Equalize It!

Mike and Carol have three adult daughters – Marcia, Jan and Cindy.  Each of them are married and have children as well.  When both of them die, Mike and Carol want to treat all three daughters equally.  In the event one of their daughters dies before, they want that daughter’s share to pass to that daughter’s children.

Mike and Carol have a house and bank accounts worth $600,000.  Mike has an IRA worth $900,000 from his years working as an architect with Mr. Phillips.  To make sure their wishes are carried out, they go to a local “elder law attorney”, James (“Jimmy”) McGill who they met at a local bingo night.  Jimmy prepares a Will whereby Mike and Carol leave their estates to one another, then to their daughters, with the provision that if one of them dies before Mike and Carol, then their share shall pass to their own children.  On his own, Mike completes a beneficiary designation form for his IRA naming Carol as his primary beneficiary and the three daughters as contingent beneficiaries.

Mike and Carol die within a few years.  However, Jan predeceased them.  Her cause of death was not clear, but her last words were, “Marcia! Marcia! Marcia!”

When it is time to administer the estate, the $600,000 from the home and bank accounts are divided equally among Marcia, Cindy and the children of Jan (who took Jan’s 1/3  share by representation per the Will).  However, when it was time to claim the IRA, the broker informed the family that this account would only be paid to Marcia and Jan.  It does not recognize the concept of per representation.

Thus, Marsha and Jan get $650,000 each while Jan’s children are to divide only $200,000.

This case underscores that competent estate planning transcends more than the four corners of a written will.  To make sure that one’s wishes are carried out, it is imperative to integrate estate planning documents to reflect the nature of assets which do not pass through a Will such as the aforementioned IRA, annuities and life insurance benefits.

It is possible that Mike could have changed his beneficiary designation for his IRA upon Jan’s death.  However, Mike failed to do so and such failure is far too common in life.

Proper estate planning should incorporate what is known as an equalization clause.  In short, this clause states that if any assets pass outside of probate to any of the beneficiaries of the estate, then the Executor of the estate can adjust the shares of the beneficiaries from the probate assets accordingly.  Thus, in this case, everyone could have been treated equally.  Marcia and Cindy would get $50,000 each from the probate estate and the balance of the estate would have been divided among Jan’s children.  By doing so, everyone would have been treated equally and received $500,000.

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