Category: Estate Planning

How Divorce Can Impact Your Estate Plan – Property Settlement Agreements

May 19, 2016

With the increased divorce rate in today’s society, many individuals experiencing a divorce focus on the issues directly involved in the divorce.  For example, they may focus on spousal support, child support and the division of assets, but those same individuals forget that after a divorce or even during, there are additional considerations involving their estate plan.  This article is the beginning of several articles that will highlight a number of those additional considerations.  We begin with a discussion about property settlement agreements and the requirement to maintain life insurance. 

As a result of most divorces, a property or marital settlement agreement (“PSA”) is executed in an effort to dictate the obligations of each party to the other party.  In most cases the focus is on finalizing the PSA and not the effect of the PSA on other aspects of an individual’s life, such as his or her estate plan.  However, during this phase of the divorce, it may be helpful to consult with an estate planning attorney to ensure that the PSA permits some level of flexibility from an estate planning perspective. 

For example, if there are children from the marriage, very often the PSA will contain a provision requiring each party to maintain life insurance with a certain death benefit.  Thus, one spouse may be required to maintain five hundred thousand dollars ($500,000.00) of life insurance and name the other spouse as the beneficiary, name the children as beneficiaries or name the other spouse as trustee for the benefit of the children.  The purpose of such a provision is to provide a substitution for child support in the event of the death of either parent.  Very often the requirement to maintain the life insurance ceases when the obligation to pay child support ends.

But what happens if a death occurs and the life insurance proceeds are paid out to the former spouse directly or for the benefit of minor children?  In the first instance, the former spouse can receive and use the monies without much oversight.  Hopefully, the PSA specifies the permitted uses, but the PSA may be silent and/or the former spouse may disregard the PSA.  If the minor children are named as direct beneficiaries, then a court proceeding requesting guardianship of the child’s estate may be required and the court’s oversight continues until the child reaches age 18, at which point the child has the ability to receive unfettered access to the funds.  If the PSA simply states that the former spouse is to be named trustee for the benefit of the children, what are the provisions of the trust agreement?  Does the so-called trust remain discretionary and then become available when the child reaches age 18? 

The complexity surrounding the beneficiary designation and possible involvement of the court can be resolved if the PSA permits the parties to name a revocable living trust that would include provisions for the benefit of the children.  Therefore, the beneficiary designation is simpler since only the revocable living trust is named.  Moreover, a properly drafted revocable living trust agreement would contain provisions specifically detailing the trustee, dispositive provisions for the funds and handling any ‘what ifs.’  For example, what if the named trustee (i.e., former spouse) predeceases or what if a child predeceases, who will manage the funds and what happens to the funds in those circumstances?

In the case where complex estate planning exists, such as irrevocable life insurance trusts, the need to review the estate planning is important to prevent negative tax consequences and to ensure that the proper beneficiaries ultimately receive the assets.  Ideally, the initial drafting of such complex estate planning will take into account the possibility of a future divorce.  For example, the trust agreements can address what happens in the event of divorce with respect to a spouse continuing as a beneficiary and/or trustee.  The PSA would then detail how the assets connected to the complex estate planning are handled or distributed, and by revisiting the estate plan post-divorce, any necessary adjustments can be made.

Therefore, for those who have experienced a divorce or are in the midst of a divorce, have you revisited your estate plan recently?  What obligations to maintain life insurance do you have?  Does the PSA have certain requirements for the creation of a trust, and if so, what are those requirements?  It is better to begin to review all these issues sooner before an event, such as incapacity or death, makes it impossible to resolve later.  #estateplanning #divorce #lifeinsurance #revocabletrust

A Lesson from Sumner Redstone’s Competency Battle

May 12, 2016

For a variety of reasons, many have been following the drama filled court battle involving Sumner Redstone’s capacity that was dismissed earlier this week.  Unfortunately, a battle over control of an individual and his or her money is not an uncommon occurrence.  Typically, the higher the stakes the more likely a challenge will be lodged if a so-called beneficiary is cut out, which appears to be part of the rationale behind the Redstone case.  For the individual who has been cut out, there may be nothing to lose by objecting.  On the other hand, for the individual creating the Last Will and Testament or revocable living trust, there may be a desire to avoid a major legal battle between those beneficiaries who are to receive distributions after he or she is gone.  If that is the case, then one way to deter such a battle is to have a ‘no contest’ or ‘in terrorem’ clause.

A no contest clause simply states that if a beneficiary objects to the provisions of the Last Will and Testament or revocable living trust, then they run the risk of completely losing or diminishing their share of any distribution.  It may also mean that any of their descendants may lose or diminish their share depending on how the provision is drafted.  The goal is to dissuade beneficiaries from objecting and possibly overturning the intent behind certain provisions of the Last Will and Testament or revocable living trust. 

The use of no contest clauses depends on whether the jurisdiction in which one resides recognizes such provisions as valid.  For example, not all jurisdictions recognize such clauses within revocable living trusts.  Some jurisdictions place emphasis on a person’s final wishes as evidenced by the execution of a Last Will and Testament or revocable living trust and it is difficult to overturn that intent.  Other jurisdictions void such clauses if there is good faith, probable cause or reasonable justification for bringing a suit, which may lessen the deterrent factor in using a no contest clause.  However, these defenses also recognize that at times there are in fact valid reasons for objecting, such as undue influence, lack of capacity, or the like.  In all three neighboring jurisdictions (Virginia, Maryland and the District of Columbia), each recognizes no contest clauses in some fashion. 

Thus, it may be that in a case like Redstone’s, a no contest clause would have prevented court action.  But if there is a likelihood of litigation, the use of such clauses should be carefully considered.  #sumnerredstone #incapacity #competency #nocontestclause #estateplanning 

 

 

Prince Dies Without A Will; Special Administrator Appointed

April 28, 2016

Although the quote: “Where there is a will, there is a way” is meant to encourage perseverance, it also seems appropriate in the estate planning realm as a Last Will and Testament can guide surviving family members as to the disposition of assets after a person’s death.  In the case of Prince, the quote is better modified to say: “Where there is no will, there is a messy road ahead.”  As reported earlier this week, Prince’s sister filed an emergency petition asking the court to appoint a special administrator to oversee the initial stages of administering Prince’s estate.  She did so because no Last Will and Testament could be located.  The Court agreed and appointed Bremer Bank, National Association as the special administrator.  The Court’s actions allow Bremer Bank to marshal or gather the assets and preserve such assets until a personal representative or executor can be appointed.  In short, it appears that Prince failed to plan and the laws of Minnesota will now dictate what happens to his estate.  

And what does this all mean?  Dying without a Last Will and Testament or a revocable living trust means that a person is intestate and the laws of the state in which they resided at death will spell out who is to receive the assets of the estate.  In Prince’s case, since he had no spouse or surviving children or parents, his siblings, both full and half siblings, are the beneficiaries of his estate under Minnesota law.  Thus, the law of unintended consequences may now apply as Prince may not have wanted his siblings to become the beneficiaries.  He may have wanted to include charity or friends perhaps even other relatives.  But, without a Last Will and Testament or revocable living trust, we will never know what his wishes may have been. 

It will also be interesting to see how the administration of Prince’s estate unfolds.  A number of questions will have to be asked and answered, including, but not limited to: Who will end up being the personal representative or executor?  What debts does the singer have?  How will the estate tax be paid (both at the Federal and state level since Minnesota has an estate tax)? What assets will each beneficiary ultimately receive?  Will an agreement be reached amongst the beneficiaries regarding the management and distribution of the assets?  Unfortunately, the process that has begun will be lengthy, likely expensive and may result in the dismantling of a legacy if the process devolves into an ugly court battle. All of which could have been avoided or at least minimized had Prince simply planned. #PrinceDiesWithoutWill; #Prince; #estateplanning #intestacy

Caring for Pets As Part of Your Estate Plan

April 21, 2016

Many if not all of us have had a pet during our lifetimes.  But what happens to that pet if the owner becomes incapacitated or dies?  Virginia (Section 64.2-726), Maryland (Section 14.5-407)  and the District of Columbia (Section 19-1304.08) all have statutes that permit the creation of a trust for the care of a pet.  In determining how to provide for a pet during incapacity and/or at death, here are a few items to remember:

1.  The owner should ensure that, at a minimum, they have a Power of Attorney giving someone authority to take care of their pets using the owner’s monies to do so.   In addition, the owner should ensure that instructions for caring for the pet have been provided for in their estate plan.  This can be done in various ways including specific provisions in a Last Will and Testament or through a Revocable Living Trust.

2.  An owner of a pet may want to carry information in a wallet or purse that identifies the fact that he or she owns a pet, what kind of pet, where the pet is located and any special instructions regarding care.  The thought is that if the owner is unable to return home those going through the wallet or purse will find this information and ensure the pet receives the proper care.

3.  Along with other important papers relating to one’s estate plan, there should be a document that summarizes all pertinent information relating to the pet including any medical history, veterinarian’s contact information, allergies, likes/dislikes, etc.  The information carried in the purse or wallet would also be included and further detail provided, if necessary.

4.  Many pet owners now post a notice near their front door that they have pets in the house to alert anyone entering the home to be on the look out for the animals.

5.  If the owner is considering establishing a Pet Trust, then the following questions must be asked:
     a. Who will be named as caregiver for the pet?
     b. Will there be different caregivers for different pets? 
     c. Is the proposed caregiver willing to serve? 
     d. Who are the alternate caregivers?
     e. Who will be Trustee of the Pet Trust? 
     f. Will the Trustee be the same as the caregiver?
     g. Who will be successor Trustee?
     h. How much money should be set aside for the pet or pets that the Trustee will manage?
     i. What special care instructions should be included in the Pet Trust?
     j. How should the Trustee make distributions from the Pet Trust (i.e., to the caregiver or directly to the vendor)?
     k. Should any monies be paid to the caregiver from the Pet Trust?
     l. What should happen to any remaining monies upon the death of the pet or pets?
     m. Are there any specific burial and/or cremation instructions for the pet or pets?

There is certainly more information that can be included in the Pet Trust depending on the kind of pet, the standard of care, the amount of money to be set aside and the overall goals and objectives of the owner.   But these items will help you to start thinking about what happens next for your pets who are more likely than not a part of your family, and therefore, need to not be forgotten in any estate plan.  #pettrust #estateplanning #incapacityplanning #caringforanimals

National Healthcare Decisions Day – April 16

April 14, 2016

Previous posts have talked about you controlling your final moments and also how you want to be remembered.  April 16 is National Healthcare Decisions Day and provides a reminder that having a living will in which you express your wishes regarding life-prolonging procedures or choosing not to have a living will are crucial components in every estate plan.

To that end, during this past legislative session of the General Assembly of Maryland, a bill was introduced that would authorize a qualified individual to request aid in dying.  The Richard E. Israel and Roger “Pip” Moyer End of Life Option Act would have allowed individuals meeting certain criteria to request and receive from their physician a lethal dose of a particular medication.  The bill was withdrawn from consideration as it lacked enough support, but not before sparking public conversation about the topic.  At this juncture, there are four states that have death with dignity statutes: Washington, Oregon, Vermont and California.  In fact, California’s statute is so new it will only take effect in June.  Montana does not have a statute, but a 2009 Montana Supreme Court case (Baxter v. State of Montana) examined whether a physician could prescribe a fatal dose of medication to a terminally ill individual without being charged with a crime because consent was involved.  In the end, although attempts have been made to pass aid in dying legislation, Montana does not have a statute legalizing the practice and the Baxter case addressed a very narrow aspect of the practice.

Regardless of your position on death with dignity statutes, end of life decision-making and advance healthcare planning is an important conversation to have and to share with your loved ones and National Healthcare Decisions Day helps remind us of the need to begin the dialog on the subject.  @deathwdignity @NHDD #livingwill #estateplanning #endoflife #advancedirective #NHDD

New Department of Labor Rules May Impact Your Retirement Accounts

April 7, 2016

Recently, the Department of Labor issued new rules that may impact your relationship with your financial advisor as it relates to your individual retirement accounts.  The rules are an attempt to require investment advisors who provide retirement investment advice to put a client’s best interest first translating to the parties signing a ‘best interest contract‘.  The effort to create these new rules began in 2010 with proposed rules issued last year, and after a period for comments, the new rules being issued now.  Implementation of the rules will be staged over the next couple of years with compliance required by January 1, 2018.   

So, what does this mean to an individual investor?  The ultimate impact is still being determined, but it does mean that individuals should reach out to their investment advisors to determine how their relationship may change, if at all, and whether fees will be impacted.  And how does such news correlate to estate planning?  Since almost every estate plan involves disposing of financial assets, and for most individuals that means passing on retirement assets, having your financial plan in order and understanding your rights as an investor is part of the process of structuring your estate plan so that your plan will meet your goals and objectives. #DOLnewrules #retirement #money #bestinterestcontract          

Alternative Living Solutions – “The Granny Pod”

April 2, 2016

As the population ages and the costs of entering and living in a continuing care retirement community (CCRC) or an assisted living facility (ALF) continue to rise, families are looking for alternative living arrangements for their loved ones.  One alternative is ‘the granny pod‘ or ‘MedCottage.’  In general, these tiny houses are comprised of a bedroom, bathroom, kitchen area and living space.  The pod is meant to reside in the backyard of an existing residential location and be a safe living area for an aging family member.  So, instead of families looking to buy a bigger home or to construct a large addition to accommodate their family member, the pod gives everyone the space they need.  Arguably, the cost is less than several months at an assisted living facility or the entry fee for a CCRC (depending on location).  Of course, one cannot simply move a pod into the backyard without first ensuring compliance with zoning ordinances, permit requirements for construction and hooking up utilities, insurance coverage and an overall fit for the family lifestyle and the care needs, among other considerations.  However, the idea is unique and innovative and may relieve a lot of stress and avoid family arguments during what may already be difficult times. #alternativeliving #grannypod @KennethDupin #elderlaw

The ABLE Act – Proposed Legislation Will Modify Certain Provisions

March 22, 2016

An earlier post gave a brief summary of the Achieving a Better Life Experience Act of 2014 or the ABLE Act.  Three different pieces of legislation were introduced on March 17, 2016 that would change some of the provisions of the ABLE Act.  Below is a brief summary of each proposed change.

  1.  Current law limits eligibility for the creation of an ABLE account to individuals with disabilities where the disability occurred before turning 26 years old.  H.R. 4813 would increase that age from 26 to 46.
  2. H.R. 4794 would allow for rollovers between 529 accounts and ABLE accounts.
  3. Finally, H.R. 4795 would permit individuals with disabilities to save additional monies to an ABLE account above the annual maximum ($14,000.00) now in place.  Such additional contributions would be allowed for those individuals with disabilities who work and earn income.  The additional contribution would equal the lesser of (a) his or her “compensation…for the taxable year” or (b) “an amount equal to the poverty line for a one-person household, as determined for the calendar year preceding the calendar year in which the taxable year begins.”

Updates will be posted as the legislation moves forward.  #specialneeds #ABLEact #estateplanning #proposedlegislation

The ABLE Act – An Additional Resource for Families and Advisors

March 15, 2016

In 2014, the Achieving a Better Life Experience Act of 2014 or the ABLE Act was signed into law.  Under the ABLE Act, certain savings accounts could be established for individuals with disabilities.  Such accounts allow for monies to be set aside for an individual with disabilities without disqualifying the individual from public benefits such as Social Security Income (SSI) or Medicaid.  The total annual contributions are currently capped at $14,000, but the accounts can grow and be funded up to state mandated limits.  Virginia and Maryland limit these accounts to $350,000 while the District of Columbia caps the accounts at $260,000.  Various other restrictions apply including restrictions that may impact an individual’s SSI benefit for a period of time and require any remaining amounts in the account to be used to pay back for Medicaid benefits that are received; generally known as a “Medicaid pay-back” provision.

Recently, the ABLE National Resource Center, an organization founded and managed by the National Disability Institute (NDI), went live with an informative website for families and professional advisors interested in learning more about the ABLE Act and establishing an account for an individual with disabilities.  In addition, the website provides state specific information since each state has implemented the ABLE Act differently.   Families of individuals with disabilities now have another resource in addition to consulting with their professional advisors if they are considering creating an account to ensure such planning fits within their overall goals and objectives.  #specialneeds #ABLEact #estateplanning @RealEconImpact

Why Has Income Tax Planning Become a Bigger Part of Estate Planning?

February 17, 2016

Many of you may have had your estate plan prepared at a time when the exemptions from Federal estate tax were much lower and the ability to use a deceased spouse’s exemption was unavailable. To ensure that a married couple maximized the use of the available exemptions, your estate plan may have been structured so that upon the death of one spouse, two subtrusts were automatically created for the benefit of the surviving spouse.  

As discussed in an earlier post, the estate tax laws have changed and exemptions from Federal estate tax were permanently set at higher levels. In addition, married couples are permitted to transfer any unused Federal estate tax exemption to a surviving spouse by way of a concept known as ‘portability.’ Thus, the need for an automatic allocation between two subtrusts upon the death of one spouse is no longer necessary in certain circumstances and may have unintended income tax consequences as follows.

As you may know, upon the death of one spouse, the tax basis in certain assets owned by that spouse is adjusted to the fair market value as of the date of death. This adjustment is often referred to as a “step-up” or “step-down” in basis. Assets funded into the subtrusts will receive a basis adjustment on the death of the first spouse. Upon the death of the surviving spouse, only assets held in one of the subtrusts (i.e., the Marital Trust) will be adjusted to the fair market value as of the date of death of the surviving spouse. The assets of the other subtrust (i.e., Credit Shelter or Bypass Trust) continue with the same tax basis that was received upon the death of the first spouse. Therefore, the beneficiaries under your estate plan after both of you are gone may pay more in capital gains tax on any assets held in the subtrusts if automatic allocation is made between the subtrusts and the assets appreciate in value after the date of death of the first spouse.

To provide maximum flexibility to the family following the death of the first spouse, you should consider amending your estate plan to remove the automatic allocation and having all the assets pass to one subtrust. The surviving spouse would then have the ability to reallocate (i.e., disclaim) a portion of the assets, if necessary, but the reallocation would be made after evaluating both the income tax and estate tax situation at that time.

Realizing this may be a lot to digest, the main point is that if you have not recently reviewed your estate plan, you should do so to see if any changes need to be made. Rest assured that any change would be implemented only after collaboration and concurrence of all of your advisors (i.e., your financial advisors, your accountant and your attorney). #estateplanning #taxplanning #incometaxplanning #portability #estateplanupdate