People with great children often think their estate plan won’t affect the children’s lives.

“When my time comes, my estate can just go to them, and they can do whatever they want. No need for me to tie their hands or do anything fancy.”

In reality, if you think your children are successful and responsible, you should actively coordinate your estate plan with theirs. Failure to do so can have a really unfortunate impact.

Let’s tell a story. To keep the parent, children and grandchildren straight for this story, the parent is Pauline, 85 years old and widowed. Her daughter is Clara, 63, who is married to Chuck, 65, and their children are George, Gus and Gayla. Gus battles substance abuse. Pauline’s son Chris, 65, is married to Charlene. Gary is their perfect son.

In the beginning

Clara and Chuck built a large farm estate, well in excess of their estate tax exemptions. Realizing that estate taxes would be a problem at death, over the last couple of years, the couple went through extensive steps to reduce their estate. They strategically leveraged their lifetime gift tax exemptions to move most of their assets out of their taxable estate into irrevocable gift trusts. Chuck and Clara are able to retain most of the income from those trusts.

After their deaths, the gift trusts will continue for their kids. George and Gayla will manage theirs. A professional trustee will manage Gus’ for him, because access to wealth could trigger a relapse. Chuck and Clara designed all three trusts so that if anything remains years later when the beneficiary (George, Gus or Gayla, respectively) dies, their inherited assets will not count as part of their estate.

The large gifts Chuck and Clara made to set up these trusts while living were tax-free. But they used up most of their estate tax exemptions. This should be no problem, however, because relatively few assets will remain in their taxable estate at death.

Then … Pauline dies. She leaves 240 acres to Clara — outright and free of trust, no strings attached. Clara has nine months from her mother’s death to decide what to do. Accepting it adds $4 million to Clara’s estate, which will likely appreciate before her death and cause $1 million in estate tax. She could refuse (disclaim) the inheritance. If she does, it won’t be included in her estate, but will pass to George, Gus and Gayla equally. What will this new wealth do to Gus? Pauline’s well-intentioned gift undermines Clara and Chuck’s careful planning.

What about Chris? He and Charlene have a modest estate. Not farmers, they recently retired from other employment with comfortable pensions. Charlene inherited 200 acres from her parents a few years ago. Their main concern was to protect that farmland in case either of them required long-term care. So, they created an income-only trust for that land.

Now Charlene is starting to suffer from dementia, but the farm is safe because it has been five years since they gave it to the trust. If she needs care, their pensions and the farm income will be used first to cover Chris’ living needs at home, and then to pay for Charlene’s nursing home. To the extent there is a shortfall, Medicaid will cover the difference. They won’t have to sell the farmland.

But Pauline dies. Chris also inherits 240 acres. This sets Chris and Charlene’s plans back by at least five years. The additional assets assure that she cannot qualify for the nursing home assistance until it has all been liquidated and spent. To preserve this farmland, they will have to give it to the income trust, but doing so triggers a five-year waiting period.

No good options

What about disclaiming and letting it pass to Gary? Chris and Charlene would lose the rental income, which they wanted to use to help pay for care. But if Chris disclaims the inheritance, it is treated the same as if he gave it away. Still a five-year disqualification.

Pauline could have supported her children’s plans instead of sinking them. She should have given each of her children their inheritance in trust instead of outright. Clara’s share would not increase her taxable estate, and Chris’ share would not be considered a resource that has to be spent.

Thinking “they can do whatever they want” with the inheritance, Pauline actually thwarted their efforts to do all the good they could.

Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.