Tag: Revocable Trust

How Divorce Can Impact Your Estate Plan – Real Estate and Personal Property

June 2, 2016

After addressing property settlement agreements and beneficiary designations, this next article in the series on divorce and estate planning discusses real estate and personal property. 

Married couples tend to own real estate together, whether as a primary residence, a vacation home or an investment property, and may have purchased a variety of personal property together, such as artwork, furnishings and the like.  Upon divorce, Virginia law dictates that all rights in real and personal property, “including the right of survivorship in real or personal property title to which is vested in the parties as joint tenants or as tenants by the entirety, with survivorship as at common law, shall be extinguished. . .”  Va. Code §20-111.  Thus, by operation of law, the ownership of real and personal property is converted to ownership as tenants in common.

Now depending on the property settlement agreement, each party will generally own fifty percent of the real and/or personal property.  In order to ensure that the real and/or personal property is used for an individual’s benefit during incapacity and distributed to his or her beneficiaries upon death, a person should consider transferring such real and personal property to a revocable living trust (the benefits of which I have discussed in earlier posts). 

Alternatively, for the real property, Virginia has the Uniform Real Property Transfer on Death Act, which allows a person to essentially designate a beneficiary for his or her real property by way of a transfer on death deed.  This deed is revocable, provided certain formalities under the statutes are followed, but allows for you to be on record to the public as to who or what entity should receive the real property.  Although it is a revocable designation, it is not that straightforward to change, particularly if you decide to do so multiple times, which may create issues if death occurs in the midst of a change.  Thus, a transfer on death deed should only be considered in certain circumstances depending on your overall estate plan.

With all that said, keep in mind that if nothing is done to handle the real and personal property, then both will pass by operation of law (and perhaps to unintended beneficiaries – think #Prince).  More control exists if real and personal property are passed through an effective estate plan, (e.g., by way of a revocable living trust) versus letting state statute decide.  So, if you are recently divorced or in the process of divorcing, ask yourself what should happen to your real and personal property and be sure to take action so the real and personal property does pass in accordance with your wishes.  #divorce #estateplanning #transferondeath  #revocablelivingtrust

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

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

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