One of the more misunderstood benefits of comprehensive estate planning involving a revocable trust is the prevention of fraud. Most people with estate plans based upon a Last Will use ad hoc planning to avoid probate. These individuals, using a variety of TOD’s, POD’s, beneficiary designations, and joint tenancies with survivorship rights, attempt to avoid probate with each asset.
As you might expect, these efforts do not constitute and do not demonstrate a unified, or even a consistent plan. In other words, it is not unusual for the beneficiaries of a will to receive different total portions of the estate when ad hoc planning is used. It is not unusual, for example, that the oldest child receive specific transfer of certain assets outside of probate, for a variety of reasons, notwithstanding that the will makes the beneficiaries equal beneficiaries. Consequently, a beneficiary that is not treated equally has no bases from which to complain about the unequal treatment.
In contrast, an estate plan with a revocable living trust as its controlling instrument does constitute a consistent and unified plan. Typically, all of the grantor’s assets are either transferred to the trust or directed to the trust by way of beneficiary designation. It is the consistency and unity of the plan that permits a beneficiary to complain about and demonstrate a fraud against the estate. In the State of Ohio, for example, the beneficiary might prove tortuous interference with an inheritance.
Consider the following fact situation as an example. Dad owns a home, life insurance, and various bank and investment accounts. His estate plan consists of a will naming his four children as equal beneficiaries. His life insurance is payable to his grandchildren, because he wants the benefits to assist in their education. He also has an investment account payable upon death to his youngest daughter, because in his mind he paid for education and other expenses for here siblings.
When Dad becomes ill, his never-married, childless elder daughter comes to live with him. She has him execute a power of attorney naming her as the attorney-in-fact. Because she claims that she needs to manage assets if he becomes ill, he makes her a co-owner of various bank accounts. At her request, he makes some accounts payable to her on death; she laments that she is likely to have expenses that must be paid upon his death, and it’s not best to make her wait. Using the power of attorney, she changes the life insurance beneficiary to the local funeral home to pay his final expenses. Because she is living in the house, she causes her father to gift the home to her in order to prevent medical expenses from causing her to lose her residence. As his illness progresses, she liquidates the investment account, because she is not comfortable with the risk, and she doesn’t understand stock and bond investments. She deposits the proceeds in a money market account payable to her upon death.
Upon his death, she pays the funeral expenses from a savings account. The probate court divides among the children the proceeds of the savings account, a retirement account, and a few CD’s. The eldest daughter keeps and continues to live in the home, keeps one-half of the proceeds of a checking account, and the proceeds of three CD’s payable to her upon death. She also receives almost twelve thousand dollars as an executor’s fee. When her siblings raise questions about the “fairness” of the distribution, she promises to leave the house to them equally in her will. The grandchildren receive nothing from the estate, and the youngest daughter never learns that she was to have received the proceeds of one investment account.
If you think that the prior example demonstrates a fraud, you might be correct. But, of course, you cannot be sure. More importantly, with no overriding expression of the Dad’s intent, uncovering and proving fraud would be difficult.
In contrast, however, if the Dad had a comprehensive estate plan involving a revocable trust, the mere removal of assets from the trust would raise red flags. Moreover, the ultimate distribution of the trust would stand as a yardstick with which to compare the oldest daughter’s eventual inheritance against the Dad’s stated intentions. In Ohio, for example, courts have acknowledged that the trust serves as statement of the ultimate intentions of the grantor, and is admissible for the purposes of proving fraud.
