Deciding how to dole out property after your death is neither an easy nor particularly fun task. As a result, many estate planners create their initial documents and then leave them alone, unchanged, for their remaining lives. However, all the documents in your estate plan should be reviewed regularly in order to avoid unfavorable consequences due to changes in the law, changes in your family dynamics, or changes in your finances. Failing to update your plan can lead to a “bankruptcy” in your estate, even in cases of limited lifetime debt.
In the estate or trust administration process, creditors must be paid from funds in the estate or trust estate before beneficiaries may be paid. Paying creditors is not limited to credit cards and other consumer debt; it often includes “last illness expenses” and medical bills. Unfortunately, there is no way to know for sure how much these expenses will be. If you have planned appropriately for Medicaid coverage (Medi-Cal in California), through a QMap Trust, then the bills may paid, but the Medi-Cal program will attempt to collect from the estate. Without significant planning for the possibility of these events, the amounts due can erode the estate very quickly. On top of paying creditors, legal, administrative, and accounting fees must be paid from the estate’s assets.
Even in cases where the estate can remain solvent after paying the creditors and legal fees associated with administration, a different form of “bankruptcy” is disturbingly common: bankruptcy of the residue. Put simply, the residue of the estate is whatever is left after the payments that must be made to creditors, professionals, and others are made. Frequently, the beneficiaries of the residue are the individuals closest to the decedent, such as children, with the intent that it will be the largest portion of the estate and will divided evenly among those beneficiaries. Occasionally, however, you may wish to first give specific gifts to charities or friends.
Specific gift beneficiaries will be given their amounts due first, in most cases. If you have given specific amounts (such as $10,000) to a number of individuals, it is possible to leave nothing for the residual beneficiaries! If you are leaving specific gifts to people you know, it is possible that amounts that seem minor compared to your total estate when written become extremely burdensome after payment of other debts. In such cases, court involvement and litigation may be necessary, which will only further deplete the estate!
It is possible to avoid bankrupting the residue by offering percentage gifts capped by a dollar amount, or a dollar amount, capped by a percentage of the total estate. The most effective method of avoiding adverse consequences, however, is to review your trust regularly, both on your own and with the assistance of your attorney. Keeping in mind all of the possible expenses, liabilities and legal changes, especially as part of your overall financial picture can avoid the possibility of leaving your most beloved family members with nothing!
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