Plan to Make Your Wishes Legally Enforceable

“In his Will, he left me enough money to pay for his tombstone.  Ha.  And I had him buried at sea.” – Scrooge, Mickey’s Christmas Carol

Why ask someone else to fulfill your wishes when you can do it yourself through your estate plan?

It is a common estate planning error to leave money to someone to use for a specific purpose, and then for that beneficiary to fail to fulfill that purpose.  For example, sometimes parents of young children name friends or relatives as beneficiaries of life insurance policies.  It’s the parents’ intention that the proceeds be used to provide for their children’s needs.  Unfortunately, that may not be the case.

Many people do not realize that naming an individual in your Will or as a beneficiary to receive money means that the beneficiary can do whatever they want with the money.  The money is theirs, like a gift.  There are several reasons to avoid leaving money to a beneficiary to use for another’s benefit.

  1. Wishes are not legally enforceable. Once the beneficiary inherits money, they can use it however they want to.  They may choose not to honor your wishes.
  2. Assets are less protected. If the beneficiary is in debt or is sued, the beneficiary’s creditors can seize the money you meant to be used for someone else’s benefit.
  3. Giving the assets to another person is a taxable gift for the beneficiary. Since the beneficiary legally owns the assets, the IRS considers it a gift if the beneficiary gives the money to someone else.
  4. You leave little or no guidance. An estate plan commonly spells out in detail what should be done with assets that you leave for a specific purpose.

The better option is for the money to never leave your estate until it is used for the intended purpose.  The money will be distributed according to your wishes by your Personal Representative of your Will or your Trustee of your Trust.  These individuals have a legal duty to ensure that the funds are distributed according to the terms of your estate plan.   If you want some money used for a specific purpose, like a certain kind of burial marker or for distribution to a charity, provide for that directly in your estate plan.

If you want to provide for your children’s needs, the best way to do so is to have the assets held in a Trust.  The Trust lets you decide when assets should be distributed, for what purposes, and who should be responsible for investing and distributing the assets.  A Trustee has no ownership right to the Trust’s property, and can be sued for misusing it.  A Trust protects assets from a Trustee’s personal creditors and would probably even provide substantial protection from children’s creditors.

It is very risky to depend on wishes to accomplish your estate planning priorities.  It provides much more certainty to create an estate plan that ensures your wishes are legally binding.