The High Price of an Easy Estate Plan

When Tracey's parents died in a sudden car accident, she was just shy of her eighteenth birthday. Her parents had always said they would get their estate plan done “someday,” but until then, they had taken the easy “duct tape solution” of naming their daughter as beneficiary on all of their accounts. The loss was devastating, but what she didn’t realize at the time was that delaying their estate financial plan would shape the course of her future in ways she never expected.

Her parents, believing they were making things simple for now, had listed her as the sole beneficiary of their stock account—an inheritance worth nearly one and a half million in today’s dollars. They had never taken the time to set up a trust or consider age restrictions, thinking, like many, that she would be responsible enough to handle the money when the time came.

Two months later, Tracey turned eighteen and suddenly found herself “wealthy” overnight. Overwhelmed by grief and newfound money, she made a series of choices that would change her life forever. She dropped out of high school, believing she no longer needed an education. She married a twenty-five-year-old man who had no job and no ambition, blinded by his charm and the illusion of love.

With no financial guidance, she bought an extravagant house—one far beyond her means to maintain. She spent lavishly, convinced that her bank account, with its more than hundred twenty thousand dollars in cash, would last forever.

But it didn’t.

Within a few short years, the money was gone. The house was lost, the marriage crumbled, and Tracey was left with nothing but regret. What should have been a safety net, a foundation for a secure future, had instead become the catalyst for her downfall.

Had her parents set up a revocable living trust, things might have been different. The funds could have been protected, managed wisely until she was older, ensuring she had the support and guidance she needed. Instead, a simple beneficiary designation—what some call “duct tape estate planning”—had failed to account for the realities of life.

Tracey’s story serves as a cautionary tale, a reminder that quick solutions can sometimes lead to long-term consequences. Because when it comes to planning for the future, sometimes the simplest option isn’t the safest one.

Professionals who are not full-time estate planners often look at only one or two factors related to their field of work, and they can end up ignoring some pretty big estate planning goals. Financial advisors, bankers, and even accountants look at pay on death beneficiary designations as the end-all-be-all of avoiding probate, and they end up missing the potential overriding goal of protecting younger beneficiaries.

What are they thinking?

All of them are thinking that they have been told by their home offices about how avoiding probate is a good thing for them and their clients, and how a beneficiary designation form is a simple thing to do. It’s good for the company because it gets rid of the company’s responsibility to hold and administer the account as part of a probate estate and all of the red tape that goes along with it. It’s supposedly good for the client because it avoids probate, but it could lead to a disaster like in the case of Tracey’s parents. But there are some specific reasons certain professionals use the duct tape solution of beneficiary designations:

• Financial Advisors: About 70% of adults in the U.S. have not created any estate plan at all, so trying to convince their clients to have a complete plan like a properly funded revocable living trust is not easy. Even if they do the right things by trying to get their client to plan the right way, they will use beneficiary designations “in the meantime.”
• Banks: As I mentioned, banks want to get the assets of deceased people transitioned to the next generation with as little fuss as possible, but the frontline bankers often lack the training on estate planning that even relatively inexperienced financial advisors for large institutions get. Bank personnel are usually only trained on how to react to accounts that end up in estates. The last thing bankers are thinking about is whether the standard age of inheritance of 18 is probably not a good idea for the beneficiary.
• Accountants: Along with financial advisors, accountants take a hard look at the tax angle, and that sometimes overrides everything else. When it comes to inheriting tax-deferred accounts, named individuals get a better tax schedule for withdrawals over a ten-year period compared to the five year schedule for a revocable living trust.

While these other professionals have legitimate reasons for using beneficiary designations as part of “estate planning,” they can fail to weigh the pros and cons of keeping assets away from underage or immature beneficiaries. In the end, a “better tax schedule” and even avoiding the rigors of probate may be outweighed by an inheritance being wasted or even destroying a young adult’s life. As another attorney once told me, “There is a 100% tax on an irresponsible beneficiary.”