It's kind of odd, but once people know what I do for a living, they need to tell me about their personal experiences with wills and trusts. Everyone has a story. Some of the stories are happy, but most are not.
Maybe it's not that strange. Every time I meet a dentist, I have an uncontrollable need to tell him or her about my root canal and crown.
This past week, I had one these conversations with a colleague. She was telling me about her father's trust. Most of her father's wealth is in the form of real estate. Her father's estate plan distributes a different parcel to each child.
The problem is that one of the parcels has a mortgage on it and dad is now in need of money. It appears likely that a parcel of land will need to be sold for dad's support. Since each of the children receives a different parcel, selling one will likely impact one of the children while not affecting the others.
The simple fact is that specific distributions of specific assets can be problematic, especially if you are trying to treat everyone equally. If I may take liberty with a line for a George Orwell novel, all assets are created equal, but some assets are more equal than others are.
In my colleague's case, one of the parcels is encumbered with a mortgage lien. Although dad has taken care in trying to be fair to each of the children, the encumbered parcel will be worth less compared to the others. Also, if one of the parcels is sold, what happens to that child's share? Even if dad keeps the proceeds separate for the benefit of the child, chances are some of his share will be used up supporting dad.
Some assets have different tax consequences associated with them. For example, if you name one child beneficiary of a $100,000 CD and another child beneficiary of a $100,000 IRA, the child receiving the CD will be treated more favorably. The IRA proceeds will be subject to income tax while the CD will not. Just think about that for a minute. Once the income taxes are paid on the IRA proceeds, it could be worth 30 percent or 35 percent less than the asset not subject to income tax.
Some annuities and savings bonds can have the same affect since both of them can contain tax-deferred income. If the asset contains tax-deferred income, the IRS will be looking for someone to pay income tax on it. If not you, then the beneficiary.
Also, assets can vary in price depending on the market. If you leave specific bequests of stock, who knows what it will be worth at the time of your death?
The market is down about 40 percent in the past 14 months. If you left all of the BP stock to one child as his share of your estate, his share is worth considerably less than it was a year ago.
The moral of the story is to be careful when using specific bequests or distributions in your estate plan. If you are using a specific bequest or distribution because you want the heir to have the asset, it's likely OK.
However, if you are using the specific distributions to try to equal things out, you should accept the fact that things may not work out the way you plan.
Opinions expressed solely are those of the writer. Christopher W. Yugo is a member of the Indiana Bar and a vice president and senior trust Officer for First National Bank's Trust Department. Address questions to Yugo in care of The Times, 601 W. 45th Ave., Munster, IN, 46321. Yugo's information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant or estate-planning specialist.
