Probate

What Should I Know about Beneficiary Designations?

A designated beneficiary is named on a life insurance policy or some type of investment account as the designated recipient of those assets, in the event of the account holder’s death. The beneficiary designation doesn’t replace a signed will but takes precedence over any instructions about these accounts in a will. If the decedent doesn’t have a will, the beneficiary may see a long delay in the probate court.

If you’ve done your estate planning, most likely you’ve spent a fair amount of time on the creation of your will. You’ve discussed the terms with an established estate planning attorney and reviewed the document before signing it.

FEDweek’s recent article entitled “Customizing Your Beneficiary Designations” points out, however, that with your IRA, you probably spent far less time planning for its ultimate disposition.

The bank, brokerage firm, or mutual fund company that acts as custodian undoubtedly has a standard beneficiary designation form. It is likely that you took only a moment or two to write in the name of your spouse or the names of your children.

A beneficiary designation on account, like an IRA, gives instructions on how your assets will be distributed upon your death.

If you have only a tiny sum in your IRA, a cursory treatment might make sense. Therefore, you could consider preparing the customized beneficiary designation form from the bank or company.

You can address various possibilities with this form, such as the scenario where your beneficiary predeceases you, or she becomes incompetent. Another circumstance to address, is if you and your beneficiary die in the same accident.

These situations aren’t fun to think about but they’re the issues usually covered in a will. Therefore, they should be addressed, if a sizeable IRA is at stake.

After this form has been drafted to your liking, deliver at least two copies to your custodian. Request that one be signed and dated by an official at the firm and returned to you. The other copy can be kept by the custodian.

Reference: FEDweek (Dec. 26, 2019) “Customizing Your Beneficiary Designations”

Fixing an Estate Plan Mistake

When an issue arises, you need to seek the assistance of a qualified and experienced estate planning attorney, who knows to fix the problems or find the strategy moving forward.

For example, an irrevocable trust can’t be revoked. However, in some circumstances it can be modified. The trust may have been drafted to allow its trustees and beneficiaries the authority to make certain changes in specific circumstances, like a change in the tax law.

Those kinds of changes usually require the signatures from all trustees and beneficiaries, explains The Wilmington Business Journal’s recent article entitled “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess.”

Another change to an irrevocable trust may be contemplated, if the trust’s purpose has become outdated or its administration is too expensive. An estate planning attorney can petition a judge to modify the trust in these circumstances when the trust’s purposes can’t be achieved without the requested change. Remember that trusts are complex, and you really need the advice of an experienced trust attorney.

Another option is to create the trust to allow for a “trust protector.” This is a third party who’s appointed by the trustees, the beneficiaries, or a judge. The trust protector can decide if the proposed change to the trust is warranted. However, this is only available if the original trust was written to specify the trust protector.

A term can also be added to the trust to provide “power of appointment” to trustees or beneficiaries. This makes it easier to change the trust for the benefit of current or future beneficiaries.

There’s also decanting. This is when the assets of an existing trust are “poured” into a new trust with different terms. This can include extending the trust’s life, changing trustees, fixing errors or ambiguities in the original language, and changing the legal jurisdiction. State trust laws vary, and some allow much more flexibility in how trusts are structured and administered.

The most drastic option is to end the trust. The assets would be distributed to the beneficiaries, and the trust would be dissolved. Approval must be obtained from all trustees and all beneficiaries. A frequent reason for “premature termination” is that a trust’s assets have diminished in value to the extent that administering it isn’t feasible or economical.

Again, be sure your estate plan is in good shape from the start. Anticipating problems with the help of your lawyer, instead of trying to solve issues later is the best plan.

Reference: Wilmington Business Journal (Jan. 3, 2020) “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess”

How Do I Incorporate My Business into My Estate Plan?

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about having it continue after you retire or pass away.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that estate planning and getting their affairs in order happens when they’re older. While that’s true for the most part, it’s only because that’s the stage of life when many people begin pondering their mortality and worrying about what will happen when they’re gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.

Business continuity is a big concern for many entrepreneurs. This can be a touchy subject, both personally and professionally, so it’s better to have this addressed while you’re in charge rather than leaving the company’s future in the hands of others who are emotionally invested in you or in your work. One option is to create a living trust and will that outs parameters in place for a trustee to carry out. With these decisions in place, you’ll avoid a lot of stress and conflict for those you leave behind.

Let them be upset with you, rather than with each other. This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names a successor to be in charge of operating the business, if you should become incapacitated or when you pass away.

A power of attorney document will nominate an agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries.

Estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it’s vital to plan for all that life may bring.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

How Do I Disinherit a Family Member?

Kiplinger’s recent article, “Four Ways to Disinherit Family Members,” says that quite a few families don’t get along. However, when considering estate planning, the problem is that without a valid will leaving money to other individuals, family members are the “default” recipient of your estate. If you decide to leave any property using your will, your next-of-kin must still be given legal notice of your estate being probated (even if they’re being disinherited), and usually they’re only ones who can legitimately contest your will.

If you do have bad family relations and don’t want family members contesting your will, there are several legal tactics you can use.

  1. Leave property outside of your will. You’ll only need to probate property that’s not already effectively left to someone outside of probate. Therefore, when you name a beneficiary or co-owner on your accounts or real estate, that property won’t go through probate. Similarly, life insurance policies and retirement plans ask you to name a beneficiary, and investment and bank accounts usually let you name a “transfer on death” beneficiary. Finally, any property passing by living trusts also avoids probate.
  2. Add a ‘no-contest’ clause to your will. If you decide to disinherit your family or leave them less than they would be entitled to if you had no will, you can use a “no-contest” (aka “in terrorem”) clause. A no-contest clause states that if someone contests your will, they get nothing. However, people mess up by adding a no-contest clause, then they leave no property to the disinherited family member. Because the disowned family member is getting nothing anyway, he has nothing to lose by contesting the document. Thus, the clause serves no purpose. For a no-contest clause to be effective, leave a more-than-nominal bequest and let the potential contestant know that there’s a decent alternative to receiving nothing. Leaving them an amount acts as an incentive to not contest the will.
  3. Documenting the reasons for disinheriting. Use descriptive letters to supplement (and not supplant) your proper legal documents, and create formal, signed memorandums with notarized signatures to support but not replace those documents.
  4. Create other legal documents to disinherit your spouse. Pre-nuptial and post-nuptial agreements can address what happens, if you get divorced and when you die. You and your spouse may also “waive” estate rights in a separate document that doesn’t even deal with a potential divorce. The only downside with these agreements, is that they require both parties to agree. They also usually require separate legal counsel to make them most effective.

Work with a qualified estate panning attorney when you want to leave someone out of your will.

Reference: Kiplinger (November 13, 2019) “Four Ways to Disinherit Family Members”

Why is the Cars’ Ric Ocasek’s Wife Contesting His Will?

“I have made no provision for my wife Paulina Porizkova (‘Paulina’), as we are in the process of divorcing,” the late Cars’ singer Ric Ocasek wrote in his will.

Wealth Advisor’s recent article, “Cars singer Ric Ocasek cuts supermodel wife Paulina Porizkova out of will,” reports that the will went on to state: “Even if I should die before our divorce is final … Paulina is not entitled to any elective share … because she has abandoned me.”

Porizkova was the one who discovered her estranged husband’s body in September, as she brought him a cup of coffee. Ocasek was recovering in his New York City townhouse from a recent surgery.

The couple had two sons together but ended their marriage in May 2018, after 28 years. They first met while filming the music video for the Cars’ song “Drive” in 1984.

Porizkova said that Ocasek’s death was “untimely and unexpected.”

“I found him still asleep when bringing him his Sunday morning coffee,” she wrote in a statement published to Instagram following Ocasek’s death.

“I touched his cheek to rouse him. It was then I realized that during the night he had peacefully passed on.”

Reports say that Ocasek’s will lists his assets to include $5 million in “copyrights,” but only $100,000 in “tangible personal property” and $15,000 in cash.

The document doesn’t detail what constitutes the “copyrights” assets. Even though $5 million may appear low for a rock-legend like the Cars’ Ocasek, he likely had money stashed away in trusts. One reason why people use trusts, is to protect their privacy.

Ocasek’s will looks to have excluded two of his six sons, but not the children he had with Porizkova. Perhaps these two sons may have been compensated through other financial means.

The document indicates that Ocasek signed the will on August 28, just a month before his death. The 75-year-old died of heart disease on September 15.

Pulmonary emphysema, a type of lung disease, had also contributed to his death, the medical examiner said.

Reference: Wealth Advisor (November 12, 2019) “Cars singer Ric Ocasek cuts supermodel wife Paulina Porizkova out of will”

The Downside of an Inheritance

As many as 1.7 million American households inherit assets every year. However, almost seventy-five percent of all heirs lose their inheritance within a few years. More than a third see no change or even a decline in their economic standing, says Canyon News in the article “Three Setbacks Associated With Receiving An Inheritance.” Receiving an inheritance should be a positive event, but that’s often not the case. What goes wrong?

Problems with inheritance
Inheritances can be great, but they can have a downside too.

Family battles. A survey of lawyers, trust officers, and accountants conducted by TD Wealth found that at 44 percent of all inheritance setbacks are caused by family disagreements. Conflicts often arise, when individuals die without a properly executed estate plan. Without a will, asset distributions are left to the law of the state and the probate court.

However, there are also times when even the best of plans are created and problems occur. This can happen when there are issues with trustees. Trusts are commonly used estate planning tools, a legal device that includes directions on how and when assets are to be distributed to beneficiaries. Many people use them to shield assets from estate taxes, which is all well and good. However, if a trustee is named who is adverse to the interests of the family members, or not capable of properly managing the trust, lengthy and expensive estate battles can occur. Filing a claim against an adversarial trustee can lead to divisions among beneficiaries and take a bite out of the inheritance.

Poor tax planning. Depending upon the inheritance and the beneficiaries, there could be tax consequences including:

  • Estate Taxes. This is the tax applied to the value of a decedent’s assets, properties and financial accounts. The federal estate tax exemption as of this writing is very high—$11.4 million per individual—but there are also state estate taxes. Although the executor of the estate and not the beneficiary is typically responsible for the estate taxes, it may also impact the beneficiaries.
  • Inheritance Taxes. Some states have inheritance taxes, which are based upon the kinship between the decedent and the heir, their state of residence and the value of the inheritance. These are paid by the beneficiary, and not the estate. Six states collect inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Spouses do not pay inheritance taxes, when their spouse’s die. Beneficiaries who are not related to decedents will usually pay higher inheritance taxes.
  • Capital Gains Tax. In certain circumstances, heirs pay capital gains taxes. Recipients may be subject to capital gains taxes, if they make a profit selling the assets that they inherited. For instance, if someone inherits $300,000 in stocks and the beneficiary sells them a few years later for $500,000, the beneficiary may have to pay capital gains taxes on the $200,000 profit.

Impacts on Government Benefits. If an heir is receiving government benefits like Social Security Disability Insurance (SSDI), Supplemental Social Security (SSS) or Medicaid, receiving an inheritance could make them ineligible for the government benefit. These programs are generally needs-based, and recipients are bound to strict income and asset levels. An estate planning attorney will usually plan for this with the use of a Special Needs Trust, where the trust inherits the assets, which can then be used by the heir without losing their eligibility. A trustee is in charge of the assets and their distributions.

An estate planning attorney can work with the entire family, planning for the transfer of wealth and helping educate the family, so that the efforts of a lifetime of work are not lost in a few years’ time.

Reference: Canyon News (October 15, 2019) “Three Setbacks Associated With Receiving An Inheritance”

What Is a Pour-Over Will?

If the goal of estate planning is to avoid probate, it seems counterintuitive that one would sign a will, but the pour-over will is an essential part of some estate plans, reports the Times Herald-Record’s article “Pour-over will a safety net for a living trust.”  So, what is a pour-over will?

What is a pour-over will
A pour-over will works in conjunction with your trust to make sure all your assets are distributed according to your wishes.

If you pass away with assets in your name alone, those assets will have to go through probate. The pour-over will names a trust as the beneficiary of probate assets, so the trust controls who receives the inheritance. The pour-over will works as a backup plan to the trust, and it also revokes past wills and codicils.

Living trusts became very common, and widely used after a 1991 AARP study concluded that families should be using trusts rather than wills, and that wills were obsolete. Trusts were suddenly not just for the wealthy. Middle class people started using trusts rather than wills, to save time and money and avoid estate battles among family members. Trusts also serve to keep your financial and personal affairs private. Wills that are probated are public documents that anyone can review.

Even a simple probate lasts about a year, before beneficiaries receive inheritances. A trust can be settled in months. Regarding the cost of probate, it is estimated that between 2—4% of the cost of settling an estate can be saved by using a trust instead of a will.

When a will is probated, family members receive a notice, which allows them to contest the will. When assets are in a trust, there is no notification. This avoids delay, costs and the aggravation of a will contest.

Wills are not a bad thing, and they do serve a purpose. However, this specific legal document comes with certain legal requirements.

The will was actually invented more than 500 years ago, by King Henry VIII of England. Many people still think that wills are the best estate planning document, but they may be unaware of the government oversight and potential complications when a will is probated.

Speak with an experienced estate planning attorney to discuss how probate may impact your heirs and see if you agree that the use of a trust and a pour-over will would make the most sense for your family.

Reference: Times Herald-Record (Sep. 13, 2019) “Pour-over will a safety net for a living trust.”

Estate Planning Is for Everyone

As we go through the many milestones of life, it’s important to plan for what’s coming, and also plan for the unexpected. An estate planning attorney works with individuals, families and businesses to plan for what lies ahead, says the Cincinnati Business Courier in the article “Estate planning considerations for every stage of life.” For younger families, it’s important to remember that estate planning is for everyone, and having an estate plan is like having life insurance: it is hoped that the insurance is never needed, but having it in place is comforting.

Estate planning is for everyone
Estate planning is the most effective way to protect against life’s unforeseen events, no matter what stage of life you may be in.

For others, in different stages of life, an estate plan is needed to ensure a smooth transition for a business owner heading to retirement, protecting a spouse or children from creditors or minimizing tax liability for a family.

Here are some milestones in life when an estate plan is needed:

Becoming an adult. It is true, for most 18-year-olds, estate planning is the last thing on their minds. However, as proof that estate planning is for everyone, at 18 most states consider them legal adults, and their parents no longer control many things in their lives. If parents want or need to be involved with medical or financial matters, certain estate planning documents are needed. All young adults need a general power of attorney and health care directives to allow their parents to step in and help, if something happens.

That can be as minimal as a parent talking with a doctor during an office appointment or making medical decisions during a crisis. A HIPAA release should also be prepared. A simple will should also be considered, especially if assets are to pass directly to siblings or a significant person in their life, to whom they are not married.

Getting married. Marriage unites individuals and their assets. For newly married couples, estate planning documents should be updated for each spouse, so their estate plans may be merged, and the new spouse can become a joint owner, primary beneficiary and fiduciary. In addition to the wills, power of attorney, healthcare directive and beneficiary designations also need to be updated to name the new spouse or a trust. This is also a time to start keeping a list of assets, in case someone needs to access accounts.

When a child is born. When a new child joins the family, having an estate plan becomes especially important. Choosing guardians who will raise the children in the absence of their parents is the hardest thing to think about, but it is critical for the children’s well-being. A revocable trust may be a means of allowing the seamless transfer and ongoing administration of the family’s assets to benefit the children and other family members.

Part of business planning. Estate planning should be part of every business owner’s plan. If the unexpected occurs, the business and the owner’s family will also be better off, regardless of whether they are involved in the business. At the very least, business interests should be directed to transfer out of probate, allowing for an efficient transition of the business to the right people without the burden of probate estate administration.

If a divorce occurs. Divorce is a sad reality for about half of today’s married couples. The post-divorce period is the time to review the estate plan to remove the ex-spouse, change any beneficiary designations, and plan for new fiduciaries. It’s important to review all accounts to ensure that any beneficiary designations are updated. A careful review by an estate planning attorney is worth the time to make sure no assets are overlooked.

Upon retirement. Just before or after retirement is an important time to review an estate plan. Children may be grown and take on roles of fiduciaries or be in a position to help with medical or financial affairs. This is the time to plan for wealth transfer, minimizing estate taxes and planning for incapacity.

Reference: Cincinnati Business Courier (Sep. 4, 2019) “Estate planning considerations for every stage of life.”

Does a Beneficiary of an Estate Need to Live in the U.S.?

When a person dies without a will, the distribution of his or her estate assets is governed by the state’s intestacy statute. All states have laws that instruct the court on how to disburse the intestate decedent’s property, usually according to how close in relationship they are to the person who passed away.  But what happens when a beneficiary of an estate doesn’t live in the U.S.?

Does a beneficiary of an estate have to live in the US?
Different states have different laws, but, in general, beneficiaries of an estate don’t have t live in the United States.

A recent nj.com article responded to the following question: “My ex’s new wife isn’t a citizen. Does she get an inheritance?” The article explains that under the intestacy laws of New Jersey, for example, if the deceased had children who aren’t the children of the surviving spouse, the surviving spouse is entitled to the first 25% of the estate but not less than $50,000 nor more than $200,000, plus one-half of the balance of the estate.

Also, under New Jersey law, aliens or those who are not citizens of the United States are eligible to inherit assets.

In California, if you die with children but no spouse, the children inherit everything. If you have a spouse but no children, parents, siblings, or nieces or nephews, the spouse inherits everything. If you have parents but no children, spouse, or siblings, your parents inherit everything. If you have siblings but no children, spouse, or parents, those siblings inherit everything.

Also in California, if you’re married and you die without a will, what property your spouse will receive, is based in part on how the two of you owned your property. Was it separate property or community property? California is a community property state, so your spouse will inherit your half of the community property.

In that case, an ex-husband’s wife who lives in and is a citizen of the Philippines doesn’t need to be physically present in the state to inherit assets from her husband.

If the deceased owned property in the Philippines, the distribution of those assets would be according to the laws of that country.

Reference: nj.com (August 28, 2019) “My ex’s new wife isn’t a citizen. Does she get an inheritance?”

How Does a Probate Proceeding Work?

A Will, also known as Last Will and Testament, is a legal document that is used in probate court.  It’s used when a person dies with assets that are in their name alone without a surviving joint owner or beneficiary designated, says the Record Online in the article “Anatomy of a probate proceeding.”

So, how does a probate proceeding work?

How does a probate proceeding work
Probate has been referred to as the law suit you file against yourself after you pass away.

Probate is a judicial or court proceeding, where the probate court has jurisdiction over the assets of the person who has died. The court oversees the personal representative’s payment of debts, taxes and probate fees, in addition to supervising distribution of assets to the person’s beneficiaries. The personal representative of the will has to manage the probate assets and then report to the court.

Without a will, things can get messy. A similar court proceeding takes place, but it is known as intestate succession, and the assets are distributed according to state law.

To start the probate proceeding, the personal representative completes and submits a Petition for Administration with the probate court. Most personal representatives hire an estate planning attorney to help with this. The attorney knows the process, which keeps things moving along.

The probate petition lists the beneficiaries named in the will, plus certain relatives who must, by law, receive legal notice in the mail. Let’s say that someone disinherits a child in their will. That child receives notice and learns they have been disinherited. Beneficiaries and relatives alike must return paperwork to the court stating that they either consent or object to the provisions of the will.

A disinherited child has the right to file objections with the court, and then begin a battle for inheritance that is known as a will contest. This can become protracted and expensive, drawing out the probate process for years. A will contest places all of the assets in the will in limbo. They cannot be distributed unless the court says they can, which may not occur until the will contest is completed.

In addition to the expense and time that probate takes, while the process is going on, assets are frozen. Only when the court gives the all clear does the judge issue what are called Letters of Administration, or “Letters Testamentary,” which allows the executor to start the process of distributing funds. They must open an estate account, apply for a taxpayer ID for the account, collect the assets and ultimately, distribute them, as directed in the will to the beneficiaries.

Now that you know a little about how a probate proceeding works you’re probably asking whether a will contest, or probate be avoided? Avoiding probate, or having selected assets taken out of the estate, is one reason that people use trusts as part of their estate plan. Assets can also be placed in joint ownership, and beneficiaries can be added to accounts, so that the asset goes directly to the beneficiary.

By working closely with an estate planning attorney, you’ll have the opportunity to prepare an estate plan that addresses how you want assets to be distributed, which assets may be placed outside of your estate for an easier transfer to beneficiaries and what you can do to avoid a will contest, if there is a disinheritance situation looming.

Reference: Record Online (August 24, 2019) “Anatomy of a probate proceeding”

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