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Saturday, June 23, 2012

Outsmarted by your own estate plan?

A woman recently told me her story, in which her husband recently passed away. He was relatively young and his death was unexpected. What was also unexpected was his will, which left everything to their teenaged son.

This couple had talked about estate planning, and had confirmed their intention to leave their estates to each other. They wanted to leave everything they had to their son when both of them passed away. To help bring about that outcome, the husband and wife owned their major assets jointly, and the husband named her as the beneficiary on his RRSP and life insurance policy.

Then he made a will leaving the estate to his son. It was a home-made will, prepared without legal advice.

I've seen this particular situation many times over the years. The thinking behind it is that if "everything" is already jointly owned or names a beneficiary, there is no need to name the spouse in the will. The husband was outsmarted by his own will, as it by-passed the arrangement he really wanted (leaving it to his wife) and went straight to his second choice arrangement (leaving it to his son).

The majority of the estate assets passed to the wife on the husband's death, as they had planned.

So why is the will a problem? Simply, because not every asset is covered by the joint property and designation of beneficiaries. If you're one of the people who has set things up this way with your spouse and you can't think of any assets that you might have that aren't covered, this doesn't mean there are no such assets. It just means that you aren't aware of them. In the case of the woman I recently spoke to, the husband outsmarted himself by setting up a will that would only have been useful if his wife had died before he did. He thought that was all he needed.

In this case, the husband received a significant tax refund after he died. The refund was obviously in his name only. The wife couldn't deposit it into their joint bank account because the will says that the husband's assets are to go to the son. The bank doesn't want her to open an executor's account based on a home-made will that hasn't been probated. It can't be deposited into the son's account because it isn't made out to him. So far the fight between the bank and the wife has been going on for three months and it's not over yet.

The husband in this case clearly wanted to deal with estate planning. He thought he had taken care of it. He and his wife took the steps they were aware of. Unfortunately those steps weren't quite enough and his wife is paying the price in terms of stress and upset. I really hate seeing this kind of thing, when an hour with a wills lawyer would have alerted this couple to the hole in their plan.

The lesson to be learned? Your will should say what you want, clearly and simply. If you want your spouse to have everything on your death, that's what it should say.

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