What Is a ‘Residuary’ Estate?

Sometimes lawyers use words and people don’t know what they mean.  We’ll get carried away explaining complicated legal concepts, ideas, laws, or the beauty of the work we’ve done for clients, only to forget we never defined our terms and the client has no idea what we are talking about.  One common example in estate planning is the “residuary estate” or “residuary clause”.  This blog will address both what that is its relevancy in your estate plan. This is also partially inspired by an article from earlier this year entitled  “How to Write a Residuary Estate Clause in a Will” from yahoo! although be wary as it has some mistakes.

You can also find the definitions of other common terms here:  https://galligan-law.com/common-estate-planning-terms/

The residuary estate is also known as estate residue, residual estate and can also be referred to trust residue or trust estate in that context. It simply means the assets left over after final debts and expenses have been paid and specific distributions are made. It is the general, catch all beneficiary designation of the estate plan.  For the purposes of this blog I’ll talk about it in a will, but it applies to trusts as well.

I’ll use myself as an example.  Let’s say that my wife and I have wills.  The wills don’t control all of our assets, as things like life insurance and retirement plans will be distributed directly to named beneficiaries.  The wills leave everything to the other upon the first of us to die.  If spouse is already deceased (let’s assume I survive because it’s my blog), then I may leave $10,000 to a friend, $50,000 to a charity, my pet to the trustee of a pet trust, a favorite book to my brother and the rest goes to my kids.

In my estate, my executor would pay my final debts and expenses (funeral, medical, final bills, etc), and make the specific distributions which are the money to the friend, charity, pet to the trust and book to my brother.  Whatever is left is the residuary estate, and that’s what goes to my kids.

Now, that assumes competent estate planning.  I would arrange the beneficiaries of my life insurance and retirement plans to coordinate with my wills and other assets to flow through my will because I want them to go to the beneficiaries of the residuary estate.  However, the residuary estate clause of the wills can be disrupted, either deliberately or unintentionally, by common mistakes often made without advance planning.

Here’s some examples of how that happens:

  • You forget to include appropriate assets in your plan to generate the residuary estate.
  • You have accounts that naturally pass outside of the will (e.g. life insurance and retirement) and the beneficiaries aren’t coordinated with the will.
  • You use too many transfer on death designations which take property away from the residuary estate. (This is a very common mistake)
  • If you acquired new assets after making the will that disrupt the flow and plan.
  • Someone named in the will dies before you or is unable to receive the inheritance you left for them.
  • You don’t do your own advanced long-term care planning and the assets which would create the residuary are all spent.
  • You lose the value of the residuary estate to the creditors of the beneficiaries or to the government if a beneficiary is using government benefit.
  • The will has inequitable tax planning that requires the taxes owed on my distributed outside of the will to be paid from the residuary estate.

Speak with an experienced estate planning attorney to determine how to structure your estate plan and assets to ensure the residuary estate and other assets go to the beneficiaries you wish while avoiding the pitfalls.

Reference: yahoo! (Dec. 4, 2022) “How to Write a Residuary Estate Clause in a Will”

Continue ReadingWhat Is a ‘Residuary’ Estate?

Do TOD Accounts Mean I Don’t Need an Estate Plan?

Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones because it will avoid probate.  They often do this at the suggestion of bankers or financial professionals, and they believe it avoids the need for having a trust or even a will.  However, the article “TOD Accounts Versus Revocable Trusts—Which Is Better?” from Kiplinger explains how it really works.

The TOD account allows the account owner to name a beneficiary on an account who receives funds when the account owner dies. The TOD is often used for stocks, brokerage accounts, bonds and other non-retirement accounts, and is akin to having a beneficiary named on the account.  It’s worth pointing out that I’m using TOD as a general term here, the specific term might be different for different types of assets.  For example, a POD, or “Payable on Death,” account is usually used for bank assets—cash.  You can find more information about pitfalls of beneficiary designations here.  https://galligan-law.com/common-mistakes-made-on-beneficiary-designations/ 

The chief goal of a TOD or POD is to avoid probate. The beneficiaries receive assets directly, bypassing probate, keeping the assets out of the estate and transferring them faster than through probate. The beneficiary contacts the financial institution with an original death certificate and proof of identity.  The assets are then distributed to the beneficiary. Banks and financial institutions can be a bit exacting about determining identity, but most people have the needed documents.

There are pitfalls. For one thing, the executor of the estate may be empowered by law to seek contributions from POD and TOD beneficiaries to pay for the expenses of administering an estate, estate and final income taxes and any debts or liabilities of the estate. If the beneficiaries do not contribute voluntarily, the executor (or estate administrator) may file a lawsuit against them, holding them personally responsible, to get their contributions.

If the beneficiary has already spent the money, or they are involved in a lawsuit or divorce, turning over the TOD/POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.

Very frequently, naming a TOD/POD beneficiary in an estate that otherwise expects to go through probate (i.e. a will-based estate plan) leads to having non-liquid assets such as a house which cost money to administer, and no money with which to do so.

If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD/POD assets may put their eligibility for those benefits at risk.  This is a very, very common problem when a loved one has a disability.

Very simply too, beneficiaries under TOD/POD accounts can predecease an owner with no meaningful way to handle contingencies.  If that happens, the asset will be subject to probate which will negate their advantage, and may not go to the proper beneficiaries.  Utilizing trusts can solve that problem.

These and other complications make using a POD/TOD arrangement riskier than expected.

A trust provides more benefit to the trustor (creator of the trust) and in fact can work in conjunction with TODs as part of a complete, integrated plan.  Trusts address control of assets upon incapacity because trustees will be in place to manage assets for the trustor’s benefit. With a TOD/POD, a Power of Attorney would be needed to allow the other person to control of the assets. The same banks reluctant to hand over a POD/TOD are even more strict about Powers of Attorney, even denying POAs, if they feel the forms are out-of-date or don’t have the state’s required language.  People often don’t think of trusts as part of incapacity planning, but this is often a benefit to a trust-based plan.

Similarly, trusts (whether an asset named the trust as beneficiary of a TOD/POD or if it owns the assets themselves) can address contingencies.  So, if a beneficiary has a disability, potential divorce, creditors, predeceases the owner, or virtually any other reason for them not to directly receive money, the trust can provide for what happens under all of those contingencies.

Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries, and if you chose to avoid probate, to do so in a way that will work for all of your assets and to avoid problems created by solely using TOD/POD accounts.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts—Which Is Better?”

Continue ReadingDo TOD Accounts Mean I Don’t Need an Estate Plan?

Do You Need Power of Attorney If You Have a Joint Account?

Clients often, sometimes at the suggestion of their bankers, add names onto accounts to make money accessible upon the incapacity or death of a parent.  This often leads them to assume they don’t need a Power of Attorney (POA), and they don’t realize that Powers of Attorney are designed to permit access to accounts upon incapacity of a parent. There are some pros and cons of doing this in either way, as discussed in the article “POAs vs. joint ownership” from NWI.com.

The POA permits the agent to access their parent’s bank accounts, make deposits and write checks.  However, it doesn’t create any ownership interest in the bank accounts. It allows access and signing authority.  This is usually what individuals are thinking of when they create these accounts.

If the person’s parent wants to add them to the account, they become a joint owner of the account. When this happens, the person has the same authority as the parent, accessing the account and making deposits and withdrawals.

However, there are downsides. Once the person is added to the account as a joint owner, their relationship changes. As a POA, they are a fiduciary, which means they have a legally enforceable responsibility to put their parent’s benefits above their own.  As an owner, they can treat the accounts as if they were their own and there’s no requirement to be held to a higher standard of financial care.  You can see the following article for more on this point.  https://galligan-law.com/effect-of-adding-someone-to-your-bank-account/

Because the POA does not create an ownership interest in the account, when the owner dies, the account may pass to the surviving joint owners, Payable on Death (POD) beneficiaries or beneficiaries under the parent’s estate plan.

It also avoids the creation of a gift, which may have estate tax or Medicaid ramifications.

If the account is owned jointly, when one of the joint owners dies, the other person becomes the sole owner.

Another issue to consider is that becoming a joint owner means the account could be vulnerable to creditors for all owners. If the adult child has any debt issues, the parent’s account could be attached by creditors, before or after their passing.  I worked closing on a case with the opposite scenario, a creditor a parent collected money that otherwise would have gone to the children.

Most estate planning attorneys recommend the use of a POA rather than adding an owner to a joint account. If the intent of the owners is to give the child the proceeds of the bank account, they can name the child a POD on the account for when they pass and use a POA, so the child can access the account while they are living.

One last point: while the parent is still living, the child should contact the bank and provide them with a copy of the POA. This, allows the bank to enter the POA into the system and add the child as a signatory on the account. If there are any issues, they are best resolved before while the parent is still living.

Reference: NWI.com (Aug. 15, 2021) “POAs vs. joint ownership”

Continue ReadingDo You Need Power of Attorney If You Have a Joint Account?