Your estate might need a Plan B.
When you’re drawing up a will, the assumption is typically that you’ll be the first to die; your assets distributed to a spouse, children, grandchildren and other loved ones. But accidents and crimes can claim several lives in one swoop.
And as several recent celebrity deaths highlight, it’s not unheard of for loved ones to die in close proximity — Carrie Fisher passed away a day before her mother, Debbie Reynolds, while Zsa Zsa Gabor’s son died a week after she did.
Without proper preparation, those kinds of situations could snarl your estate plan, potentially reducing the value of assets you bequeath or putting them in the hands of people you never intended to receive them.
“This is the nuts and bolts of designing wills and trusts,” said Larry Lehmann, president of the National Association of Estate Planners and Councils. “The aim is to never leave it up to chance or to state intestacy laws.”
Most consumers would benefit from more detailed succession planning, and experts say it’s especially important for high net worth individuals, those in second marriages, those with few intended heirs and people whose heirs include either very young children or someone with special needs.
Some of the elements you may want to consider:
Simultaneous death clause
When two parties with intertwined estates die in the same event or accident, it’s not always possible to determine who died first. That can lead to some confusion over who gets what; for example, in a married couple that each named the other as the primary beneficiary.
So-called simultaneous death clauses specify which person should be deemed to have died first, which can be an important consideration for estate taxes and the ultimate direction of the bequests, said Russell Fishkind, an attorney with Saul Ewing in Princeton, New Jersey.
“The simultaneous death clause should fit like a glove,” he said — there needs to be one spouse designated as the first to die, and the other as the second to die.
Without that language, your estate might be subject to the Uniform Simultaneous Death Act that some states have adopted, Fishkind said. That sets out that if two or more people die within 120 hours of one another and no other will or document has planned for that situation, each is considered to have predeceased the other. (So in the case of that married couple, the husband’s other heirs would get his estate as if the wife had predeceased him, and the wife’s other heirs would get her estate as if the husband had predeceased her.)
Specify in your will that “all bequests are subject to the condition that the legatee survive me” by a particular period of time, said Lehmann, who is also a partner at Lehmann Norman & Marcus in New Orleans. Depending on the laws in your home state, you may be able to set a term of up to several months, he said.
The net effect of such a clause is that if an intended heir dies shortly after you do, the asset passes as if that person had died before you, he said. It goes directly to your contingent beneficiary instead. That could help curtail the financial consequence of an asset being included in two estates in rapid succession, like estate taxes or a second round of probate expenses, and help you better direct where an asset ends up.
“Most wills should have — I call them default beneficiaries, but it’s essentially Armageddon,” said Fishkind, who is also the author of “Probate Wars of the Rich & Famous.” “What happens if all the beneficiaries predecease you?” (Some planners also call this an “all-dead” or “Titanic” clause.)
Note in your will whether there’s a point — even three or four heirs deep — that you’d rather have an asset pass to an entity like your alma mater, church or a favorite nonprofit rather than a very distant relative.
Watch those beneficiaries
Insurance policies and qualified retirement plans, among other assets, pass automatically to the named beneficiary on that account, regardless of what your will dictates, said Lehmann. Name a primary and a contingent beneficiary on such accounts, and keep those up to date.
Be cautious about naming your estate as a contingent beneficiary. That could have unintended consequences, he said — for example, an IRA that passes to your estate could be liquidated immediately for distribution, eliminating the tax advantage of having a younger relative inherit it. It may be better to have an asset pass to a trust that could distribute income to beneficiaries.
Consider how jointly owned assets are titled. Couples often opt for “joint tenancy with right of survivorship” or “tenancy by the entirety” to avoid probate, but that can be problematic in simultaneous death cases, Fishkind said.
Say, for example, that spouses in a second marriage — each with adult children from prior relationships — die in a car accident. Their jointly owned house ends up in the estate of whichever spouse was deemed to have died second, he said, effectively cutting out the first-to-die spouse’s kids from inheriting a share of that asset.
Retitling such assets as “tenants in common” allows the interest of each co-owner to pass according to your will, Fishkind said. That brings back into play any simultaneous death clause or survivorship provisions.
Decide how your estate will be distributed if a beneficiary with children dies before you do, Lehmann said. Dividing an estate “per stirpes” means each of that deceased beneficiary’s heirs will split his or her share. Other wording might limit inheritance only to named beneficiaries in a particular class (meaning you’d effectively shut out a deceased child’s children), or split the share by person (so if your two children predecease you, your five grandkids could divide the estate five ways).
When your Plan B beneficiary is a minor or an individual with special needs, think about whether it might make sense to have that money put in trust for their benefit rather than be awarded directly to them, Fishkind said. That could help ensure the money isn’t squandered, or negatively impacts any government benefits that individual might be entitled to receive.