Years ago, when I was practicing family law, I ran child support guidelines for my clients. Between Virginia and Kentucky, I became quite familiar with the sometimes complicated formulas of child support guidelines in a variety of situations and under two sets of state laws. Although there were a lot of different parts to the formulas, they were still just formulas. We plugged the numbers in and an amount resulted.
Nevertheless, I commonly heard from clients that the amount could not be correct. One of the most common complaints began “but my friend has the same number of kids and he only has to pay…”
It was hard for people to understand that while the rules are the same across the board, every variance in what was being input could have a significant impact on the end result. Just because two people had seemingly similar situations did not mean that their cases would turn out the same.
Estate planning is very similar. Two similar families are just that — seemingly seemingly similar, not exactly the same. Household income, amount of assets and specific types of assets all become major factors in planning. Family dynamics also is a significant factor in estate planning and should be one of the most important considerations.
A couple of examples illustrate how small differences can result in major impacts.
First, consider two couples. Both have one child and both have a house that they have owned for 40 years. Each couple names his or her spouse as the primary beneficiary with their child as the contingent beneficiary. To this point, their situation appears similar.
Now consider that each couple decides to give their house to their own child during their lifetime. They have been advised (perhaps poorly) that this will protect their house from future nursing home costs. Both couples transfer the house into the name of their child.
Several years later, the first couple dies and their child moves into the house and lives happily in the house of his youth. The second couple also dies, but instead of moving into the house, their child decides to sell the house. He is surprised to learn that he now owes capital gains taxes on the difference between his parents’ purchase price and his sale price.
Although the couples appeared to have similar situations, the one difference between the expectations of the beneficiaries resulted in tens of thousands of dollars in unintended tax consequences.
Second, again consider two couples. Both have come into the marriage with one child each. Both intend to leave their own separate children their own property. However, after marriage, both couples purchase real estate together.
The first couple purchases the property using a survivorship deed. The second couple places their deed into an irrevocable trust, with both spouses having the right to reside in the property until death, but with proceeds being divided equally between their children upon the death of the second spouse.
For the first couple, when the first spouse dies, the surviving spouse owns the property as his sole asset. Because his will leaves his property to his separate child, the deceased spouse’s child is left out and will receive no part of the real estate sale, regardless of the intent of the parties. The second couple, however, has ensured that both children will receive equal shares and that neither spouse can change that after the first spouse dies.
Unfortunately, small deviations like this are common in the estate planning world, and can have tremendous consequences for beneficiaries. By planning carefully, and examining the different factors that affect your estate plan, you can ensure that your estate planning will have the intended results.
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