Tag: Revocable Living Trust

How Divorce Can Impact Your Estate Plan – Beneficiary Designations

May 26, 2016

The last article regarding the impact of divorce on one’s estate plan talked about property settlement agreements and the obligations that must be incorporated into the estate plan.  This next article will discuss how most individuals going through a divorce have qualified retirement accounts, life insurance policies and cash, savings or brokerage accounts that may have a beneficiary designation or payable on death or transfer on death designation that needs to be updated.  Very often the named beneficiary is the former spouse.  What happens if the beneficiary designation is not updated and a person dies having named his or her former spouse on these accounts? 

Under Virginia law, upon the entry of a decree of divorce, “any revocable beneficiary designation. . .that provides for the payment of any death benefit to the other party is revoked.  A death benefit prevented from passing to a former spouse by this section shall be as if the former spouse had predeceased the decedent.”  Va. Code §20-111.1(A).  The statute includes payments from life insurance, annuities, retirement accounts, compensation agreements or other contracts where assets are paid at death.  This law is favorable for those that forget to update their beneficiary designations, however, there are exceptions.  The law does not apply (a) if the property settlement agreement and/or divorce decree provides for the former spouse to be named; or (b) to any trust or any death benefit payable to a trust.  Va. Code §20-111.1(C).  Furthermore, the Virginia law may be preempted by Federal law. 

If the Virginia law is preempted by a Federal law, the Virginia law states that in the event the death benefit is paid to a former spouse for no consideration and the former spouse was not otherwise entitled to such payment, the former spouse will be “personally liable for the amount of the payment to the person who would have been entitled to it were this section not preempted.”  Va. Code §20-111.1(D).  Thus, if a person remarries, but fails to name their new spouse as a beneficiary on their Federal retirement account and continues to name their former spouse, arguably, the new spouse could seek reimbursement from the former spouse.

However, in the case of Hillman vs. Maretta, a widow sued the decedent’s former spouse for the amount the former spouse received under the decedent’s federal employees’ group life insurance (“FEGLI”).  The parties acknowledged that Va. Code §20-111.1(A) was preempted by Federal law.  However, the widow argued that Va. Code §20-111.1(D) regarding personal liability was not preempted.  After careful analysis and consideration, the Circuit Court of Fairfax County held in favor of the widow.  On appeal to the Virginia Supreme Court, the Court ruled that the trial court erred and that Federal law trumps state law.  Ultimately, the U.S. Supreme Court agreed with the Virginia Supreme Court.       

Thus, in 2012, Virginia’s statute was modified to require every divorce decree to include a notice warning the parties that beneficiary designations may not be automatically revoked by operation of law as a result of the divorce.  Therefore, the parties are responsible for updating their beneficiary designations to avoid any unintended consequences.  As a result of the Hillman case, updating beneficiary designations, particularly beneficiary designations that are governed by Federal law, is critical.

So ask yourself – when was the last time you updated your beneficiary designations?  #divorce #estateplanning #beneficiarydesignation

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 

 

 

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

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

David Bowie’s Last Will and Testament – What Is to be Learned?

February 2, 2016

Last week David’s Bowie’s Last Will and Testament was filed in a New York Surrogate Court.  We learned how he wanted to be remembered, a subject I addressed in an earlier post.  We also learned how his considerable estate will be divided and about specific gifts he wanted to have made.  But most importantly, we learned that having a Last Will and Testament as the main instrument that details the disposition of our estate does not ensure privacy regarding our personal and financial affairs after death. In fact, having a Last Will and Testament means that anyone can see who benefits from an estate and ensures the Court has to be involved at some level. 

For some individuals, privacy may not be a priority issue after death, but for others privacy is tantamount.  This is why when you think about your own estate plan you should ask – “What level of privacy in my personal and financial affairs do I want to achieve after my death?”  If you want the utmost privacy, then consider using a Revocable Living Trust as the main instrument in which to dispose of your estate.  If, however, there are problematic parties or other reasons to have the Court supervise the administration of your estate, then perhaps having only a Last Will and Testament to dispose of your estate is the path to take.  But, you should consider who will have access to your estate plan and what will they learn as result.  Either way, a thoughtful conversation with your professional advisor should be had as you begin constructing your estate plan. #davidbowieswill #estateplanning #revocabletrust #livingtrust