Ask Liz Weston

Get smart with your money

Estate Planning

Q&A: Can stepmother prevent siblings from sharing their inheritance?

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Dear Liz: My father passed away in May of last year. In his trust, he intentionally left out one of my four children. The remaining three, who were to inherit a substantial sum, decided to pool their money and share it with their excluded sibling.

My stepmother, who is in charge of his trust, has told other recipients of his largess that she will not be distributing any money to my children. She claims that their decision to give money to their sibling is a violation of my father’s wishes. Can she do this legally and would there be any consequences to her for doing this?

Answer: That depends on the trust’s language. Your father may have granted your stepmother the power to make discretionary distributions, or may have explicitly stated that distributions could be withheld from your children if they planned to share with the disinherited grandchild.

That’s not the norm, however. If the trust requires her to distribute the money and she fails to do so, your children could sue her for breaching her fiduciary duties and ask a court to replace her as trustee, says Jennifer Sawday, an estate planning attorney in Long Beach. If your stepmother’s attorney hasn’t explained this to her already, your kids may need to hire one who will.

The unanswered question: Why did your kids make their plan known, rather than simply waiting close-mouthed until the money was distributed? Perhaps they wanted to make a show of solidarity with their sibling, but the smarter course would have been to keep their intentions under wraps until the money landed in their accounts and was theirs to spend however they saw fit.

Q&A: Navigating the Risks of 401(k)s, IRAs, and Payable-on-Death Accounts

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Dear Liz: You recently wrote about the drawbacks of payable on death accounts, including that the funds go directly to the beneficiaries before the estate’s expenses are paid. Aren’t all 401(k)s payable on death? I’m often reminded to update my beneficiary info whenever I log into my account. Should 401(k)s be converted to IRAs once we leave our jobs when we retire? At least one of my 401(k) accounts from a previous job is still in that company’s plan, as it is a very good plan. Can we designate that certain expenses be paid from the accounts before our beneficiaries receive their inheritance?

Answer: Retirement accounts, including 401(k)s and IRAs, typically have named beneficiaries that will inherit the money directly. That means retirement accounts have the same potential drawback as payable-on-death bank accounts or transfer-on-death arrangements. If you have no other assets when you die, the person who settles your estate may have to appeal to these beneficiaries to return some of the money to pay your final bills. The beneficiaries usually would be under no obligation to cooperate, however.

You could name your estate as your beneficiary, but that could have some tax drawbacks so you should consult an attorney before doing so.

Q&A: Long overdue to dust off that living trust

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Dear Liz: It’s been over 25 years since we paid for a living trust from a lawyer. We have since misplaced the original document. Our house is all paid up and we have one child. In case of our death, can he request a copy of the living trust from the county register?

Answer: Some states do allow living trusts to be registered with local courts, but typically these documents are private and never filed with a government agency.

You’re long overdue for an updated document, in any case. Estate plans should be reviewed every three to five years, after major life changes and whenever estate tax laws change — as they did in 2001, 2010 and 2017.

Q&A: For estate executors, unpaid medical bills can be daunting

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Dear Liz: My wife is in the process of being named executor for her late sister’s estate. There are several medical bills, including some that have been sold to collection agencies. Our understanding is that any negotiations or settlements should be done with those agencies as opposed to the original medical organization. Is this correct in general as well as in probate situations?

Answer: If a bill has been sold to a collection agency, that’s the entity your wife will have to contact. However, not all medical bills are sold. Sometimes collection agencies work on behalf of healthcare providers. When that’s the case, your wife may want to contact the original provider.

As executor, your wife can and should hire an attorney to advise her on administering her sister’s estate. The estate will pay the cost for this advice and your wife will receive helpful, personalized counsel on dealing with every aspect of being an executor, including this one, which is particularly fraught.

The Consumer Financial Protection Bureau recently warned that some medical debt collectors are violating federal law by inflating bills, trying to collect on debts that aren’t owed, demanding payment for services insurance has already covered and lying about consumers’ rights to contest bills. The attorney can help your wife verify the bills are accurate and negotiate settlements.

Q&A: A follow-up question about payable on death accounts

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Dear Liz: I’ve worked for various broker dealers for 33 years and have never heard of a “payable on death” account. Did you mean transfer on death (TOD) in your previous column?

Answer: I did not.

Payable on death accounts are similar to transfer on death accounts since both allow owners to designate beneficiaries and avoid probate, the court process that otherwise follows death. But the two accounts are meant for different types of assets. Bank accounts use the payable on death designation, while investment accounts are transfer on death. Some states have transfer on death registration for vehicles and transfer on death deeds for real estate.

Q&A: More on payable-on-death accounts

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Dear Liz: You recently wrote about payable-on-death accounts. You wrote that one of the disadvantages to these accounts is that an estate’s executor might have to try to get money back from beneficiaries or pay expenses out of their own pocket if there wasn’t enough money left in the estate to pay the bills. I thought your bills would have to be paid before any money was distributed. Is that not the case?

Answer: No. Payable-on-death accounts typically go directly to the named beneficiaries. Such accounts avoid probate, the court process that otherwise follows death, so there’s no mechanism to withhold money that might be needed to pay final expenses or other bills.

Furthermore, beneficiary designations usually override the terms of a will or living trust. If you were counting on an account to pay final expenses but forgot you named a beneficiary, your executor probably couldn’t access those funds.

Payable-on-death accounts might be a solution for people with simple situations and too few resources to justify a living trust. For example, you might use a pay-on-death designation if you’re leaving a bank account to an only child and you trust them to use the money to pay your final bills.

Otherwise, you’ll want to discuss your situation with an estate planning attorney and get personalized advice about how best to settle your affairs.