By: Martin M. Shenkman, CPA, MBA, JD
Supreme Court Rules in Favor of Anna Nicole
The Supreme Court ruled that Anna Nicole can pursue her claims. Whatever the outcome, what can potential heirs do to protect themselves from these types of issues in the future? Plenty. Following is an excerpt of Chapter 3 of Inherit More (John Wiley & Sons, Inc.) that discusses the Smith case and what heirs can do.
From the opposite perspective, what can a new, younger spouse do to protect themselves from heirs seeking to prevent them from getting what they were promised? Document the intended arrangements in a pre-nuptial agreement. If your benefactor/spouse wishes to become more generous, modify the pre-nuptial agreement with each of you using separate counsel and observing all the formality of the initial pre-nuptial agreement. Have your spouse revisit and resign his or her will on several sequential occasions to establish a patter of conduct as it pertains to you. Have a trust established while your spouse is alive for your benefit that parallels the trust in the will to demonstrate the intent to provide for you. If a trust is established and exists for years before death the issues raised in the Anna Nicole Smith case as to document tampering, etc., become less of a risk.
I. Chapter 3: Second (and Later) Spouses Can Destroy Your Inheritance.
A. Introduction: The Problem.
1. Where's Beaver and Ward.
The good old times of the Brady Bunch were pretty simple. The show never addressed estate planning, real financial issues, and the other complexities which the hybrid family commonly faces today. In the Cleaver family everything was even more idyllic. There was nothing that Beaver or Wally could do that Ward, the all-knowing dad, couldn't solve before shows end. That was the world your parents inherited and not the one being left for you and your children. In the era of reality-TV it is more likely that Peter and Jan are fooling around in the attic, Cindy gets pregnant at sixteen, all six children leave home as soon as they graduate from high-school and move back in as soon as they graduate from college, and their parents disinherit them out of pure disgust leaving everything to Alice and the Sam the butcher. If your parents have remarried, and there are children of more than one marriage involved, there are a few common pitfalls to look out for when attempting to protect your inheritance. But first, your parents need to understand the Cleaver family is about as relevant as a dinosaur.
2. The Typical Estate Plan Won't Work Second (or Third) Time Around.
The typical "estate plan" for a "standard" family of husband, wife and the average 2.3 kids (have you ever seen a .3 kid?), is to leave everything out-right (i.e., without any trusts or other restrictions) to the surviving spouse (unless tax planning creates a need for trusts -- which it doesn't for most). This is the typical four or five page will most Americans who have wills, have. Not much by way of planning for a traditional family, and for second and later families, usually a disaster in the making.
Ward dies first, On the second spouse's death, say the wife, June Cleaver, she bequeaths all of the family assets to the joint and only children of the marriage, Wally and Beaver. Now everyone on the show is happy and Thanksgiving dinners will continue happily along.
Now what about a tad of American social reality. After Ward's funeral, June remarries a lawyer for another town, who doesn't really care much for Wally, Beaver, Apple Pie or wholesomeness. What happens if June and her new beau have children too, how should assets be divided between the various groups of kids? How can Wally or Beaver, as the child of June's first marriage, protect their interests?
The answer is not a simple outright bequest in Dad's will to Mom. The far better approach to protect June, and all spouses who remarry, is for the will of the first spouse to distribute assets in trust to protect those assets for the benefit of the surviving spouse, and then assure that they are ultimately distributed to you and other intended heirs (not the new spouse) on you Mom's death. The classic estate planning approach of using a by pass and marital (QTIP) trusts can accomplish this. These techniques are discussed below and in Chapter 10 on estate tax planning. Even without a tax, the same approaches work for any estate to protect assets for the intended beneficiaries.
3. Hybrid Families Generate Hybrid Problems.
What if the kids from Dad's first marriage are in their thirties and have all completed college, bought houses, and started families and careers, with much financial support from Dad. Should more of the estate be distributed to the new child with Dad's second wife? If the new child is only 4 years old, common sense dictates that she will need more money to get to the point Dad's first kids are already at. So fairness would seem to suggest that more money be set aside to pay for this younger half-sibling. But how would you, as the older half-siblings from Dad's first marriage feel about such "fairness" and would you endeavor to prevent it?
What if dad died and Mom remarried? Dad had $1 million in life insurance that Mom received on Dad's death. How will you, as a child of Mom's first marriage, feel about Mom spending money received on account of your father's death on Mom's new Husband, or on children from Mom's new marriage? Will Mom care?
The classic scenario faced by children of today, is Dad divorcing first wife, who is Mom of the children, and marrying the proverbial "Betty Bazoom" who is perhaps even younger than Dad's eldest child from Dad's first marriage.
What happens next? The New Wife may be a brilliant brunette executive, and be rather resentful of being looked upon as the blond bimbo after Dad's money. When, how and to whom should Dad leave his money in his will?
More surprisingly, what happens if Dad is disabled, who will be in charge of Dad's money? Many parents entering second marriages will seek legal guidance and have a pre-nuptial agreement, and a will taking many of the steps outlined below to safeguard assets for you and other intended heirs. After all the careful planning the same parent (even the help of the same lawyer!) may then sign a typical standard power of attorney designating the new spouse as financial agent to handle all legal, tax and financial matters in the event Dad becomes sick or incapacitated. At the first sneeze, the new spouse may set about systematically transferring all of Dad's money to her accounts, or accounts of her children, friends or relatives, in contradiction to the express intent of the pre-nuptial agreement and will. Your only recourse to help your parent, or protect your family's intended inheritance might be a lawsuit. If there is no pre-nuptial agreement what recourse will you have? If the new spouse just used the money to care for her self in a rather grand, but not outrageous lifestyle, what might you be able to prove?
4. Property and Family Law Can Make a Complex Situation Even More Complex.
The complexities of dealing with second marriages are vast. Did your parent sign a prenuptial agreement or post-nuptial agreement? Was it done properly? What laws apply in the state or country where your parent re-married?
Famous Case Studies: Due to the particulars of community property laws in various locations, celebrities often jump through numerous legal hoops to circumvent inconvenient regulations. Because of community property laws in California, Kirstie Alley attempted to declare Maine her primary residence when she divorced Parker Stevenson. Additionally, because in Britain the key in any divorce proceeding is the marriage license, Mick Jagger claimed that he and Jerry Hall were never legally married in all the years they lived together and raised their family. He declared that the minister who officiated was merely a friend posing as a minister and was not licensed to perform the marriage ceremony. This, if true, would negate any obligation Jagger would have toward Hall and would minimize his obligations to the children they share.
For smaller estate's different issues apply that may not affect the celebrities and Life Styles of the Rich and Famous types. If your dad's new wife becomes ill, or is incapacitated and requires nursing care, will these costs deplete his estate and inheritance? Will your father become impoverished and you end up supporting him? See chapter 9 for medicaid planning ideas and chapter 4 for other insurance ideas.
To really help your parents protect their assets from a greedy second or later spouse, or from the problems poor planning with a later spouse can create, you really need to get your parent professional advice.
B. Anna Nicole Smith.
No story of second and later marriages can be complete without telling the Anna Nicole Smith story.
Famous Case Study: In 1994, 26 year old Anna Nicole Smith, a former stripper, Playboy Playmate of the Year and Guess? jeans model, married 89 year-old Texas multi-millionaire J. Howard Marshall. Marshall died a year later and, in his will, bequeathed everything to the younger of his two sons, E. Pierce Marshall, leaving nothing to his widow or elder son, J. Howard Marshall III. Thus was born the battle of the century over an estate with an estimated worth of anywhere from $46 million to $1.6 billion.
Smith immediately contested the will, claiming that her deceased spouse lived to fulfill her every wish and had promised her half his estate on more than one occasion. Pierce Marshall, the sole beneficiary, begged to differ pointing to seven trusts and six wills prepared by his father, none of them naming either Smith or Howard III as beneficiaries. Howard III, disinherited over a business dispute also sued for a portion of the estate. Anna Nicole filed for bankruptcy and in September of 2000 the Bankruptcy judge awarded her $474 million of her late husband's estate. That ruling was overturned by a US District Court, who in March of 2002, awarded her a total of $88.5 million of her late husband's estate in compensatory and punitive damages from Pierce. This verdict also overturned a 1999 ruling in Texas probate court awarding the entire estate to Pierce Marshall. After six years of bitter litigation, "Miss Cleavage" had a second verdict handed down in her favor which Pierce is expected to appeal. All this costly litigation, however, might have been minimized if Pierce had seen to it that his father had clearly stated his intentions to disinherit his spouse and elder son. As it is, his inheritance was vastly dissipated through legal fees and then awards for damages that could have been avoided.
If you Dad is about to marry the young gold-digger, or your mom the handsome young man who is younger than your son, what do you do? If the circumstances are really outlandish, consult a psychologist to determine how to address the situation. Ongoing consultations may give you the insight to help your parent see what they are getting into. If the circumstances are really not so unreasonable, don't let them destroy your relationship. Keep close, keep in touch, and try to be understanding. If you succeed in getting your parent to open up about their wishes and planning perhaps they would be willing to consult an attorney so that their wishes can be clarified in their will, as well as reflected in other planning steps. Always encourage your parent to seek the advice of an estate specialist when second marriage and other complications exist.
C. Hybrid Families: Case Histories Illustrate the Problems.
You don't have to be famous to face the same difficult problems that fractionalized or hybrid families create for estate planning. There is perhaps no circumstance more fraught with difficulties and likely battles than improper planning for hybrid families.
Case Study: Some families insist on believing the Brady Bunch myth. Logic, and even professional cautions, can't persuade them. The Winklers were both married for the second time, both after rather tough divorces. Each had four children, and under their wills they decided to set up trusts. Each trust was to be co-managed by the eldest child from each family: wife's oldest son with father's oldest daughter, and so on! They are entrusting each family to vote fairly for both families without any mechanism to break a deadlock or argument. This idealistic Brady Bunch might soon end up looking more like the Hattfields and McCoys. Only time will tell.
The better approach with hybrid families is to name executors (who manage the will) and trustees (who manage trusts set up under the will or before death as separate documents) who are independent and objective. This might include long time friends, professionals who have advised the family for many years, institutions, or some combination.
Case Study: Arthur Smith's wife died. He had rocky relationships with his children for decades. Then, when he was 81, he met Beatrice. Beatrice wasn't quite the Anna Nicole Smith type, she was 79. Beatrice was a true companion and confidant for Arthur. They became best friends, and about five years after meeting, began to live together. They both wrote wills. Arthur's estate had grown substantially with the stock market (in case you don't recall, there have been periods in history when stock prices rose!), and although he had always lived a rather modest lifestyle, his estate had grown to more than $5 million. He left half of his estate to Beatrice, his companion, and half to his son, but nothing to his daughter. The next year, on the advice of an attorney (that since Beatrice wasn't his wife estate taxes would take a lot of what he left her). Arthur and Beatrice married. Arthur's estate continued to grow to more than $7 million and soon after marriage he made gifts of more than $1 million in assets to Beatrice, and changed many of his other accounts to joint ownership (this gave Beatrice access to the accounts and on Arthur's death would assure that those accounts would immediately become hers). A few years later, Arthur, with the relationship with his children becoming more strained, revised his will leaving everything to his now wife, Beatrice. About one year later, Arthur died. Arthur's children immediately sued their father's estate, trying to prevent Beatrice from gaining access to his assets. They claimed that Arthur was unduly influenced by Beatrice (at age 89 she was after his money!), the lawyer failed to do her job correctly, and pretty much anything else they could think of. As the legal battle raged on, Beatrice, at 90, fell ill and passed away. Her last years were spent watching her companion die, and then both of their families fighting, depositions, nasty accusations, and so on.
Arthur's will could have been a bit clearer, but Arthur's wishes were not a surprise and were consistent with years of changes. The real problem was the anger and greed of his children. Had Arthur's children only been a bit more understanding of their father's loneliness, his desire for some warmth and family unity, instead of the constant positioning and bickering over a business deal gone bad, his children would have inherited substantially more, and he would have been far more sensitive to their wishes.
D. Get Your Mom or Dad to Sign a Pre-Nuptial Agreement before they Re-Marry.
If your mom is going to re-marry, if you can encourage her to consult a family lawyer about a pre-nuptial agreement to limit her new spouse's rights to her assets. The pre-nuptial agreement could assure her of some minimum amount of support in the event that the new marriage doesn't work out. The agreement can list in detail the assets your mother has before remarriage and assure that her new spouse has no claims on them. If your mom has already remarried without the benefit of a pre-nuptial agreement, she can still achieve some protection by entering into a post-nuptial or ante-nuptial agreement. Exercise considerable caution. You don't want to offend and upset your parent. Try to help them understand the potentially adverse financial consequences if they don't protect themselves.
E. Get Your Mom or Dad to Sign a Living Together Agreement If They Have a Significant Other but Won't Marry.
If your dad, after the death of, or divorce from, your mom, should take up living with a new companion, without contemplating marriage, a pre-nuptial or post-nuptial agreement won't apply. But that doesn't mean that he cannot take steps to protect themselves. Your dad could consider entering into a living together contract with his new roommate or partner to minimize the likelihood of legal and financial entanglements if the relationship terminates. Such an agreement can also prevent the new partner from pilfering your future inheritance without dad's consent.
Your dad should get a contractual arrangement governing the legal, economic and perhaps other aspects of his new relationship. "A living together agreement is important for partners who live together without the formality of a marriage since they do not have many legal protection married couples have. These include common law rights of dower and curtesy, the statutory right of election against an estate, the estate and gift tax marital deduction, and forms of joint ownership (tenancy by the entirety). The law is generally less clear as to how the rights between non-married partners will be applied," cautions Charles Abut, Esq., based in Fort Lee, New Jersey.
The "living together" agreement attempts to establish the parties' economic, legal and other ties during and after dissolution of their relationship. Unfortunately, there is little assurance how many courts will treat these contracts. In some states the concept of palimony is recognized in the law, based on the seminal Lee Marvin case in California. Palimony can require that an unmarried cohabitant be paid financial support from an unmarried partner, if the existence of an agreement to provide that support can be established.
F. What If Dad's New Wife Wants More Money in Her Name.
1. Beware: Tax Laws Encourage Large Gifts.
Gifts made to a spouse, who is a United States citizen, in any amount, are not subject to gift tax. This means that there are generally no tax restrictions on your dad giving his new wife any portion of his estate.
There is another, less common, transfer which also qualifies for the marital deduction (i.e., no tax) is to give one's spouse a life estate with a general power of appointment. This means the spouse would have the right to the income or use of the assets for their life. The spouse will also have the right to designate who should receive the property following their death. Since this will likely be her children or family, not you and your family, this isn't an ideal option.
There is a better option than either of the above. Your dad can gift assets to a trust for his new wife, instead of directly to her. If this trust, a special marital trust (e.g., a QTIP trust) for a spouse, is properly formed during your dad's life (inter-vivos), there will not be an adverse tax costs to the transfer. The best result, however, is that your dad can control who the ultimate beneficiaries will be. Typically the funds can be given to a trust for dad's new wife. She can be given income for her life. On her death, the assets can be distributed back to your dad's heirs.
Planning Tip: While this inter-vivos QTIP approach can be great for everyone, there is a potential leak in the program. And the leak will take more than a little Dutch boy's finger to plug. If your dad's lawyer doesn't draft the trust carefully, and if the trustee is indifferent or favors your dad's new mate, the powers given to distribute principal of the trust could effectively put all the assets in your dad's new wife's hands. Principal distribution could be restricted to funds needed to maintain her standard of living after giving consideration to her other resources, or even less.
G. Have Dad Leave the Second Wife a "Life Estate".
There are often seemingly simple solutions to complex problems in estate planning. Simplicity is great; it's easier to understand and it's cheaper to get the will written. The real issue is does it work! A common second marriage situation concerns the marital home. Mom and Dad raised the kids in the old Victorian. Dad died and years later Mom remarried and lived together with the New Husband for ten years in the family home. Mom was getting on in years and concerned that her New Husband be protected so he could live in the home, but she wanted to also be sure that on his death the old Victorian would pass to her children due to their strong attachment to and fond memories of the house.
One option available to her is a life estate. A life estate means that the New Husband can live in the home for his lifetime, but on his death it will pass back to Mom's children. Life estates are not only used to allow a spouse to continue living in a home after death, it can be used to give children residential rights, as well.
Famous Case Study: In Newport, Rhode Island, one of the largest tourist attractions is The Breakers, the former home of Cornelius Vanderbilt II. The Breakers is a four story, seventy room summer "cottage" where the Vanderbilts would summer, together with the rest of the Four Hundred. The cost of running such a large estate, however, had become prohibitive. Additionally, the Vanderbilt family wanted to continue in their tradition of supporting the preservation of art and historic homes in the area. As insurance that a change of fortune will not mean the deterioration of the family home, and to help raise funds to preserve other historic homes in the area, in 1972, the Vanderbilt family sold the home to the Preservation Society of Newport County with the provision that the Vanderbilt heirs, currently Gloria Vanderbilt, be allowed to live on the estate. When visiting the house, some of the rooms are closed to public tours when the family is in residence.
A life estate sounds great. Sounds simple. Unfortunately, it's not - even if your place is a bit more modest than the Vanderbilt cottage. While it may be common and inexpensive to implement, it's not always the best option when one is looking to maximize one's inheritance. Thee are too many ambiguities and issues left unsettled when implementing a standard life estate. Take a look at the following simple clause for a will giving the New Husband a life estate:
Sample Clause: I give, devise and bequeath to New Husband the house located at 123 Main Street, Anytown, USA to have and to hold the same for and during New Husband's lifetime, without the necessity of paying rent or furnishing bond or other security therefor, but subject to New Husband paying all normal costs of maintenance and repair in respect thereof. On the death of New Husband, or upon such life estate beneficiary's earlier renunciation or disclaimer of the interest in said property, or on my death if such life estate beneficiary does not survive me, I give, devise and bequeath said real property to my children.
The above clause is typical, but so far short of what is necessary to prevent family problems. Consider the following common issues which the above clause doesn't address:
A life estate is a great technique when it works, but be sure to review all possible scenarios and problems with your parent and attorney.
H. Using Trusts to Protect Your Inheritance from You Mom's New Beau.
Dad died, or Mom and Dad divorced. Mom is involved with a new Beau who lives out of his VW Bug when not hanging with your Mom. Beau's tie-died t-shirts and peace symbol necklace, and general lifestyle concerns you, but Mom marries him anyhow. Pre-nuptial agreement you suggest! No says Mom, its true love. Mom however, becomes sufficiently receptive to meeting with an attorney about an estate plan. The classic planning step is to recommend that Mom bequeath her assets into a trust. She can use the trust to benefit her new beau, and also assure that the assets eventually reach you and other intended heirs.
There's a common problem. If the new beau mom hooks up with is decades younger, you might not inherit until you're in your 70s or later. Just in time to my more Depends -- exactly how you wanted to enjoy your inheritance! Solutions exist. Your mom could leave a portion of her estate to you and other children or heirs on her death, not waiting for her new young spouse to die. Another common approach which can be effective to minimize all these problems is for mom to buy a large life insurance policy (or perhaps have a trust set up to own the policy). This can assure that on her death both her natural heirs (often children from a prior marriage) and new young spouse, are provided for economically.
I. Setting up a Family Trust.
When planning for a second or later marriage, and the hybrid family situations discussed in this chapter, a common approach is to set up a trust for the new spouse in the will. A trust is a contractual relationship created by your parent under a legal document called a trust, or under their will, in which case the trust will only become effective following death. The key concept of a trust is that it can separate legal ownership from beneficial ownership. The legal owner is a trustee who can be an independent person named to be in charge of investing trust assets and distributing trust money. The beneficial owner are the persons intended to benefit from the trust assets. These can include the new spouse, but importantly, yourself and other natural heirs. The key benefit of using a trust in a second and later marriage is the above separation of control and benefit. Your mom can designate the long time family accountant who has proven himself trustworthy (his name isn't Arthur) and independent of the family politics, especially as they concern mom's new husband. This independent trustee can be given some flexibility to distribute assets and income as between the children and other heirs and the new spouse. This can be an effective way to help all loved ones, with the benefit of hindsight (i.e., when the trustee knows future circumstances they can use the trust money as then appropriate).
There are really two types of trusts. The first, called a by pass, applicable exclusion or credit shelter trust can hold assets up to the amount which your parent can bequeath estate tax free. This is $1 million in 2002 and scheduled to increase in future years (unless Congress acts to change the rules, yet again). This type of trust can include anyone as a beneficiary - new spouse, children from prior marriage, and others. If your parent's estate exceeds this exclusion amount the remainder of the estate should be left to a trust which qualifies for the estate tax marital deduction. This will enable your parent to benefit her new spouse, while deferring any estate taxes, and still assuring that you and the other natural heirs will eventually inherit. Since a marital trust is so commonly used in second and later marriages to protect assets, it is discussed in more detail below.
Planning Tip: If you parent or other likely benefactor is or has remarried, if these types of trusts are not included in their will, you are far less likely to see any money other than what the will leaves you directly on your parent's death. Anything given outright to the new spouse is only per chance going to make its way to your pocket. If your parent's will is less than 10 pages, there is a good chance that the trusts are not included, or if included, don't have enough legal meat to make them as workable as you'd like.
J. Qualifying for Unlimited Marital Deduction.
When mom want's to leave assets to benefit and protect her new spouse, and defer estate taxes, her estate plan should be designed to take advantage of her ability to leave unlimited assets to a spouse in trust. An unlimited marital deduction is available for qualifying bequests under your parent's will to a trust for his or her spouse. The following requirements must be met:
Example: Dad marries new spouse. Dad has a $2 million estate and the maximum amount Dad can give away without estate tax is $1 million. Dad uses the classic second marriage approach outlined above and leaves $1 million in a by pass trust under his will to benefit all of his children from his prior marriage and his new spouse. The balance of his estate, the remaining $1 million, is distributed to a marital or QTIP trust for his new wife. His new wife has no assets. If she dies a few years later, the $1 million exclusion her estate has available is unused by her assets and may protect the entire QTIP trust from taxation. Thus, you and your Dad's other heirs will save potentially $500,000 in estate taxes as a result of your Dad having used a QTIP trust. Not a bad savings for waiting a few years for the new spouse to die.
The above example illustrates a really important point. Planning is not always a zero sum game. You don't have to loose if the new spouse wins, and vice versa. Everyone, with careful planning, can benefit. This concept can be a key selling point to get your parent, your parent's new spouse, and your siblings and other family members on board to plan together.
K. Pros and Cons of A Marital Trust.
When in doubt, use the trust. Why? While a trust creates a bit more complexity and cost, it assures your parent's control over the assets. It can prevent a greedy new spouse from pilfering the inheritance intended for you and other family members. It can protect the new spouse from your siblings and other's infringing on her lifestyle. It can work both ways and protect everyone.
A trust can also provide a number of important tax benefits. Your parent's executor, possibly you if you play your cards right, can determine what portion of the trust should qualify for the marital deduction. This can enable the executor to use hindsight to preserve some of your parent's estate tax exclusion which will ultimately save the family and heirs tax. The executor can also make decisions to maximize GST tax benefit using the benefit of hindsight.
As a child of the marriage, it should be an imperative in your mind that your surviving parent or a beloved step-parent be provided for upon the passing of their spouse. The cost of caring for an independent elder parent is high, and if they do not have the funds to meet their own needs you may have to assume the entire burden for their care. Even if you have twelve siblings, you have no guarantee they will share the burden of caring for your parent or step-parent and, unless your parent has sufficient funds to care for themselves you should expect that you could be the one supporting their needs. Don't lose sight of that when helping your parents plan their estate. It's one thing to inherit more, it's another thing to do it at the expense of your surviving parent.
L. Will Dad's Trophy Wife Exercise a Right of Election.
1. What is a Spousal Right of Election.
A spousal right of election, particularly as a result of the increases in second and later marriages, and the growing divorce rate, can be quite important in determining how any decedent's assets will ultimately be distributed, including your parent's.
The laws of almost every state recognize that the surviving spouse should be entitled to some minimum portion of the deceased spouse's estate, or alternatively that the surviving spouse should be entitled to enough assets to live on. The rationale for this is that state legislatures believe that it is in the public's interest to protect surviving spouses. While many states assure the surviving spouse at least one-third of the estate, subject to various conditions, limitations and other requirements, not all do.
The spousal right of election laws of a particular state generally apply to any married person who dies domiciled in that state. Determining the state of domicile is quite important since the laws differ considerable from state to state. domicile is generally defined as a place of permanent residence to which you ultimately intend to return. The determination as to in which state a person is domiciled is based on the specific facts in each case.
2. Not Every Trophy Can Get this Benefit.
Not every surviving spouse is entitled to the protection of this rule. A surviving spouse may be denied the Right of Election where the couple was living separate and apart in different homes, or where the couple had ceased to cohabit as husband and wife under circumstances which would give rise to a cause of action for divorce (or nullification of the marriage) from the decedent, prior to death. Mere separation does not defeat the right of election.
Even your parent's new spouse can take advantage of a spousal right of election, it is not always obvious what it will amount to. In some states, any transfer under which the decedent retained the possession or enjoyment of, or right to income from, the property, at the time of death.
Planning Tip: In a few states if your parent transfers all of her assets to, a revocable living trust it could limit her new spouse's right of election. If you find yourself in a position of advising you parent as to what kind of trust to set up in your name, investigate your state's position on elective share rights and revocable living trusts.
3. What is a Surviving Spouse Typically Entitled To.
A typical state spousal Right of Election law guarantees the surviving spouse a one-third share of the estate. Not only may the percentage vary from state to state, but the definitions of what is included in the estate will vary considerably. Prior gifts may be included in the calculation, there may be subtractions for assets owned by or given to the surviving spouse, and so on. If a trust is set up for the surviving spouse under the will (not a "revocable living trust), such as a marital or QTIP trust under the deceased spouse's will for the benefit of the surviving spouse, it may only be partially counted.
Another common Right of Election issue is to what extent property to be held in Trust for the benefit of the surviving spouse will be counted towards meeting her Elective Share (the amount the surviving spouse is entitled to). In many states property in trust is only counted at 50% in value. In some states a Life Estate (the surviving spouse is given the right to use property, such as a house, but doesn't own it, as discussed above) and interests held in a Trust do not qualify as satisfying the surviving spouse's Right of Election at all.
Example: Husband dies in 2002 leaving a $2 million estate. $500,000 are joint assets which pass to the deceased husband's child from a prior marriage. The Probate Estate consists of $1.5 million of securities. The Will leaves $800,000 in a marital trust, a QTIP, for his surviving spouse. The remaining $700,000 assets are distributed to a by pass trust, protected from estate tax by the applicable exclusion amount. The surviving spouse and the Husband's children from a prior marriage are all beneficiaries of the by pass trust. Under state law the by pass trust is included in the calculation of the estate but does not count as an asset paid to the surviving spouse. Under a typical state statute assets in a QTIP trust will count 50% as meeting the spousal right of election. If insurance is included in the estate for calculating the spousal right of election under state law then the surviving spouse has a right of election against a $2 million estate. A one-third elective share is $666,666. The only bequest which counts towards satisfying the spousal right of election is the QTIP trust of $800,000. This only counts at a 50% rate, or as if the surviving spouse received $400,000. Thus, the surviving spouse would be entitled to an additional $266,666 [$666,666 - $400,000] if she elects against the estate.
To prevent an end-run around the spousal Right of Election laws, many state laws permit the surviving spouse to obtain a percentage of assets given away just before death. For example, in some states, any transfer if made within two years of death of the Decedent to the extent that the aggregate transfer to any one donee in either of the years exceed $3,000. However, if the surviving spouse gave a written consent to the transfer, or joined in the transfer, the property transferred may not be reached.
4. Be Certain that the Dad's New Bimbo (or Mom's New Beau) Waived the Right.
When the Testator's Will is to provide the surviving spouse less than the amount of the statutory election, it is common and proper that the surviving spouse be requested to formally sign a legal document giving up the right (waive his or her right of election). This is done specifically to avoid Mom's new honey from using the election to upset the dispositions provided for under your parent's will. To be effective, the waiver of the right of election must meet specified requirements under state law. The rules will vary from state to state, but might include the following:
If you serve as an executor for your parent's estate, and the new spouse exerts her right of election, be certain to confirm whether a waiver had ever been signed.
M. Lessons to Learn.
This Chapter has summarized a number of special situations and problems which can affect an Estate. If you are serving as Executor and any of the situations discussed could arise, or even appear to be an issue, be certain to obtain professional legal advice. Also, be careful since state law differs considerably from state to state. Be certain to keep the Beneficiaries, other Fiduciaries, and other persons interested in the Estate apprised of the status of these situations because they all can add time delays and cost to the probate process.
In the words of one wealthy individual, when advised to have a pre-nuptial agreement before his third marriage remarked, "Its not necessary. After this one, its either the cemetery or the monetary."
What can be done? Plenty -- if your parent or other benefactor is willing. Most importantly, every step to protect your parent from a new spouse, will also protect your inheritance. In many situations the goals can be consistent. Further, in many cases the planning is not a zero sum game. If your parent will plan creatively, tax, liability and other savings and protection can make everyone better off, and minimize family feuds. Try to gently guide your parent to carefully consider all of the ways your family, or the families of your parent's new spouse can cause havoc. Try to encourage your parent to seek professional legal advice to craft a plan that minimizes the likelihood of any of these problems having a significant adverse impact.
N. For Your Notebook: Sample Waiver of Right of Election.
I, Jane Doe, spouse of John Doe, for one dollar and other good and valuable consideration receipt of which is hereby acknowledged, now waive and release "all rights in the property or estate" of John Doe ("my spouse") in accordance with [list appropriate state law reference], specifically the right to elect against the Last Will and Testament of my spouse executed on September 2, 1998. I further waive and release any right to elect as against any testamentary substitute or intestate share to which I would otherwise be entitled under the provisions of [list appropriate state law reference].
I further acknowledge that I am fully informed of the value of the assets owned by my spouse, including but not limited to the assets listed on the balance sheet and related financial information attached hereto as an exhibit, which I now waive and release and am fully informed of the nature of my rights in those assets.
I further represent that I have been represented by counsel in the execution of this document and I am signing this document freely and voluntarily.
Subscribed and sworn to before me
this 2th day of June, 2003
My Commission expires:______________
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