Estate Planning and a Second Marriage

In California, a community property state, a resident can bequeath (leave) 100% of their separate property assets and half of their community property assets. A resident may only bequeath the entirety of a community property asset to someone other than their spouse with their spouse’s consent or acquiescence. This can be extremely important to those in second marriages with prior children.

Wealth Advisor’s recent article entitled “Estate planning for second marriages” asks, first, does the individual’s (the testator) spouse even need support? If they don’t, a testator typically leaves his or her separate property assets directly to his or her own children. However, because the surviving spouse is an heir of the testator, his or her will and/or trust must acknowledge the marriage and say that the spouse is not inheriting. Otherwise, the surviving spouse as heir may be entitled either to a one-half or one-third share in the testator’s separate property, along with all of the couple’s community property assets. The surviving spouse would inherit, if the testator died intestate (with no will) or he or she passed with an outdated will he or she signed before this marriage that left out the current spouse.

If the spouse needs support, consider the assets and family relationships. Determine if the assets are the surviving spouse’s separate property from prior to marriage or from inheritance while married. It is also important to know if the testator’s spouse and children get along and whether it’s possible for the beneficiaries to inherit separate assets. If the testator’s surviving spouse and children aren’t on good terms and/or are close in age, and if it’s possible for separate assets to go to each party, perhaps they should inherit separate assets outright and part company. If not, it can get heated and complicated quickly. For example, the testator’s house could be left to his or her children and a retirement plan goes to the testator’s spouse.

If that type of set-up doesn’t work, a testator might consider making the spouse a lifetime beneficiary of a trust that owns some or all of an individual’s assets. A trust requires careful drafting, so work with an experienced estate planning attorney.

Next, determine if the children need support, and if so, what kind of support, such as Supplemental Security Income. Also think about whether the children can manage an outright inheritance or if a special needs or a support trust is required.

This just scratches the surface of this complex topic. Talk to an experienced estate planning attorney about your specific situation.

Reference: Wealth Advisor (Feb. 23, 2021) “Estate planning for second marriages”

 

Should I Add that to My Will?

In general, a last will and testament is an easy and straightforward way to state who gets what when you die and designate a guardian for your minor children, if you (and your spouse) die unexpectedly.

MSN’s recent article entitled “Things you should never put in your will” explains that you can be specific about who receives what. However, attaching strings or conditions may not work because there’s no one to legally enforce the terms. If you have specific details about how a person should use their inheritance, whether they are a spendthrift or someone with special needs, a trust may be a better option because you’ll have more control, even from beyond the grave.

Keeping some assets out of your will can actually benefit your future heirs because they’ll get their inheritance faster. When you pass on, your will must be “proven” and validated in a probate court prior to distribution of your property. This process takes some time and effort, if there are issues—including something in your will that doesn’t need to be there. For example, property in a trust and payable-on-death accounts are two types of assets that can be distributed to your beneficiaries without a will.

Don’t put anything in a will that you don’t own outright. If you jointly own assets with someone, they will likely become the new owner. For example, this applies to a property acquired by married couples in community property states.

Property in a revocable living trust. This is a separate entity that you can use to distribute your assets which avoids probate. When you title property into the trust, it is subject to the trust’s rules.  Because a trust operates independently, you must avoid inconsistencies and not include anything in your will that the trust addresses. Contact an experienced estate planning attorney to discuss.

Assets with named beneficiaries. Some financial accounts are payable-on-death or transferable-on-death. They are distributed or paid out directly to the named beneficiaries. That makes putting them in a will unnecessary (and potentially troublesome, if you’re inconsistent). However, you can add information about these assets in your letter of instruction (see below). As far as bank accounts, brokerage or investment accounts, retirement accounts and pension plans and life insurance policies, assign a beneficiary rather than putting these assets in your will.

Jointly owned property. Property you jointly own with someone else will almost always directly pass to the co-owner when you die, so do not put it in your will. A common arrangement is joint tenancy with rights of survivorship.

Other things you may not want to put in a will. Businesses can be given away in a will, but it’s not the best plan. Wills must be probated in court and that can create a rough transition after you die. Instead, work with an experienced estate planning attorney on a succession plan for your business and discuss any estate tax issues you may have as a business owner.

Adding your funeral instructions in your will isn’t optimal. This is because the family may not be able to read the will before making arrangements. Instead, leave a letter of instruction with any personal wishes and desires.

Reference: MSN (Dec. 8, 2020) “Things you should never put in your will”

 

Do I Need More Than a Will?

If you die without a will (i.e., intestate), a court will determine who inherits your assets and who would care for any surviving children as a guardian.  CNBC’s recent article entitled “A will doesn’t cover all your bases when it comes to end-of-life decisions. Here’s what else you need” explains that some assets pass outside of the will including retirement accounts and life insurance.

Start your estate planning with a will which is just one piece of an “estate plan.” Creating a plan for your assets helps make certain that your wishes will be carried out upon your death and that family grumbling doesn’t escalate into destroyed relationships. Here are some additional things about estate planning you should know.

What passes via your will. A will is a document that allows you to say who gets what when you die. However, there are some assets that pass outside of the will, such as retirement accounts like 401(k) plans and individual retirement accounts (IRAs), and life insurance policies. As a result, the person named as a beneficiary on those accounts will get the money, no matter what your will says. Regular bank accounts also can have beneficiaries listed on a payable-on-death form, also known as a POD. If you own a home, check how it’s titled to ensure it ends up passing as you wish upon your death.

Executor. As part of the will-making process, you’ll need to name an executor of your will (sometimes called a personal representative). This entails making sure that assets are liquidated, the assets go to the proper beneficiaries, paying any debts not discharged and selling your home.

To prepare a will, you can hire an estate planning attorney in your local area, who knows state law. If use an online option, note that not all of the web-based alternatives will necessarily reflect the specifics of your state’s law. Online forms or software may not be compliant with your local law.

Living Will. An estate plan will typically include a few other legal documents, such as an advance health-care directive, also known as a living will. This document states your wishes, if you become incapacitated due to illness or injury, like whether you want to be kept on life support if there’s no hope of recovery.

Powers of Attorney. If you become incapacitated, your designated attorney-at-fact or agent will handle your medical and financial affairs. Similar to selecting an executor, be certain that he or she is trustworthy and smart, with the ability, skill set, time and desire to make such decisions and do these tasks.

Make a list of critical documents. Create an organized list of information your executor will need to settle your estate and include passwords, so your online accounts can be accessed.

Look at a trust. If you want your children or loved ones to receive money but don’t want to give a young adult or someone with poor money management free access to a lot of cash, you can create a trust for your beneficiaries. A trust holds assets on behalf of your beneficiaries, so they can only receive money according to how (or when) you’ve stated in the trust documents.

Again, it is important that you contact an experienced estate planning attorney to help you.

Reference: CNBC (July 27, 2020) “A will doesn’t cover all your bases when it comes to end-of-life decisions. Here’s what else you need”

 

Why Do I Need to Have Up-to-Date Beneficiaries on My Accounts?

When a family member passes away, it can be a very unsettling time. There are many tasks that need to be accomplished in a short amount of time. One way that you can lessen that burden for your heirs by clearly telling them your preferences for your assets. One element of this is making certain that you have accurate beneficiaries to your retirement and investment accounts.

Nerd Wallet’s recent article entitled “5 Reasons to Add Beneficiaries to Your Investment Accounts Now” says taking the time to do this will help save your heirs and family time, money and energy when they need it most. Let’s take a look at some of the compelling reasons to do this.

  1. Your beneficiaries get to keep more money (and get it faster). When your beneficiaries are assigned to your investment and retirement accounts, the assets will pass directly to them. However, if they are not, those accounts may have to go through the probate process to settle an estate after someone dies. A typical probate case can drag on for a year or longer, and during that time, your beneficiaries are unable to access their inheritance. “Court” also means expenses, time, effort and added stress—all of which are things they’d rather avoid.
  2. Less stress for your heirs. When you make certain that you designate the beneficiaries for your accounts, it can relieve your family of a heavy burden, so they’re not trying to figure out your finances while they’re grieving.
  3. Your beneficiaries will supersede your will. If you have beneficiaries named, those choices will typically override what is written in your will. Therefore, you can see that keeping your beneficiaries up-to-date is extremely important.
  4. It’s easy and painless. If you have a retirement account, such as a 401(k) or an IRA, your account will typically have its own beneficiary form within the account itself. With this, you are able to choose your beneficiaries when you open your account or review them later. With a regular investment account, you’ll need to ask for a transfer on death (TOD) form to make beneficiary elections.
  5. You recently experienced a change in your circumstances. If you experience a big life change, like getting married or having a child, it’s critical to update or add beneficiary elections immediately. It’s best to be prepared for the unexpected.

Remember that in community property states, spouses may be entitled to half of the assets in an IRA — even if another beneficiary is listed — unless you have written consent. Ask a qualified estate planning attorney about state laws and setting up an estate plan to be sure your money goes to whom you want.

Reference: Nerd Wallet (January 22, 2020) “5 Reasons to Add Beneficiaries to Your Investment Accounts Now”

 

Do It Yourself Wills Go Wrong–Fast

What happens when a well-meaning person decides to create a will, after reading information from various sources on the internet? There’s no end of problems, as described in the Glen Rose Reporter’s article “Do-it-yourself estate plan goes awry.”

The woman started her plan by deeding her home to her three children retaining a life estate for herself.

By doing so, she has eliminated the possibility of either selling the house or taking out a reverse mortgage on the home, if she ever needs to tap its equity.

Since she is neither an estate planning attorney nor an accountant, she missed the tax issue completely.

By deeding the house, the transfer has caused a taxable transaction. Therefore, she needs to file a gift tax return because of it. At the same time, her life estate diminishes the value of the gift, and her estate is not large enough to require her to actually pay any tax.

She was puzzled to learn this, since there wasn’t any tax when her husband died and left his share of the house to her. That’s because the transfer of community property between spouses is not a taxable event.

However, that wasn’t the only tax issue to consider. When the house passed to her from her husband, she got a stepped-up basis meaning that since the house had appreciated in value since she bought it, she only had to pay taxes on the difference in the increased value at the time of her husband’s death and what she sold the property for.

By transferring the house to the children, they don’t get a stepped-up basis. This doesn’t apply to a gift made during one’s lifetime. When the children get ready to sell the home, the basis will be the value that was established at the time of her husband’s death, even if the property increased in value by the time of the mother’s death. The children will have to pay tax on the difference between that value, which is likely to be quite lower, and the sale price of the house.

There are many overlapping issues that go into creating an estate plan. The average person who doesn’t handle estate planning on a regular basis (and even an attorney who does not handle estate planning on a regular basis), doesn’t know how one fact can impact another.

Sitting down with an experienced estate planning attorney, who understands the tax issues surrounding estate planning, gifting, real estate, and inheritances, will protect the value of the assets being passed to the next generation and protect the family. It’s money well spent.

Reference: Glen Rose Reporter (September 17, 2019) “Do-it-yourself estate plan goes awry”

 

How Do I Deed My Home into a Trust?

Say that a husband used his inheritance to purchase the family home outright. The wife signed a quitclaim deed to him to put the property into his living trust with the condition that if he died before his wife, she could live in the home until her death.

However, a common issue is that the husband or the creator of the trust never signed the living trust. So what would happen to the property if the husband were to die before the wife?

This can be complicated if the couple lives out-of-state and it’s a second marriage for each of the spouses. They both also have adult children from prior marriages.

The Herald Tribune’s recent article, “Home ownership complications need guidance from estate planning attorney,” says that in this situation it’s important to know if the deed was to the husband, individually or to his living trust. If the wife deeded the home to her husband, individually, he then owns her share of the home. However, if the wife deeded the home to his living trust, and the trust was never created, the wife may still own the husband’s interest in the home. You need to contact an experienced estate planning attorney if this is the case.

First, the wife should see if the deed was even filed or recorded. If it wasn’t recorded or filed, she could simply destroy the document and keep the status of the title as it was. However, if the document was recorded and she transferred ownership to her husband, he would be the sole owner of the home, subject to her marital rights under state law.

If the trust doesn’t exist, her deed transfer to an entity that doesn’t exist would create a situation, where she could claim that she still owned her interest in the home. However, the home may now be owned by the spouses, as tenants in common, rather than joint tenants with rights of survivorship.

To complicate things further, if the husband now owns the home and the wife has marital rights in the home, upon his death, she may still be entitled to a share of the home under her husband’s will, if he has one, or by the laws of intestacy. However, the husband’s children would also own a share of his share of the home. At that point, the wife would co-own the home with his children.

You can see how crazy this can get. It’s best to seek the advice of a qualified estate planning attorney to guide you through the process and make sure that the proper documents get signed and filed or recorded.

Reference: The (Sarasota, FL) Herald Tribune (September 8, 2019) “Home ownership complications need guidance from estate planning attorney”

 

Your Will Isn’t the End of Your Estate Planning

Even if your financial life is pretty simple, you should have a will. However, there’s more work to be done. Assets must be properly titled, so that assets are distributed as intended upon death.

Forbes’ recent article, “For Estate Plan To Work As Intended, Assets Must Be Properly Titled” notes that with the exception of the choice of potential guardians for children, the most important function of a will is to make certain that the transfer of assets to beneficiaries is the way you intended.

However, not all assets are disposed of by a will—they pass to beneficiaries regardless of the intentions stated in the will. Your will only controls the disposition of assets that fall within your probated estate.

An example of when a designated beneficiary controls the disposition of a financial asset is life insurance. Other examples are retirement accounts, such as a 401(k) or an IRA. When there’s a named beneficiary, assets will be distributed accordingly, which may be different than the intentions stated in a will.

The title of real estate controls its disposition. When property is jointly owned, how it is titled determines if the decedent’s interest in the property passes to the surviving partner, becomes part of the decedent’s estate, or passes to a third party. Titling of jointly owned property can be complicated in community property states.

In the same light, a revocable trust is an inter vivos or living trust that’s created during the grantor’s life, as part of an estate plan.

Such a trust can be used to ensure privacy, avoid the expenses and delays in the probate process and provide for continuity of asset management. A critical part of the planning is that the grantor must transfer (or retitle) assets to the trust.

Wills are very important in estate planning. To ensure that your estate plan fulfills your intentions, talk to an estate planning attorney about the proper titling of your assets.

Reference: Forbes (May 20, 2019) “For Estate Plan To Work As Intended, Assets Must Be Properly Titled”