Estate Planning, Financial Planning

Don’t Underestimate the Importance of Proper Estate Planning

In my profession, every once and awhile you come across a situation that makes you sick to your stomach…I just had one. Despite the number of red flags in this situation, my intent is not to critique another advisor’s strategy–I won’t have to because the flaws with the strategy will be obvious. Instead, I want to stress the importance of making sure your estate planning documents (will, trust, etc.) are up to date and match your goals.

Allow me to paint you a picture: A recently widowed grandmother came to me and explained her frustration with her late husband’s trust. After speaking with the advisor in charge of the trust, she learned the accounts established to fund their grandchildren’s college education would no longer be accessible for those needs. Instead, the accounts would be used to generate her survivorship income–$900 a month she does not need. While her survivorship income is important, there are other assets in the trust to generate enough income for her to live comfortably–the accounts earmarked for college are not needed for her income, nor were they intended to be. Since I was not in the meetings when the strategy for funding the grandchildren’s college was created, I do not know exactly what was discussed, or what was disclosed, but I am fairly confident the current situation was not a part of the client’s goals.

So, how did this happen?

First, instead of using 529 plans, with a successor-owner designated, to fund the college expenses, two separate variable annuities were established with a trust as the primary beneficiary. Had the deceased grandfather lived long enough to see the grandchildren through college, the annuity driven strategy probably would have accomplished the goal; it may not have been the most efficient, or cost effective, but it would have gotten the job done.  But, life doesn’t always go as planned, and due to his unexpected passing, the goal of funding his grandchildren’s college education has been derailed. There is no question the intent to help his grandchildren was there; it was proper execution that was not.

In addition to using annuities instead of 529 plans, the annuities either were not designated properly to cover the grandchildren’s college expenses if the owner was deceased, or the proper estate planning documents were not updated to reflect a change in the investments. If I had to guess, and this is a guess, the grandfather wasn’t instructed to have his estate planning documents updated to allocate the annuities for college expenses. Regardless of which error was made, the outcome is the same.

Unfortunately, there is nothing that can be done to gain access to the annuities, which was the original intent. Without access to the annuities, there are no additional funds to cover the college expenses, leaving the grandchildren, their mother and the surviving grandmother scrambling to develop a plan for college, and they have less than a year before the first grandchild heads off to college–hardly enough time to recover.

So, as a reader, how can you learn from this?

  • When meeting with an estate planning attorney, fully explain your goals and what you would like to accomplish with your estate plan. Keep explaining until you are certain you are understood and your documents reflect your wishes.
  • Periodically review your documents, and make updates when necessary.
  • If you make changes to your investments, make sure your estate planning documents reflect the changes (if necessary–like opening an annuity). If you don’t know if an update is needed—ASK. 
  • Make sure you understand the investments you are using, and ask what happens “if…” to make sure they meet your goals under all circumstances.

Just having estate planning documents, like a will, or a trust, is not enough. It’s important  imperative that your documents, along with any accounts impacted by them, are up to date. If you are unsure of the strength of your estate planning documents, schedule a review with the attorney who created them. Yes, it’ll cost you some money, but it is worth it to insure your plans are carried out in the event that you are not able to do so yourself.


Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.