Summary: Markets down, house value down…counting on that inheritance to make the gap? Then the heir loss prevention tips for last month and below will help you avoid getting scalped. Don’t count on throwing Momma from the train in 2010, it’s pretty unlikely the estate tax will disappear. So if you want to maintain that trust fund baby lifestyle, consider the following.
Mom’s Investment Horizon
So mom has CDs at 50 different banks (and lots of toasters). For her, investment risk means a lower CD rate. “While staying conservative might make sense for mom’s core portfolio that supports her daily living expenses, its really not necessary or appropriate for assets she won’t spend down,” suggests Ted Sarenski, CPA, PFS, DB&AB Financial Services, LLC. If mom’s planner can determine the principal to assure mom’s living expenses to say 95% of life expectancy, the remaining principal can be invested with a more appropriate asset allocation without jeopardizing her safety, peace of mind, or your Tuesday night meatloaf dinner. “You can get a pretty good handle on what her life expectancy really is by getting a life expectancy analysis (LE) from a number of independent companies,” recommends Susan J. Bruno, CPA, PFS of Beacon Wealth Consulting, LLC.
Ownership (Title) to Assets
How do your parents own their assets? This may control the ultimate distribution of assets regardless of what their will says. ◙ Adding “joint tenants” on the name of a bank statement or stock certificate can dramatically change who will receive an account following a parent’s death. ◙ If personal assets (e.g. jewelry) are held in a safe-deposit box, the legal presumption is that the owner of the box owns the assets. ◙ Distinguish “joint tenancy” from “tenants in common”, where each person owns an undivided interest in the property. On the death of a joint tenant, the survivor obtains ownership of the entire property. On the death of a tenant in common, the deceased person’s will governs where ownership of his interest in the property will be distributed.
◙ Community property can be an issue. Generally all property that a husband and wife acquire during their marriage while they are domiciled in one of the community property states belongs to each of them. If one of your parents remarries and lives with the new spouse in a community property state, these rules could have a huge effect on what you may ultimately inherit. The rule in community property states is “share and share alike.” They share not only in the physical property acquired but also in the income from the property and their salaries, wages, and other compensation for services. At the same time, each may have separate property. Spouses may also hold property between them in joint tenancy and generally may adjust their community and separate property between themselves (i.e., use a transmutation agreement).
Unique Problems Raised by Personal Property
Jewelry, art, and other personal property can raise a host of issues. Often these assets have tremendous sentimental value so that improper distribution can lead to fueds. If your parents will let you address the topic with them, there are a host of issues you should help them focus on ways you can help them on to assure that their wishes are carried out. What is Aunt Nellie’s wedding band worth? Valuing personal assets is often a very difficult task. When the value is largely sentimental, the task becomes impossible. This should be carefully considered by your Your parents should consider this carefully in determining how to handle personal property. Often, the best solution is for your parents them to specifically identify which asset should be given to which heir. A personal letter or note may be helpful in this regard. If your parents or other benefactor lists each item of personal property in their wills, the distribution of those items, as they have specified, will be assured. Well maybe.
Sample Clause: I give devise and bequeath my wedding band to my favorite nephew, Joseph Fordham. And exactly which Aunt Nellie’s wedding band exactly which one was she Aunt Nellie referring to? The one from her first or her sixth marriage? Which one was actually bequeathed? The case of the disappearing broach. Personal property is often tough to track.
Case Study: The case of the disappearing broach. Aunt Gertrude bequeathed her diamond broach to a particular niece Joanne. Her other assets were generally divided up by specific bequests as well. —$50,000 to one nephew, $75,000 to another, and so on. However, went when Aunt Gertrude died, no one, not even the executor, could find a diamond broach among her belongings. There were no letters indicating that she gave it away before she died. It wasn’t was not listed in any insurance policy. There were No claims had been filed for its loss or theft. Joanne really wanted the broach. The more she wanted it, the more the value of the broach seemed to soar. Aunt Gertrude’s executor couldn’t could not prove it was missing. How do you prove a negative? The ensuing legal battle, which ultimately was settled for $10,000 paid from the estate to Joanne, probably cost the family $25,000 in combined legal fees, and fractured the family relationships beyond repair.
What happens when cousin Sue sues? ◙ Planning for a will challenge should begin with your parents’ first estate estate-planning meeting, not after a lawsuit has been filed following their deaths. ◙ Expect your parent’s will be to be challenged if they leave a disproportionate amount to one beneficiary. ◙ Dissuade angry relatives from challenging your parent’s will in court by having your parent’s sign another will a few months later. Each new will revokes the prior will. But if a later will is invalidated (e.g, proven to be signed under duress), the prior will is reinstated and governs. So if relatives feel they were treated unfairly challenge the last will and they succeed in overturning it, then the prior will, which is identical as to the major distributions is reinstated. They’d have to successfully overturn that prior will as well! Each successive will should add some change, e.g. $1,000 to a new charity, to demonstrate that they reviewed and reconsidered the will, but did not change the primary distribution provisions. ◙ Several similar wills over a long time period will show a court that they did not write up a new will or change your their intentions on a whim.
Insure Against Mom’s New Spouse
So when mom marries the pool boy, insure that your inheritance will be protected. When mom’s new spouse is younger than you, suggest (very politely!) that Mom purchase a life insurance policy to fund your inheritance if she wants to leave most of her assets to her new hubby. While advisers often recommend a QTIP trust for the new spouse, if the new spouse is younger than you, you’ll be using the inheritance when the QTIP ends for dentures and Centrum Silver. “Consider a guaranteed universal life insurance policy on mom to insure that you’ll get an inheritance on mom’s death, not when the young pool boy eventually dies. This also gives mom the ability to plan with no constraints. A simpler solution for all,” suggests Susan J. Bruno, CPA, PFS of Beacon Wealth Consulting, LLC.
Mom’s Nuptial Agreement
If mom is going to remarry, encourage her to sign a prenuptial as the first line of defense in protecting her assets from later marital claims. Points mom should consider: ◙ Mom and her prospective spouse should each be represented by independent attorneys. ◙ The agreement should be signed in advance of the marriage (not on Mom’s way down the aisle, —the longer before the marriage the better). ◙ The agreement should be signed, witnessed, and notarized with the same formality used for a deed for real estate. ◙ Mom must make full and clear disclosures of what she owns. Attach detailed balance sheets, several prior years’ income tax returns (the more the merrier), and other pertinent info to the agreement as exhibits. ◙ The agreement should be fair and reasonable. These terms are impossible to define, so Mom should take any steps feasible to demonstrate this. If her new spouse will have adequate to support himself if divorce occurs will be helpful. ◙ Steps should be taken to corroborate that Mom’s future spouse was not signing under duress, because of fraud, and that Mom was not over-reaching. ◙ The prenup should address all legal, tax, and financial issues that might be relevant: Which state law will govern? What alimony or support rights will Mom’s spouse have in the event of divorce? Will Mom be obligated to leave anything to her new spouse in her will? Is her new spouse waiving any rights of a spouse to elect against her estate (spousal right of election)? ◙ What if Mom was too starry eyed to sign a pre-nup but wakes up and smell’s the coffee after the honeymoon? While unlikely to provide the same measure of protection as a prenup, a post-nup might be the only choice, assuming new-hubby agrees.
So you’re getting married and an gangbuster inheritance might come your way. Sign a prenup that expressly addresses gift and inherited assets to shore up the protection. If you’ve been married for years before realizing the likelihood of gifts or an inheritance, then even if everything seems peachy, consider having a lawyer draw up a post-nup between you and your spouse confirming that any gifts or inheritance will remain yours alone and will not become a marital asset.
Inherit the Best Way Possible
Maximizing your inheritance is not only about getting the most dollars. It’s about getting them the best way. ◙ The best way is in a lifetime or perpetual trust structured so as much of the inheritance as possible will never be subject to a gift, estate, or generation skipping transfer (GST) tax again. ◙ If the trust is set up in a state with favorable tax laws you might be able to avoid your state’s income tax on trust earnings. ◙ The trust can provide considerable protection from your claimants, divorce, and other things that go bump in the night. ◙ Instead of your parents bequeathing assets directly to you they should bequeath assets to a trust for your benefit that is structured to achieve the above goals. ◙ Your parents can set up this type of trust while they are alive or under their will. You could even arrange for the set up of the trust and your parents will can bequeath assets to that trust. ◙ Consider using an independent institutional trustee in a state with laws that are particularly favorable to the goals you’re trying to achieve (e.g., Delaware, Alaska and others) and giving that trustee discretion over distributions instead of mandating distributions (e.g., a unitrust or HEMS standard).
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