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Financial Literacy - Planning for your heirs
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Avoiding accidental disinheritance
It happened to Anna Nicole's daughter, and it's more common than you think.
Planning for your heirs

You can accidentally disinherit your heirs

4. Disinheritance by ademption
This scenario is all too common: At age 40, a father wills his house and business to his sons, then adds a few residuary (from residual, as in what's left) bequeaths of bank account balances and CDs to nieces and nephews. At 70, the father sells the house and business, but fails to update his will. Upon his death, the father's former house and business are no longer part of the estate, and therefore cannot be transferred to his sons; lawyers call this ademption. However, the proceeds from those sales, if any, would flow as residuary assets to the nieces and nephews, contrary to the father's wishes.

The sad outcome could have been prevented if Dad had updated his will to reflect his new circumstances. He also could have taken the proceeds from the house and business out of his estate by placing them in a trust for his sons.

5. Disinheritance by misunderstanding survivorship
Fewer assets are passing through probate today because of the increased use of various forms of survivorship, such as transfer upon death and pay on death instruments. It becomes particularly tricky when we are trying to treat children equitably.

Here's an example of an unintended snafu: Let's say a farmer had two sons and early on decided to disinherit the wastrel one. Years pass, during which the father established pay on death and survivorship deeds in the good son's name. Then the prodigal son returns to the bosom of the family. The father rewrites his will leaving equal shares of his estate to each son. But upon his death, the shares won't be equal, as the survivorship instruments will dump a disproportionate, unintended inheritance into the good son's lap. That's because a will does not supercede survivorship, transfer upon death and pay-on-death instruments.

"One of the biggest forms of accidental disinheritance today is the split of assets between wills and trusts and survivorship forms," says Adams. "When they want to make a change later on, the will can't touch those assets because they put them in survivorships. Now it's a slippery slope to categorize those things."

6. Disinheritance by mirror-image wills
Sometimes when married people prepare their wills, the attorney will draft one and simply generate a mirror image in the other spouse's name. It's logical when they both want the same thing to happen after they're gone. But trouble can arise when one spouse dies and the other does not update their will.

-- Posted: Nov. 19, 2007
 
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