds that John left the kids (bond premiums typically being .25% of the value of the assets). 

Since John kept only a few thousand dollars in a checking account and had no savings or stocks, the Estate was in a big cash crunch.  Jane ended up loaning the estate money from the insurance proceeds she had received upon John’s death to pay the mortgage on the house until it finally sold.

In the first year after John died, Jane spent approximately $10,000 in legal fees related to the Petition to probate John’s estate, the Petition for Legal Financial Guardianship for the kids, Inventory in both cases and Property Management Plans for both cases.  She also had to post bond at a clip of $2,500.  It got a little better the next year when she only incurred the $2,500 bond and an additional $2,500 in legal fees to file an Accounting in each of the Guardianships, which detailed every transaction that occurred from each Guardianship account (she spent 3 hours each month maintaining the spreadsheet and filing account statements).  

Jane found that she could expect the yearly $5,000 expense for legal fees and bond until her youngest child turned eighteen.  Her financial planner was tactful, but the financial forecast he printed for Jane’s yearly review really put her in the dumps.  The projection showed that her kids’ inheritance from their father would be reduced by over $100,000 in present value during the 15 years until the last Guardianship case and account could be closed.  Jane also spent countless hours going to court and communicating with attorneys over the estate and guardianships. Most of this expense and time could have been avoided with proper estate planning.

That’s terrible, but it would never happen to me, right?

It could – do any of the following apply to you?

• No estate planning?
• Real estate in only one spouse’s name?
• Bank account in only one spouse’s name?
• Divorced and have not revisited your estate planning?
• Life Insurance, IRA, 401(k), 403(b), ROTH IRA naming your minor children as a primary or contingent beneficiary?

If you have any of the above, your loved ones could suffer their own Estate Planning Horror Story

Lack of estate planning?

If you are married and have children, your assets will not automatically pass to your spouse unless they are held jointly or designated as payable on death.  Under Tennessee intestacy laws (the rules that apply if you die without a will), your spouse will be splitting everything equally with your children or receive one-third of your assets, whichever is greater.

If your minor children are set to inherit assets individually (and not in a trust), Tennessee law requires a legal guardianship for financial purposes for an adult to handle the assets until each child becomes an adult.  The guardianship requires bond and Court oversight including the review of Inventory, Accounting and a Property Management Plan – all of which are very expensive and time-consuming.

Real estate in one spouse’s name?

If one spouse owns real property in his or her name without the other spouse, the surviving spouse will have to hire an attorney to open an estate in order to get the real estate into the surviving spouse’s name.

Bank  or brokerage account in one spouse’s name?

If a spouse has a checking, savings, brokerage or any other taxable account in his or her name only, the surviving spouse will have to open an estate to get access to such an account.  Even if the funds in the bank account are negligible, it is still a shame to have money sitting in accounts that no one can access.  The easiest way to avoid this issue is to set up all accounts as either joint accounts with both spouse’s names or make the account payable on death (POD) or transfer on death (TOD) to the non-account-owner spouse.

Divorced and have not updated estate planning documents?

In Tennessee, your ex-spouse is removed from any positions they were appointed to in your Will prior to the divorce.

However, all beneficiary designations for retirement accounts and life insurance are not subject to this rule and must be updated or they will go to your ex-spouse if they remain as the primary beneficiary (unless otherwise indicated in the final decree of the divorce / MDA).

Life Insurance, IRA, 401(k), etc. naming minor children as primary or contingent beneficiary?

A legal guardian will have to be appointed by the court to watch over these funds until your children are 18.  This guardian will have to post bond, file an Initial Inventory and Property Management Plan, as well as yearly Accounting. This process can cost $10,000 for the first year and $5,000 each year thereafter. It’s not only costly, but also time-consuming.