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Estate Planning

A Standard Estate Plan Will Not Work For Second Marriages

by Evan

Estate planning when a person has been married before or has children from previous marriage is a very difficult subject to undertake, but like most estate planning issues it should not be ignored.  There are a multitude of reasons why a simple estate plan will not work for most second marriages.

What is a Simple Estate Plan? and Why does Extra Care Need to be Taken Planning your Estate When There is a Second Marriage?

A simple estate plan, which can be commonly referred to as an “I love you will” is a natural distribution wherein everything is passed from the decedent spouse to the surviving spouse, and if there isn’t one (i.e. at the second death) to the children.  Sounds natural right? Why would this be a problem in a second marriage? There are a litany of issues that at least must be considered when creating a plan for a second marriage: 

  • The first problem that usually freaks out clients is the biggest one – if assets are left to the surviving spouse and then the children, it is only the children of the surviving spouse (without adoption) that are inheriting.  So in the situation where husband and wife have children from previous relationships, and the husband dies first then his assets will pass to his surviving spouse and then her children.  He has inadvertently disinherited his children!
  • Fine you may think then I’ll just leave assets to my child/children at my death.  Well that leads to the problem that any assets left to the child will no longer be available for the surviving spouse’s well being and financial needs.
  • What if there is a business?  Who is buying out who? Can your surviving spouse run the business? If she can should she now work from the decedent’s children from the first marriage?
  • If one spouse is the primary bread winner, should everything be left 50-50 between decedent spouse’s heirs (whether they are children or other heris) and a surviving spouse?  What about the elective share which states that *something* must be left behind to a surviving spouse (the amount differs State to State)?
  • Is there a prenuptial agreement that has to be honored/considered? What about a post-nuptial agreement?
  • What about the previous divorce decree?  Was the decedent spouse supposed to leave a life insurance policy wherein the ex-spouse and/or children from a previous marriage?  If so, and the policy has lapsed and/or was never taken out then the child or ex has a claim against the estate.
  • Let’s say you are smart enough to say, “I know what a QTIP is and I want one of those” there are still issues to be discussed! A Qualified Terminable Interest Property Trust (QTIP) is a type of trust that allows a decedent to put his assets into a box (a trust) that provides the surviving second spouse with income and then at his or her death it gets distributed how the decedent wanted (presumably to the children from a previous marriage).  Well let’s say the spouses are 55 you have now forced a 30 year relationship between your child from a previous marriage and your surviving spouse.  Every time he or she spends your child is going to be there like a hawk circling.

So what’s the answer?  There could be a few.  How is that for an attorney’s answer? All joking aside, if you are in a second marriage it is imperative that you work with a qualified estate planning attorney to go over these issues to ensure that your testamentary intent is being followed.

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Estate Planning

Everyone has a Default Estate Plan

by Evan

It is amazing how many people believe that when someone dies without a Last Will and Testament the surviving family (and mistresses) are paraded in front of a judge and possibly even a jury to argue who the decedent loved more.  I hate to burst the bubble of anyone who loves “legal” TV shows but is not what happens.  When someone does without a Last Will and Testament they are said to die intestate and their is an estate plan.

What is Intestacy? What is the Default Estate Plan?

Intestacy, much like a Last Will and Testament, only controls those assets which do not pass by deed, operation of law or contract.  So your 401(k) or life insurance would only pass pursuant to your State’s intestacy law if you didn’t have a named beneficiary (or you named your Estate as beneficiary). Every State has some sort of distribution schedule based on the family dynamics of the decedent to avoid the made up TV scenario above.

Your State’s Intestacy Law

I found a cool website that lists every intestacy statute called, My State Will. Each State distributes assets by intestacy differently. So you will have to check out your own State:

Lets take a look at New York for example.  The intestacy law is covered by EPTL 4-1.1 and distributes assets as follows:

  1. Spouse and No Kids – Spouse gets it all
  2. Spouse and Kids – First $50,000 to your spouse and then one-half to your spouse and one-half to your children;
  3. Kids No Spouse – Kids get it all
  4. No Kids, No Spouse – Decedent’s Parents
  5. No Kids, No Spouse, No parents – Your Siblings
  6. No Kids, No Spouse, No Parents, No Siblings – One half to maternal grandparents and one half to paternal grandparents
  7. Then work your way down to aunts, uncles, nieces and nephews.

Re-read number 2.  Yes, you read that correctly. If a New York domiciliary were to die his assets which do not pass by deed, ownership, or contract would be basically split between the surviving spouse and children.  Whose testamentary intent is that?!

Avoiding the distribution schedule of intestacy is only one of many reasons everyone should have a will.

 

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Estate Planning

Important People You Need to Name When Estate Planning

by Evan

Most people think about the flow of their assets when they think “estate planning” and while gifting, trusts, and taxes are obviously important I have found that there is something that takes precedence for most younger families and that is the naming of your Executor, Trustee and Guardian.

Naming an Executor

Black’s Law Dictionary defines executor

 A person named by a testator to carry out the provisions in the testator’s will

The Executor is person who is going to attempt and wrap up your estate.  This includes marshaling assets and paying expenses and then finally distributing the assets.  It is customary that someone would name their spouse as the first successor but I always insist my clients provide at least one successor.

Naming Your Trustee

If you are creating a trust for your surviving spouse, a trust for your estate tax purposes, a trust for your children or a trust for someone with special needs you are going to have to choose a Trustee.  If the Executor is the person who will be administering the testator’s intent for the person’s Last Will and Testament then a Trustee is continuing the intent for possibly years, decades or even a generations.

Naming a Trustee is a little more complicated than choosing an Executor because both the “rules” of the trust as well as the corresponding law determines who you can name.  For example if you are creating an estate tax sensitive Trust you can’t name your surviving spouse without limiting her ability to use that money in some way (usually an ascertainable standard) otherwise the amount will be included in his or her estate and you have done nothing.

Not only do you need to understand the guidelines of the Trust one must also take into account logic.  If you are creating a Trust for the benefit of children only to be funded if both spouses are dead then why would you name a spouse as Trustee? For the off-chance of a disclaimer? You would be shocked how often I see this mistake made by both attorneys and laypeople.

Naming a Guardian

When I prepare a Last Will and Testament for people in their early 30s it is amazing how much more important naming a guardian is than whether the assets are passing tax efficiently.  Customarily, the surviving spouse is going to be named as Guardian although that is just a formality.  The real issue is what happens when both spouses die.

Prior to meeting a couple I will have asked them to have that question answered because the fighting I have seen in my short career is just astounding.  Let them have that fight at home before they meet me!

Naming Your Fiduciaries and Guardians

I am often asked whether I advise to separate the person in charge of the money (Trustee) and the person in charge of the child (Guardian) and my answer is always the same; it has to do with whether you have one person in your life that can handle both.  There are wonderful care takers that should not be around large sums of money and there are people who are money-gurus but can’t take care of a kid.  If you have both in one person then it is not the worst thing in the world to put them in a position to help your minor children who just lost both parents.

Beyond appointing your alcoholic uncle or meth-loving sister as Guardian or Trustee there is no right or wrong answer when naming your Fiduciaries (Trustees and/or Executors) and Guardians.

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Estate Planning

Please Don’t Use an Automated System to Draft Your Last Will and Testament

by Evan

drafting will and testament

I can’t believe I haven’t written about this in 2 years of blogging, but I cringe every time I see a personal finance blogger recommend one of those Will preparation services/sites.  Every single week, I review at least 3 (and sometimes up to 10) Wills written by trained and licensed attorneys.

While I find mistakes, oversights and ignored natural testamentary intent changes at least there was a trained individual trying to flush out issues and follow all the procedural landmines that could be out there when executing a legal document.  So I got excited when I saw the headline “The Case Against Do-It-Yourself Wills”written by Deborah L. Jacobs on Forbes.com.  Some choice quotes from the article include,

More recently, a wealthy Texan who tried to save a few bucks wound up forfeiting his $3.5 million federal estate tax exemption.(Texas has no estate tax). Using a form he copied from a library book, this guy cobbled together a will, leaving everything–a cool $7 million–to his wife. There was no estate tax due at that point because assets left to a citizen spouse (or to charity) generally aren’t subject to the tax. But anything left when she died, less her own exemption amount, could be taxable as part of her estate.

To fix the problem after the husband died, William Wollard, a lawyer with his own practice in McKinney, Texas, recommended the wife disclaim (or turn down) the entire $3.5 million exemption amount, allowing it to pass under state law, estate-tax free to the couple’s three adult sons. The assets she chose to disclaim were most of the ranch land the couple owned, and a large sum of cash.

***

Another important detail you might overlook in your do-it-yourself effort: Various types of assets do not usually pass through a will or living trust. These include savings bonds, and certain bank accounts or certificates of deposit, which can be made automatically payable on death to the person you name. Retirement accounts are distributed according to beneficiary designation forms that you complete when you open an account and can later amend. Similarly, when you apply for life insurance, you are asked to choose a beneficiary, and the proceeds are paid out according to those instructions. In addition to preparing your will, a lawyer can coordinate all these moving parts.

By not getting legal advice to help navigate changing circumstances, one Washington state resident of modest means just deepened the mess he left his family. Using an online program, this fellow did his original will in 2003, leaving everything to his adult son and daughter in equal shares. Six years later, Son told Dad that he and his company were filing for bankruptcy and that he was getting a divorce. He asked Dad to see a lawyer about putting his share of the estate into a trust that would protect these assets from creditors, rather than leaving it to him outright.

Dad thought he knew better and didn’t want to shell out the dough for a trust. Instead, he changed his will himself online, leaving everything to his daughter, with the expectation that she would “do the right thing” and give part of her inheritance to her brother, says Wendy S. Goffe, a lawyer with Graham & Dunn in Seattle. When the daughter refused to split her share after Dad died, the brother consulted Goffe, who told him nothing could be done at this point.

I have discussed some of the issues Ms. Jacobs discusses including intestacy, special needs planning and state estate taxes, but I think it is more basic than those issues.  Does it seem reasonable for someone to recommend that you draft your own deed? or commercial contract? or prenup? Yet, somehow, this area of the law gets pushed aside and automated.  To save some money, but at what possible cost?

There is no substitute for sitting down with an attorney to talk you through the issues that can come up.  Oh and nothing I said here or ever on my blog can be construed as legal advice as we have no legal relationship.

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Estate Planning

What is Intestacy? Don’t Let the State Determine Where your Assets Go!

by Evan

Regardless of whether you know it or not you have a Will – the Will is called Intestate Distribution and is determined by the State Legislature.

When one dies without a Will it is often said he or she died intestate, and their Will enters Intestacy.  I am sure different parts of the country refer to it differently, but in the end it is a State chosen distribution of assets.  Think about it, when did your State ever do anything logically?

When I bring this up to a client or financial planner – they look at me funny, and my response is always the same,  “Did you think all the grieving family members get in front of a judge with a powdered wig and screaming about who dad loved more?”  Once, I say that condesending line, I usually get the “Ahhhh, that makes sense.”

Intestacy distributes assets according to family dynamics, only, and does not take into account your Testamentary Intent, which is only one of the reasons that EVERYONE NEEDS A WILL.  It should be noted that intestacy only distributes assets which would have been controlled by a Will, as such, assets distributed according to contract, deed, or payable upon death – aren’t distributed by intestacy.

New York Intestacy Law

In New York the intestacy law is covered by EPTL 4-1.1 and distributes assets as follows:

  1. Spouse and Kids – First $50,000 to your spouse and then one-half to your spouse and one-half to your children;
  2. Spouse and No Kids – Spouse gets it all
  3. Kids No Spouse – Kids get it all
  4. No Kids, No Spouse – Decedent’s Parents
  5. No Kids, No Spouse, No parents – Your Siblings
  6. No Kids, No Spouse, No Parents, No Siblings – One half to maternal grandparents and one half to paternal grandparents
  7. Then work your way down to aunts, uncles, nieces and nephews.

Your State’s Intestacy Law

I found a cool website that lists every intestacy statute called, My State Will. Each State distributes assets by intestacy differently. So you will have to check out your own State:

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