In Fairness to Your Heirs, Think About Expenses

The “pay my debts and taxes” clause is a seemingly innocuous feature in almost every will. It is also a prime example of how easy it can be to foul up your estate plan without realizing it. Here is an example.

Mary, a recently deceased widow, had three children to whom she intended to leave her estate, in equal shares. The estate consists of a $75,000 house and a $25,000 savings account in the name of the decedent alone, plus two $100,000 certificates of deposit. Mary’s simple will gives the house and the savings account to Child A. One of the CDs is payable on death (POD) to Child B, and one is POD to Child C. The decedent understood that POD accounts are non-probate dispositions, so there was no reason to mention them in her will. As far as Mary understood, this simple combination of probate and non-probate dispositions constituted a good estate plan. It would put into effect her desire to give each of her three children equal monetary value—$100,000. So far, so good.

But the estate will have administrative and other final bills and expenses. Where does the money come from to pay them? Mary’s will directs her executor (a son) to “pay my just debts.” So that’s what he must do—pay all the expenses from the cash available to him, which is limited to the savings account in the probate estate. This means, obviously, that all expenses must come out of Child A’s share.

That is not what Mary wanted, yet the executor (no matter who it is) had no choice. Because the CDs left to Child B and Child C were payable on death, they were transferred outside of probate. Those funds were therefore not available to the executor to help pay bills. (The outcome would be even more complicated if the value of the probate estate alone was not large enough to pay a legitimate big claim, such as an unpaid debt of the decedent. In that case, it might be possible under state law for the creditor to recover payment from non-probate beneficiaries such as Child B or C.)

Had Mary recognized the potential problem and obtained good advice, she could have avoided the unfairness of this situation. Of course, if Children B and C want to be fair to Child A, they are free to contribute to the estate’s debts and expenses—but they don’t have to do so.

From “AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts and Your Personal Legacy,” by Michael T. Palermo, JD, CFP, 2005, pp. 39-40.