By: Frank Armstrong
By: Frank Armstrong, CFP, AIF
Every once in a while, a tragedy reminds us that simultaneous deaths do happen. While rare, my experience has shown that few couples have prepared for the possibility.
Let’s look at a typical case of a young couple with minor children, Mark and Mary. They each have some pension assets, and some insurance coverage. Between them they do not have a net worth that would put them into an estate tax problem. They have named each other as beneficiaries in their wills, and for their retirement plans and insurance. Each names the other as guardian for their children. They feel pretty good about their estate planning. But, like most young couples, they haven’t considered what might happen in the case of a simultaneous death. What might they have overlooked? What problems would their heirs face if they get run over together by a steamroller while returning from shopping next Saturday? Let’s presume that Mary lives five minutes longer than Mark.
Under Mark’s will, and because Mary is named beneficiary of the pension plan assets and insurance, Mary gets everything. Mary becomes the guardian of the children. This might have been the ideal solution if Mary had survived. Probate costs are minimal, and taxes are not a problem.
But, upon Mary’s death things go rapidly down hill. Mark is not alive to inherit Mary’s estate. Mary might as well not have had a will. For all practical purposes, she is intestate.
All of Mark’s and Mary’s insurance proceeds will be paid to Mary’s estate. Probate costs will be grossly inflated.
All of the Pension and IRA assets will have to be distributed within five years of their deaths accelerating the income tax that otherwise could have been deferred.
The courts will have to step in to appoint guardians for their children. Mark and Mary will not be able to choose who raises their children.
Because minors are not allowed to own property or handle their own finances, a guardian will administer the entire proceeds of the estate under court supervision. Guardianships are expensive and restrictive. Believe me, you don’t want to go there.
Perhaps as bad, as soon as each child reaches the state age of majority, they get all the remaining funds. To put it kindly, this is often not a good thing for young people. Too much money too young with no guidance attached could be a disaster.
So, how do you prevent this disaster?
Name a guardian to raise the children in the event of the death of both parents. The guardian’s function is to raise and care for them as you would if you were alive. So, chose a person that shares your values, and has a relationship with your children. Of course, you should discuss this appointment with them in advance.
Establish a contingent trust under each will. This trust would only come into effect in the event of both party’s deaths. The trustee should have a good feel for money management, and need not be the same person as the guardian. The trustee might be an institution, or close family advisor or friend. The trustee and guardian will work together to provide for your children.
The trust might provide for distribution of proceeds to the children at a later age than provided by state law. A trustee can manage your assets for the benefit of your children until they are old enough to handle their own affairs.
Name the trust as contingent beneficiary of all life policies, and pension benefits. The trust should be written so that pension benefits need not be forced out prematurely if they are not a trivial amount of the couple’s net worth.
In the will, name the trust as contingent beneficiary of any liquid assets that the couple hold such as savings accounts, CD’s, brokerage accounts and/or the proceeds of any real estate sales.
If Mark and Mary rearrange their affairs as we have suggested, they will get to pick their children’s guardian, their probate fees and administrative costs will shrink dramatically, the children’s funds can be invested much more effectively and economically, the funds can be held until they are responsible enough to accept them, and pension assets will not be forced into premature distribution.