Mistakes that disinherit 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 certificates of deposit 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.

This 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 supersede 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," Adams says. "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, an 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 his or her will.

Here's an example: The deceased husband's will specified that one of his two children is to receive $100,000 more than the other child because the other child previously received a similar amount for educational expenses. This was his way of evening things out. But if the wife does not change her mirror-image will, when she dies, that child will receive a $100,000 grant from each parent, or double what their parents intended.

7. Disinheritance by failure to prepare a will

Though it was certainly not their intent, at least some of the 3,000 victims of the Sept. 11 terrorist attack on the World Trade Center may have accidentally disinherited loved ones, either because they had not yet prepared wills or their wills were outdated. Most of those who died were men ages 35 to 39.

Grossman says having a will is not always about the money. "There are nonfinancial things that actually are more important, such as naming a guardian for your children," she says. "Giving someone a durable power of attorney for health-care decisions is another big one."

Staring down the reaper

Let's face it: No one likes to draft a will. It's way too close to the gaping maw of the unknown. It is often as uncomfortable for parents to talk openly about their last wishes with their children as it is for their children to broach the subject with their parents.

"It's a terribly painful area because you're fighting people's instincts. They don't want to think about the inevitable, and so they don't," Adams says. "If they would have brought (the will) to our attention the day before someone passed, we could have solved hundreds of thousands of dollars going to the wrong places. Beyond that, there's not much chance of saying Dad didn't understand what he was doing -- hey, he wrote a will."

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The AARP's Setzfand says overcoming that nervousness is precisely what people need to do if we hope to avoid accidental disinheritance.

"The best approach is to have conversations well in advance of these uncomfortable situations," she says. "One should put in place things like powers of attorney well before they need to. The sooner that you do these estate-planning tasks, the better it is. Then, once you have them in place, go back maybe annually or every five years and review the process you've put in place. The sooner you do it, the easier it is.

"Put the trains on the tracks and then you just grease the wheels every so often."

This article was reported and written by Jay MacDonald for Bankrate.com.

Published Dec. 27, 2007

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