A proper estate plan involves more than just drafting a will. That’s because a will only controls the distribution of what are known as “probate assets.” These are assets that do not have separate beneficiary designations. “Non-probate assets,” which include life insurance, retirement accounts, joint bank accounts, and real property owned “with rights of survivorship,” are inherited by the designated beneficiaries, even if your will states otherwise. As a result, the only way to ensure that your money and property go to the people you want is to have a comprehensive estate plan that addresses all your assets – both probate and non-probate. A recent decision of the New York Appellate Division, Second Department, while arising in the context of legal malpractice, illustrates this point. You must have a thorough discussion of asset holdings when preparing an estate plan to avoid unintended consequences.
Schmidt v. Burner concerned an estate plan prepared for Evelyn Schmidt in 2013. Ms. Schmidt had two children. She wanted all of her assets to go to one son, Frederick, with the exception of $1,000 to go to her sister-in-law’s daughter. Frederick was also designated as the executor of his mother’s will.
The estate planning attorney prepared a will and “pour over trust” consistent with those instructions and which specifically stated the intent to disinherit the decedent’s other son. However, among the decedent’s assets were two bank accounts with a combined balance of $600,000. These accounts were set up as “Totten Trust” accounts, which means that the account balances were held in trust for a designated beneficiary. The accounts designated both of the decedent’s children, in equal shares, as the beneficiaries of these accounts.
Because a Totten Trust is a “non-probate asset,” these beneficiary designations trumped the instructions in the will to disinherit the other son. As a result, the son who was to be excluded from the estate received $300,000 from the Totten Trust accounts.
The executor of the estate (who was the brother who lost $300,000) sued the estate planning attorney for malpractice for failing to address the Totten Trust accounts in the estate plan by advising the decedent to either terminate or modify the beneficiary designations. The trial court granted dismissal of the complaint on the grounds that the estate could not show damages resulting from the alleged malpractice.* However, the Appellate Division reversed, finding that Defendant had not met its burden of proof for dismissal. The case now goes back to the trial court for both sides to continue the litigation.
This outcome is secondary to the key takeaway of the case. It is a cautionary tale about the consequences of failing to address probate and non-probate assets in an estate plan. Ms. Schmidt wanted to disinherit one of her children. She didn’t succeed because the will didn’t control inheritance of the money in her bank account. Even if the estate eventually wins the malpractice suit, the disinherited son still gets to keep $300,000 and the estate will have incurred legal expenses to sue the attorney, which means less money for the other son than his mother intended.
A comprehensive estate plan must consider all your assets and ensure that the pieces of the plan fit together to effectuate your goals. If you are interested in creating or revising your estate plan, make sure you discuss all your assets with your attorney and work with an experienced lawyer who understands how to implement your wishes.
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