Why Your Last Will Might Not Accomplish What You Want
By Nevin Beiler, Attorney
A large part of my law practice is preparing Wills and sometimes Trusts for people of all ages. Young couples are often concerned about having a plan for guardianship of minor children, or that ownership of a business would pass to a surviving spouse if one spouse would die. Older people are usually more concerned about appointing executors and ensuring the fair and orderly distribution of their assets after they pass away. Whatever stage of life we are in, having a current Will is a good idea.
What many people don’t think about, however, is that Wills have limitations. People often think that whatever their Will says is what will happen to their stuff after they die. However, that is not always true.
I recently observed a situation (with which I was unable to assist because of the distance from my office) that illustrates how things can go wrong even when a person’s Will appears to say what the person wants to happen after they die. I have substantially changed some of the facts of the following story to protect confidentiality, but the illustration is true to life.
There was a middle-aged man who was an only child, and who was in charge of settling his father’s estate after the father died. The father owned a duplex property jointly with his younger sister (the son’s aunt). When they originally bought the duplex, the father thought that he’d like his sister to get the whole duplex if he and his wife died before the sister did.
The sister had never married, and she lived in half of the duplex. Some years later, after his wife had died, the father decided that he wanted his son to receive his share of the duplex when he died, so he wrote a will that directed that his share be given to his son, not his sister. He did not inform his sister of this. The trouble was, the deed for the duplex included the words “joint tenants, with right of survivorship.”
Also, the father wanted to leave a portion of his IRA account, which totaled a little over $200,000, to his sister, and the rest to his son. The father told this to his IRA custodian, who helped him sign a beneficiary designation that directed that when he died 25% of the IRA should go to his sister, and the rest to his son. The father also later told his attorney that he wanted $50,000 to go to his sister, with the intention that it come from his IRA account, so the attorney wrote in the father’s Will, “I give $50,000 to my sister. This amount may be withdrawn from my IRA account.” In addition to the duplex and the IRA account, the father died with about $90,000 in his checking account.
As far as the father was concerned, his plan was clear and exactly how he wanted it. The Will stated that the son would get half of the duplex, and both the IRA beneficiary designation and the Will indicated that the father’s sister would get $50,000, to be paid from the IRA account. The son would get everything else. But as we’ll soon see, things were not going to work out as the father had planned.
What many people don’t realize, or perhaps just fail to think about, is that a Will does not necessarily direct what happens to everything that a person owns. Actually, there are many things that people commonly own that might not pass according to the direction of their Will when they die.
For example, a house that is jointly owned with a right of survivorship automatically passes to the surviving owner when one owner dies. This is what happened in our story, meaning that the sister automatically became the owner of the whole duplex, instead of the son getting half of it like the father’s Will stated. The duplex was simply not subject to the directions of the Will. Instead, it passed automatically based on the language in the deed.
Another example is an IRA account, and some other types of investment accounts. These often are transferred by a beneficiary designation that an account owner signs, rather than by the account holder’s Will. In our story, the father signed a beneficiary designation that left 25% of his IRA account to his sister. This was not necessarily a wrong thing to do. In fact, naming beneficiaries of an IRA account can sometimes be a good thing for tax purposes. However, the father also stated in his Will that his sister should get $50,000 from his estate, with only a suggestion that the funds could come from the IRA account. This was likely a mistake in drafting the Will.
The son thought, and I agreed with him, that the father probably meant to leave just a total of $50,000 to the sister, not 25% of the IRA account plus $50,000 through his Will. However, the way things were written, the sister appeared to be legally entitled to both 25% of the IRA and $50,000 from the Will.
To make matters worse, the Will contained a generic tax clause that stated that all inheritance taxes owed by the estate, including for transfers not affected by the Will, must be paid from the residue of the estate. This meant that all the tax due on half the value of the duplex, and all the money going to the sister, was to be paid from the portion of the estate that the son was supposed to receive.
Now for the math. The value of the duplex was $220,000, meaning that the taxable portion (50%) was $110,000. The $50,000 gift stated in the Will and 25% of the IRA account totaled about $100,000, meaning that the total value going to the sister was about $210,000. The inheritance tax rate for transfers to siblings in Pennsylvania is 12%. Multiplying $210,000 times 12% equals $25,200. Plus, the son needed to pay taxes on his $150,000 share of the inherited IRA account and his $40,000 share of the father’s checking account, which at the 4.5% rate for children, would be about $8,000. From the $90,000 in the father’s checking account, the estate was expected to pay $50,000 to the sister (to satisfy the gift written in the Will) and about $33,000 in taxes. After funeral costs and estate administration expenses, there wasn’t going to be anything left for the son other than his $150,000 share of the inherited IRA account, which would also be subject to income taxes if he chose to withdraw any of it.
In total, the father’s sister would be receiving value of about $210,000, while the son would be receiving value of about $150,000. But from all the evidence, it appears that the father’s intent was for his sister to receive $50,000, and for his son to receive the rest, which would have been assets worth about $321,000 for the son. The son was not too pleased when he discovered this. He shared with me about how his father had been determined to make things clear and simple for his heirs by writing a Will that expressed his final wishes. Unfortunately, the father’s goal would not be accomplished.
The son tried to explain the situation to his aunt and propose an alternate settlement arrangement, but their relationship was not very close, and was sometimes cold. She was on a limited income, and was very reluctant to give up anything that she thought she was technically entitled to receive. Plus, she had all along been expecting to receive the father’s half of the duplex if she lived longer than him, because of the right of survivorship in the deed. And even if she agreed to give half of the duplex to the son, the higher tax rate (12% instead of 4.5%) would still apply, as well as real estate transfer taxes.
There is a lesson you can learn from this story, even if the unique facts do not apply directly to you. Where the father (and his attorney) messed up was failing to coordinate his Will with the ownership and beneficiary designations of his assets. The father should have owned the duplex as “tenants in common” with his sister if he wanted to be able to pass on his half of the property to his son through his Will. Also, he should have listed the $50,000 gift to his sister in just his Will or just his IRA (not both the way he did). Or, he should have made it clear in his Will that if he left money to his sister in his IRA that the gift to her in the Will should be disregarded or reduced.
When you have your Will prepared, it is important to understand which assets will be directed by your Will, and which assets will be directed by another means, such as by right of survivorship or a beneficiary designation. When these issues are known, your overall estate plan can address them properly. For this reason, it is important that your estate planning attorney knows the following information:
- How your real estate is titled. For example, whether you own property individually, jointly with your spouse, jointly with someone else, etc.
- Whether you have any financial accounts that are owned jointly with any person other than your spouse.
- Whether you have any financial accounts (such as IRAs or other investment accounts) that have beneficiary designations.
By paying attention to which assets pass according to the directions of your Will, and which assets are directed in other ways, you and your heirs can avoid the disappointment and confusion faced by the son in our story. Otherwise, your Last Will might not accomplish what you want.
Nevin Beiler is an attorney licensed to practice law in Pennsylvania (no other states). He practices primarily in the areas of wills & trusts, settling estates, and business formations & agreements. Nevin and his wife Nancy are part of the conservative Mennonite community, and Nevin previously served as the in-house accountant for Anabaptist Financial before leaving to become an attorney. Nevin’s office is located at 105 S Hoover Ave, New Holland, PA, and he can be contacted by email at firstname.lastname@example.org or by phone at 717-287-1688. More information can be found at www.beilerlegalservices.com.
Disclaimer: This article is general in nature and is not intended to provide specific legal or tax advice. Please contact Nevin or another attorney licensed in your state to discuss your specific legal questions.