Contingency plan

If only we had a crystal ball. That would make estate planning so much easier. But none of us can see into the future. So we try to address the unknown by asking, “What if?” As in, “What if the future doesn’t go like you think it will?” Then we build a client’s contingency wishes into the plan. Many contingency plans are unique to a client’s circumstances. But some should be in every will or trust. Here are a few:

Contingency Plan 1: Out-of-Order Death

Older generations almost always want to leave their assets to the next generation. What the elders almost never want to consider: What if one or more of the younger people don’t survive me?

For every bequest, the question needs to be addressed. What then?

If the unfortunate or unthinkable occurs, and the document doesn’t provide direction, state law steps in to dictate where the property goes. In Arizona, a state “anti-lapse” statute governs. The law (A.R.S. 14-2706) says that if the deceased beneficiary is a grandparent, a descendant of a grandparent, or a stepchild, then property will pass to the deceased beneficiary’s descendants.

So, if you leave assets to a child, or a sibling, or a stepchild, and he or she dies before you do, the gift would automatically go to the beneficiary’s children. For beneficiaries who don’t fall into that group (grandparent, descendant of a grandparent, or stepchild), the bequest “lapses” and is added to the “residue” of your estate – the part that is distributed after other gifts have been made and expenses paid. So a gift to a friend who has died would not automatically go to her children. That gift would go to others named in the document.

In most plans, the better option is to specify what you would want. Sometimes, clients want the spouse of the intended beneficiary to be next in line (usually sons-in-law and daughters-in-law). Other times, clients don’t want the gift to pass to the next generation at all but want the gift to stay among a group. (Take care of all the kids before anything goes to grandkids.). And sometimes, people choose another beneficiary, like charity.

The important takeaway is: It’s better to consider what you want and make your wishes clear in the document than leave it up to state default rules. Consider also: What if you move? That could change your plan; the default rules are not the same in every state.

When assets end up flowing to younger generations, there’s always a chance that could mean a minor child. Which brings us to Contingency Plan 2.

Ultimate Beneficiary

Every estate plan should consider: What if none of my beneficiaries survive me? It’s rare, but it does happen. The default is state intestacy laws.

In Arizona, that’s surviving relatives who are descendants of parents (siblings and, if deceased, their descendants). And if none, descendants of grandparents (aunts and uncles, and if deceased, their descendants). If no relative survives, your estate would “escheat” to the state. No one wants that.

So consider: If everyone provided for in your document has died, who might be left? Would you want them to inherit? Is there a chance the estate would escheat? You may want to specify an alternate disposition.

Contingency Plan 2: Child Taker

What if a minor inherits property? Minors can inherit, but they can’t legally own the property until they are adults. They can’t just have the money.

What happens depends on how much money there is. If the value of property is less than $10,000 (or more with court approval), funds can be held in a Uniform Transfers to Minors Act (UTMA) account. An adult (such as a parent or grandparent) can be custodian and caretake the funds till the child turns 18.

If the value is more than allowed in a UTMA, the solution is a court-supervised conservatorship. A judge decides whom to appoint after a court proceeding. In many cases, the child’s parents are appointed and take control of funds. But parents don’t always qualify. The court oversees management of the property until the minor turns 18. Depending on the circumstances, the conservator will be required to submit annual accountings to the court or must request court approval before funds can be used.

Conservatorships are intrusive and can be expensive. And because termination at 18 is mandatory, they may release funds before the child has sufficient maturity to manage money.

The solution? A trust.

Wills and trusts can include contingency provisions that establish a trust in the event a beneficiary happens to be a minor. Such trust provisions can specify that the trustee control the funds until the beneficiary is 25 or 40 or for the beneficiary’s lifetime, if the client so desires.

Contingency Plan 3: Disabled Beneficiary

What if a beneficiary is disabled? We don’t have crystal balls, and we can’t know whether our beneficiaries will be able bodied at the time they receive their inheritance.

If a beneficiary is disabled and receives public benefits, the inheritance could cause loss of benefits, which can be devastating.

The solution? A trust known as a special needs or supplemental needs trust, which has special terms designed to protect public benefits.

If no such trust is in the document and the estate plan centers on a trust, the trustee may file a petition with the court to modify the trust to incorporate these special trust terms.

But there’s a simpler, less expensive option: the contingent special needs trust. Just like any plan can anticipate funds going to a minor child, any plan can anticipate funds going to a disabled beneficiary. Contingent trust terms can protect the benefits for any beneficiary who happens to be receiving or is likely to become eligible for benefits. The trust can specify that the trustee control the funds and distribute them only in ways that preserve the beneficiary’s benefits.

Contingency Plan 4: Charitable Organization

If you include gifts to charity in your estate plan, consider: What if the charity is no longer in existence?

Charities don’t always last forever, and sometimes they change via purchase, merger, or change of mission. Your gift might not automatically flow to the new entity. More importantly, would you want it to?

State your intention in your document. You say that the gift lapses and augments “residue.” You can direct that your administrator divide the gift among other named charities. Or you give someone else the power to choose other charities to receive the gift.

Power of Contingencies

The ability to include contingency plans is a significant benefit of having a will and/or trust. These contingencies are available only for assets that pass according to the documents. Many clients are fans of beneficiary designations and joint ownership because those methods are simple. The ease of filling out a form is appealing. But that simplicity comes at a cost: There’s little room for a contingency plan.

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