Here, I’m going to discuss the drawbacks of “I love you” wills and introduce you to the estate planning move that’s actually going to ensure you do well by your loved ones: a lifetime beneficiary trust.
Rise above the misconceptions
No aspect of estate planning brings out as much emotional decision-making as the division of assets. Many people think, “I love you,” so I’ll leave you everything. In order to understand why “I love you” wills are, contrary to their name, not the most caring of estate planning gestures, it’s important to understand the risks of “I love you” wills.
Simply, an “I love you” will is a common name for a will in which the Grantor leaves all of his or her assets outright to his or her surviving spouse. Many people consider or even use this approach because they think that leaving assets in trust shows they don’t trust their spouse. They may also think that a lack of federal estate taxes protects their assets from getting into the wrong hands. Sadly, many people also think that a will can be used to avoid probate. Unfortunately, none of these things are true.
Understand why “I love you” wills aren’t effective
Let’s assume for a moment that you want to ensure your spouse gets access to your wealth upon your death. If all you have completed is a simple “I Love You” will, your spouse (or whomever you designated as your Personal Representative) will have to open a court proceeding, called, Probate, in order to validate your will and transfer your assets. Depending on how your will was written, your Personal Representative may have to post bond. Obtaining a Bond requires credit worthiness so if your Personal Representative has a credit problem, the Court may not allow that person to act and will appoint a Professional Fiduciary to act as your Personal Representative if a successor was not named. In such case, that Personal Representative may not act according to what you had ultimately wanted if it wasn’t spelled out.
Once your spouse receives the assets, which could take years in the Probate Court, the assets are distributed outright. An outright distribution of assets has many disadvantages, which are listed below. With your spouse holding all of the assets outright, his/her estate plan will eventually control the distribution of whatever assets are left at her death – assuming proper estate planning was done, otherwise, an additional probate would be opened at his/her death. If estate planning was completed, s/he has the right to alter his/her plan at any time and any verbal agreements that you two may have had are not enforceable and your wealth may end up in the hands of someone else, rather than your children or other beneficiaries.
Disadvantages of outright distributions include:
- You could inadvertently disinherit your children. If you use an “I love you” will, your assets are now in your spouse’s hands for him/her to leave however s/he wants. For example, your spouse could leave the assets to his/her own kids, a charity, a lover, or a new spouse. Likewise, assets left outright to children could be lost in a divorce.
- Basic planning with outright inheritance sets your heirs up for asset protection issues. Once your assets are owned outright by your beneficiaries through a direct inheritance, those assets can be seized by creditors, divorcing spouses, or lost in bankruptcy. Even if your estate is below the exemption for the death tax, predatory creditors and lawsuits could still spell trouble.
- These wills still have to go through probate. Surviving spouses do not receive an exemption from probate. Even a simple will still has to go through the process, which you may not be anticipating — especially if you had hoped to keep the details of the will private. If you end up in Probate, the matter becomes public record. Trusts, however, don’t need to go through probate and all of your assets will pass according to the Trust as long as those assets are titled to your Trust.
- An “I love you” will does not protect against guardianship or conservatorship court involvement for you or for your beneficiaries. For example, if you leave all of your assets to your spouse and s/he develops dementia, the entire estate (existing assets plus the inheritance s/he received from you) could be under the control of a guardianship or conservatorship court.
- Basic plans pile more assets into survivors’ estates. Although portability between spouses can help, it still doesn’t prove useful with the generation-skipping transfer tax (GSTT). Portability isn’t available for non-spouse beneficiaries. While at this point in time, having a taxable estate affect a very narrow group of people with very high net worth; however, we don’t know yet what will happen with tax policy under the new Trump presidency. In a changing tax policy landscape, keeping yourself as informed as possible is an important tactic for ongoing success.
Explore lifetime beneficiary directed trusts
Comprehensive, trust-based estate planning with lifetime beneficiary trusts is a better option than outright inheritance for surviving spouses, children, grandchildren, or other beneficiaries. If you leave your assets in lifetime beneficiary trusts, you retain control over where assets end up in the long run. Plus, your beneficiaries obtain robust asset protection features that can keep wealth safe from courts, creditors, and divorcing spouses. Your family’s private information can stay out of public record. You can also take advantage of more sophisticated tax planning than you can with a basic will or trust with outright distributions.
With proper planning now, you can focus on enjoying your life without worry about what could happen in the future. Now that’s something to love and truly expresses “I love you” to your beneficiaries. Feel free to contact me and I can share some stories about people who neglected to plan and you can let me know if that is something that you want your family to experience. I look forward to working for your best interests now as well as down the road.