Failure to Plan is a Disaster for Clients and their Advisors

Savvy planners know that failing to plan is not desirable. Benjamin Franklin is often quoted, “If you fail to plan, you are planning to fail.” Few planners would guess how many of their clients might not have a plan in place. According to a recent survey by Harris Poll, 64% of Americans do not even have a will. Here’s a link to an article in USA Today which discusses the survey. Many would guess their wealthier or more sophisticated clients would not be among those without a plan. But, even wealthy, sophisticated clients can fail to plan.

Sonny Bono is an example of a failure to plan. Sonny Bono was wealthier than average, with an estate estimated at $15 million. He was not unsophisticated. He served as mayor of Palm Springs, California, and later as a member of Congress. He had also been a restauranteur and had his start as an entertainer. Perhaps he was most famous as half of the duo Sonny and Cher (with his second wife). Yet, he had no plan. So, when he died in a skiing accident in 1998, he died intestate.

At the time of his death, Bono was married to Mary (Whitaker) Bono, his fourth wife. He had four children, Christy (with his first wife, Donna Rankin), Chaz (born Chastity)(with Cher), Chesare Elan and Chianna Maria (with his fourth wife, Mary (Whitaker) Bono).

During the intestacy proceeding, another person came forward and claimed to be another of Bono’s children. The estate settled the claim out of court.

Certainly, Bono’s advisors would never have guessed that he was intestate. Yet, he was.

In addition to probate fees that can run well into six figures for an estate of that size, there are many other disadvantages to having your client’s estate go through intestacy and probate as a result of the failure to plan.

Probate is a public proceeding. Thus, your client’s financial life becomes an open book. The public could know the decedent’s net worth and the value of each asset in the estate. That might include real estate, a closely-held business, stocks, bonds or other assets. Not only does all that information become public, but so does the identity of the recipients.

Upon the death of their loved one, the family already has enough to worry about. But, with the public probate process, they are likely to be subject to many solicitations. Some of those solicitations may be merely annoying, others may be unscrupulous.

They family is likely to receive numerous solicitations from realtors, financial planners, brokers, insurance agents, and other professionals who would know how much each family member inherited. Even the nosy neighbors would know the family’s business. They would know of the child the client had out of wedlock or other information which the family might prefer kept private.

Intestacy means the client is leaving their assets in the manner decided by the legislature of their state of residence. Perhaps that’s exactly how the client would have wanted to dispose of their assets. That is extremely unlikely for many reasons.

The dispositive scheme set by the state legislature typically provides for an outright distribution. An outright distribution would be inappropriate for many beneficiaries. A minor beneficiary would require a guardianship or conservatorship, the expenses of which would eat away at the assets. An outright distribution of assets to a special needs beneficiary would result in them losing benefits unless they put those assets in a Special Needs Trust. Even then, at the beneficiary’s death, the trust set up by or for the special needs beneficiary (with assets inherited by the special needs beneficiary outright) would have to reimburse the state for benefits prior to distributing to the beneficiary’s surviving family or other beneficiaries. On the other hand, if the decedent had directed the assets to a special needs trust for the beneficiary, the trust would not have to reimburse the state at the beneficiary’s death.

If the assets were distributed outright to the beneficiaries, this could prove problematic, even if the beneficiary were not minors or special needs beneficiaries. The beneficiary might not be able to manage their money due to a variety of reasons. The beneficiary might have addiction issues or simply might be irresponsible with money. If the assets go outright, there is no protection for the beneficiary. On the other hand, if the client leaves the assets in a trust with someone else as the trustee, the trustee could manage the funds and distribute to the beneficiary as appropriate. If the assets are not dissipated, then advisors might be able to assist the trustee in the preservation and growth of the assets.

Even for a responsible beneficiary, it may be desirable to leave assets in trust. Leaving the assets in trust can protect those assets from a future divorce by the beneficiary. Further, a trust could protect the assets from creditors of the beneficiary.

As discussed in last month’s alert, retirement assets comprise a large portion of most Americans’ total wealth. If there is no plan and retirement assets have no designated beneficiary, then they will be forced to be distributed much more rapidly than otherwise required. This would result in an unnecessarily rapid diminishment of the assets due to income taxation.

Even if a beneficiary is named, assets are still not protected from creditors of the beneficiary. In Clark v. Rameker, the U.S. Supreme Court ruled that asset protection for retirement assets under bankruptcy law does not extend to inherited retirement assets. If a trust providing creditor protection for the beneficiary were designated as the beneficiary, the assets could be protected from creditors.

Protect your client and their assets by encouraging them to plan.