In our ongoing series on how to make your life and death easier to deal with, today we write about how to pick out your beneficiaries and what can go wrong when you do.
Let’s say you have only one child, a daughter, and you are leaving everything to her. When you die, if she’s the trustee and she’s getting everything, then the trust administration becomes a paperwork drill. As long as your daughter pays off your creditors and deals with federal and state income taxes properly, then transferring the assets to her is just a matter of paperwork. If you have two or more children and they get along, it can be just as easy.
But what if you have other beneficiaries? You’re a generous person, right? So you decide to graciously leave some of your life savings to charity, let’s say ten percent, divided equally among ten different charities, worthy causes all. This is not such a good idea, because you have just made your daughter’s job a lot more complicated.
A beneficiary who is entitled to a percentage or fractional share of your trust is entitled to an accounting of every last financial transaction during the trust administration, balanced down to the last penny. As a rule, charities don’t waive the accounting. So instead of being a simple paperwork drill where your daughter and be a little fast and loose with expenses, as it’s all going to her, she has to be very organized and she’ll probably have to hire a bookkeeper to prepare an accounting - which isn’t just a simple check register. It’s double-entry accounting and unless your daughter is a bookkeeper or CPA, she doesn’t know how to do it.
So what do you do? Leave nothing to charity? No, go ahead and be generous. Instead, leave each charity of your choice a fixed dollar amount. If your trust leaves $10,000 to the puppies and kittens, all they want is a $10,000 check, and when they get it you’ll receive their thanks and your daughter will remain on their mailing list for life, but she won’t have to give them an accounting, because they won’t care.
The same applies to modest gifts made to grandchildren or more distant relatives. Leave them a dollar amount and the math will be easy. If you are concerned about losing everything before your death and leaving nothing to your daughter, your trust could say something like “$100,000 or 10%, whichever is less.” Your daughter may not get out of an accounting that way, but doing this will make sure that she gets what you want her to receive.
You should also pay close attention to the needs of your beneficiaries. If you have a disabled child, then he or she likely needs a Special Needs Trust to preserve his or her eligibility for Supplemental Support Income (SSI) and Medi-Cal benefits. If you have a child who has a substance abuse problem, then you should consider leaving that child’s share in a trust, instead of being distributed outright where he or she may use it to buy drugs. Your child’s trust could even have a provision allowing the trustee to restrict distributions unless and until the beneficiary passes a drug-screening test.
All of this is why it’s important, when you meet with your attorney, to fill him or her in on all of (or most of) your family secrets. Your neighbor doesn’t need to know that your son can’t save a dime to save his life, but your lawyer should know, so you can get the best estate planning advice possible.
Len & Rosie