If we all had crystal balls that could predict the future, estate planning would be a whole lot easier. We don’t, it’s not — and we’re here to tell you that you need to plan for contingencies.
One difficult aspect of planning is considering the various ways the future can unfold. Perhaps the hardest part: the possibility that loved ones in your plan might die before you do. Life doesn’t always happen as we expect. Younger spouses sometimes die before older ones. Children sometimes die before parents, and so on. It’s not unusal, however, for clients to admit they have never considered where bequests should go if a beneficiary predeceases them.
If you don’t plan for contingencies, Arizona law may decide for you
If you don’t specify, the bequest doesn’t necessarily go to the state of Arizona, as many people assume. Instead, just like if you have no plan at all, state law steps in to fill in the blanks. The law tries to guess what you would have wanted. That can end up including some people you might not want to inherit from you and exclude others you might want to.
For all bequests, state law requires survival of 120 hours. Any beneficiary must live at least 5 days in order to receive (or for his or her estate to receive) a bequest. Many documents extend that survival requirement to 30 days or even 180 days. You can choose your own time period or eliminate it entirely.
Failing to spell out a taker isn’t the end of it
If someone dies before you or before the survival requirement ends and the document does not say what happens, the bequest will fail. In many cases, the law creates a substitute gift for the descendants of the deceased beneficiary. The share the deceased beneficiary would have taken had he or she survived passes to his or her descendants, by representation (which we’ve written about before). The substitute recipient does not include spouses or stepchildren. It does include adopted people and “half-bloods”; half-siblings count as full siblings. So if you would like assets to pass to a child’s spouse or stepchild, you have to say so. Or if you don’t want a certain grandchild to receive anything, you may want to specifically exclude him or her.
For instance, assume you are married and have three grown children, Abbie, Bart, and Charlie. Let’s say Abbie and Bart are married, and Abbie has two children and Bart has three, one of whom is a stepchild. At the death of the first of you and your spouse, you want all three kids to receive a sum of $30,000 each, and the rest goes to the whichever of you survives. Your document says simply that each child is to receive $30,000, with no additional instruction.
Bart dies in an automobile accident, and your spouse dies before you have a chance to update your documents. Bart’s two children would receive $15,000 each, but his stepchild would receive nothing. Maybe that’s what you want. But maybe you’d prefer that $30,000 go to Bart’s wife. Or maybe you’d want it to be added to your own share. Or be given to a charity that you or Bart support.
There are limits to substitution
Substitute gifts generally are not created for remote or non-family members (specifically, those other than descendants of a grandparent or a stepchild). If you want to give $10,000 to your housekeeper, and you want her kids to get it if she predeceases you, you need to say so. It’s best to say what you want to happen, regardless of whether it tracks current default law. The law could change!
If assets go to a minor child or a person with a disability, that can create additional complications. Your documents can include provisions to handle such circumstances, even if there is no minor or disabled person in the family when they are drafted.
In very rare cases, the state of Arizona could end up with your estate. Almost all of your relatives are in line first, though. Specifically, descendants of your grandparents. Your personal representative or trustee would search for (and probably find) descendants of siblings, aunts, uncles, cousins, nieces, nephews, etc. If the only survivor didn’t make it 5 days, even the 120-day survival rule is suspended. Your estate ending up with the state is unlikely. However, if that’s a concern, you can name an ultimate beneficiary that will be in existence, such as a charitable organization.
Thinking about loved ones dying earlier than you might expect can be difficult. But your estate plan isn’t really complete until you have planned for contingencies. That is, you need to think about what you would want to happen to your assets if the unthinkable happens.
