Your estate plan needs some wiggle room

Doing your own estate planning is not a good idea. There are a lot of mistakes people make when they try, and they usually don’t realize it.

One example is what I call the “illiquid estate.” If you are an accountant, I apologize because I know you use the word illiquid in a more precise way, but I think you’ll understand my meaning.

By an illiquid estate, I mean an estate plan where each major asset is designated to go to somebody in particular, and there is not enough left in the “residuary estate” (the part that says who gets whatever is left over) to pay for all the costs, allowances, creditor’s claims and so forth.

Let’s say that Joe, an elderly widower, passes away and leaves behind a will. The will is valid, since he signed it in front of two witnesses. The terms of the will, which he wrote up himself, say that his home in Wasilla goes to his oldest son, Junior. His rental property in Anchorage goes to his daughter Sally. His cabin and property on the Kenai River goes to his younger son, Buford.

And the problem is, there isn’t enough left to pay for everything. Other than those three properties, all Joe had was a pickup truck, some furniture and other household items, and a thousand bucks in his checking account. And there are expenses to be paid. He had some medical bills at the end that Medicare didn’t cover, some credit cards that he got behind on during his last few months when he was sick, and then the normal, but substantial, expenses of probate.

So Joe’s executor realizes he has to sell something. Since the Kenai River property is nicely situated and ought to fetch a quick sale at a good price, he decides to sell it. He calls up Buford and says “I hate to tell you this, but I have to sell something. I know you and your dad had all those wonderful fishing trips at the cabin there, and I know you were looking forward to doing the same thing with your kids, but I’m going to have to sell the Kenai property.”

Buford says “Hold on a minute! Doesn’t that mean that I end up paying all of the expenses and creditors, because the property I am supposed to get is being sold to pay them?”

The executor puzzles over this for a moment, then turns around and calls the attorney, who tells him that the other two kids will have to kick in their fair share of the expenses as well. So now the executor calls up Junior and Sally and tells them that they have to come up with some money if they are going to receive the properties they are supposed to get. Both of them are strapped for cash, and can’t come up with it. Sally gets the bright idea to have the executor take out some small mortgages against each of the properties, but she can’t get any mortgage lender to finance the properties while they are still in probate.

So ultimately all three properties are sold. It actually produces way more cash than they needed, but it was the only way to make things come out even. And it definitely was not what Joe wanted; he wanted to be able to pass those properties along to his children.

Why didn’t Joe foresee this? Like most people, he expected that when he died, his circumstances would be similar to what they were when he made the will. A lot of people tell me that they don’t expect there to be any creditor’s claims, because they pay their bills promptly. But a lot can happen toward the end of life, including uncovered medical bills, and people sometimes neglect their financial affairs as their physical condition deteriorates.

Joe also, most likely, underestimated the cost of probate, which will be thousands of dollars under the best of circumstances, and can easily be tens of thousands of dollars if any complications or disputes arise.

Nowadays, for a few hundred dollars, you can have your will done on the Internet, or through a cheap computer program. The problem is that you don’t get the experience that someone who deals with this every day (an estate planner) can provide.

As they say, sometimes you get what you pay for.

Kenneth Kirk is an attorney and estate planner in Anchorage. This article should not be taken as legal advice; for specific legal advice you should consult an attorney.

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