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5 Quick and Easy Ways to Make Sure Your Distribution Wishes Are Honored



5 Quick and Easy Ways to Make Sure Your Distribution Wishes Are Honored

In this article, I’m going to give you 5 tips for creating your distribution wishes for estate planning purposes. These tips include: How Distribution Works, What A Per Stirpes Distribution Is, Choose Percentages Over Dollar Figures, and Handling Of Tangible Personal Property & Consider Establishing A Living Trust To Plan For Black Swan Events.

1. How Distribution Works

It’s important to know that specific bequests go first and then general or residual bequest come afterwards. And so a specific bequest is, “I give my Ferrari to my son, Allen. I give ten thousand dollars cash to the ASPCA (American Society for the Prevention of Cruelty).” It’s a specific asset or amount to a specific person.

Everything that’s not specifically distributed in your estate plan gets wrapped up into what’s called the “residual distribution.” And so a residual distribution is everything that’s left over. And the typical way that we see people leave their residual distribution is: spouse first and then an equal shares to the children.

That’s the most common thing. And you can do it in a bunch of different ways. There’s immense flexibility with residual distributions. Typically, we’ll see some constraining clauses that make sure that your distribution goes to beneficiaries when they reach a certain age. And you can do it where it is 1/3 at twenty-five, 1/3 at thirty-one, another 1/3 at thirty-five.

Just keep in mind that if you’re going to do something like that, the trust or will or estate is going to have to continue for all those years until the beneficiaries reach the specified ages. And during that time, the estate is incurring fees, and so typically, we recommend that you give the beneficiary a withdrawal right at twenty-five. Twenty-five is a good age because 1) by then your beneficiary’s qualities are known to yourself and your family, as in, by then they’ve probably gone to college and are now on their way in graduate school or a career  and 2) they’re young enough for the money to really matter to them, as in, they more likely at this age to put it towards a down payment on a house or to start a business, although whether that’s actually the case for your circumstances is a matter of judgement that rests with you.

2. What Is A Per Stirpes Distribution?

So a Per Stirpes Distribution is one where you are giving a share or an asset to a named beneficiary and if that named beneficiary predeceases you then to their children in equal shares for as many (grand)children as survive them. So envisioning the scenario where you’ve given a cash gift to your nephew and  they passed away in a tragic car accident prior to your death but they left their kids behind, then you might want your nephew’s kidsto inherit his cash gift. And so you do that by saying Per Stirpes at the end of the sentence. The alternative is Per Capita. A Per Capita distribution is when you give a gift to a person and then if that person predeceases you, the gift fails and gets added to the residuary.

3. Choose Percentages Over A Dollar Figure

There is a possibility if you’re going to leave a dollar figure to a person that may defeat your wishes. An example of this is where a daughter was living in her mom’s home when she passed away and it was meaningful for daughter to have housing because she was a single mom and not working a particularly lucrative job.

And so having secure housing for her and her daughter was very important. But what happened is that her mom made a very large specific bequest to another relative, a brother and there wasn’t enough cash in the estate to make that distribution, so the house had to be sold to satisfy the testator’s wishes as expressed in the will. Now, if mom had had a say in it with knowledge of the current circumstances, she might have had a different wish, but she neglected to plan properly.

And so if you’re going to choose an absolute dollar figure, you just have to be very careful that you’re not going to bankrupt the estate by making that large bequest.

And you know, a thousand dollars or so, I’m not going to fight you on that but if we’re talking five, ten thousand dollars, I might encourage you to say, “All right. Maybe you should have left this as a percentage. And we can approximate. We can choose that percentage based on today’s value of your estate. It’s just that you don’t know what’s going to happen later in life.” The end of life care that we incur in America is very expensive. And so we don’t know exactly how much is it going to be in the estate when you pass away. And so percentages are much, much more flexible versus absolute dollar figures.

4. How Do We Handle Tangible Personal Property?

Tangible personal property is basically all of your stuff including your things, your clothes, your furniture, your artwork, and your belongings. When you come to see me, I don’t expect you to have figured out how you want to distribute all of those things.

One way to determine who gets what is the way my family did it when my grandmother was moving out of her home. She had a lot of antiques and the three children went around the house putting different colored tape on different pieces of stuff. And so there was a negotiation that happened. Everyone made it clear what was going to happen.

But, you don’t have to do it that way. What every one of my estate plans has in it is, a clause that says, “I give my tangible personal property in accordance with any written instructions that I leave behind.” And I also provide that form for you to leave those written instructions. And so the form that I’m going to give you is just going to be straight forward one-page list format. Who gets what I have.

However, you don’t have to use my form. You can use a narrative written letter if you want. Just make sure you sign and date it. You can say, “Because of the support that Alice gave me while I was going through my divorce, I give her my Matisse painting.” That kind of thing. That’s what I mean when I say you can write a narrative letter. But if you don’t leave any written instructions, then typically, what’s going to happen is, its either all going to go to one person or to the residual distribution of the trust or will. So that’s how we handle tangible personal property.

5. Consider Establishing A Living Trust To Plan For Black Swan Events

So what I mean by black swan events, are the events that you can reasonably anticipate might occur but you don’t know if they will occur. Like with a black swan, you can figure that one in a hundred eggs are going to hatch a black swan, but you just don’t know which egg and when that egg is going to come. So that’s what I mean by a black swan event.

So the black swan events we consider when we do estate planning are scenarios where a beneficiary becomes an inappropriate recipient of a large sum of money. For instance, one reason that a beneficiary might be an inappropriate recipient of a large sum of money would be because that persons addicted to drugs or alcohol. It kind of speaks to itself, right? You don’t want to give a lot of money to a person with an addiction problem because they would just use the money to harm themselves.

Another black swan event is if that beneficiary has creditors. So instead of that money going to that beneficiary, the creditors would garnish that money. You would want the trustee or executor to have the ability to hold that money back until those creditors go away. That’s one of the nice features of a trust.

Another black swan event is divorce, marital dissolution. You don’t want the divorcing spouse of your blood to then have a one half or a one-third interest in any money that they inherit from you.

And so those are black swan events that we plan for with the Living Trust.

Talk to An Attorney About Your Distribution Plans

Now that you know the 5 tips that can help your distribution go smoothly, it’s important to consult with an attorney. Now is the perfect time to set up a consultation with Misha Gill. You can make a consultation appointment by reaching him at (703) 553-2577 or [email protected].