“El Niño”, “Explosions!”, and “Trump says…” lead today's headlines.

Headlines such as those are virtually guaranteed to draw eyeballs. On the other han, "Check Your Beneficiaries!” probably would rank just below “See What Vegetables are Best For You” above tips for making paint dry faster.

Mundane topics may not create much ad revenue, but ignoring or misunderstanding them can blow up even the best laid plans. This week I share with you three such true stories of overlooked boring details that unexpectedly blew up seemingly good plans.

 

The PO-A

The young lady sitting at my desk was understandably upset. She had dropped of some paperwork at the front desk of the brokerage office with one of the clerks that worked the counter. The paperwork was properly completed and granted her Power of Attorney (POA) over her ill mother’s account. She had asked the clerk if “this will let me take care of everything?”

The clerk replied, “This will allow you to act in your mother’s place.”

The mother had subsequently passed away and the daughter had come back to the office to inquire as to what needed to be done to transfer her mother’s accounts into her name. The clerk reviewed the accounts and saw that there were no named beneficiaries on file. Absent beneficiaries, the clerk correctly informed the daughter that the IRA would be probated and that the assets could be distributed via the Executor. 

"But I have Power of Attorney!" she protested.

HAD POA. She learned belatedly that the power is only valid during the principal's (her mother) lifetime. That now presented other issues.

Problem one was that in her mother’s state of residence, California, the probate process was expensive. In this case, her $250,000 of assets in the accounts were going to cost about $8,000 to probate. The second was that without a named beneficiary the IRA would have to be distributed over a five year period, resulting in less opportunity for tax deferred growth and potentially higher income taxes being owed.

If beneficiaries had been named, all of those assets would have avoided probate and the associated costs. In addition, the assets could have been distributed over the beneficiary’s lifetime.

She had come to me to see if there was any alternative to avoiding the probate fees. I think I learned a few new words that day.

 

Guarding the Guardian

Kyle’s brother seemingly did everything right. He had an appropriate amount of life insurance with his spouse named as beneficiary and their two young children named as contingents. When the two of them died in a traffic accident, Kyle was named as the guardian of the kids’ interest in the estate.

When he contacted the life insurance company as guardian on the kids’ behalf to collect the insurance, they informed him that since the beneficiaries were minors that he would need to go to the county court to get approval for anything he wanted to invest the proceeds into for their benefit.

The judge at the county court told him he had two choices, invest the funds in US Government backed bonds or file an investment plan within 180 days that the court will review and approve or deny. Any subsequent changes to that plan must also be submitted to the court for pre-approval until the minors reach age 18.

When he protested that bond rates were too low and that he didn’t have time to go to all that trouble of coming back to court for approval of more suitable investments, the judge replied, “Your brother should have thought of that before naming minors as beneficiaries.”

Had Kyle’s brother set up trusts for children with Kyle named as the trustee, he would have been free to manage the assets for the kids as he saw best for their interest. Instead, those assets will remain in very low interest investments for years unless Kyle commits significant time and effort to convince the court otherwise.

Kyle had come to me for advice as to what was involved with getting approval from the court. We consulted a local estate planning attorney with experience in these matters who just laughed and said, "Oh it's easy to get approval, as long as you buy Treasury Bonds."

 

The Giddy “Ex”

“Hi, Jeff, you probably don’t remember but you helped me set up an IRA after my divorce a few years ago,” said the voice on the other end of the phone. “I’d like to come in to discuss investing some other money.”

Janice was giddy. Since her divorce, like many single parents, she had struggled to make ends meet. The IRA I had helped her establish was part of a Qualified Domestic Relationship Order (QDRO) where she received a portion of her ex-husband’s retirement account. She had subsequently withdrawn much of those funds to help make ends meet.

The reason for her joy? Her ex had recently passed away. She told me that she grieved the death of the father of her children, but she celebrated a seemingly small detail that had been overlooked by her former husband. When their first child was born 19 years earlier, he had taken out a 20 year term life insurance policy for $1,000,000. Janice had been named the sole beneficiary. He never changed that detail, even though he had remarried and had another child.

When I asked her if she felt sorry for his widow, all she could do is smile.

 

Have a Plan

The common thread in each of these true stories was missing a detail that lead to a blown estate plan. Purchasing a life insurance policy, writing a will, creating trusts, and even just naming proper beneficiaries, are all part of the estate planning process that should be included in any financial plan.

A good plan is like a road map. The route you take to your ultimate destination may need to change and you can consult the map whenever necessary. If the map becomes outdated, you may need to get a new one.

Final destinations are not frivolous details best left up to the clerk at a counter or the salesperson cashing the commission check. Once a plan has been created, it should be regularly reviewed and amended as priorities and circumstances dictate.

Have you reviewed your plan lately? Get in touch if you need to review some of those boring details.