Category: Spouse

Life Estate may be a good option for Older Homeowners

Life Estate may be a good option for Older Homeowners

A life estate may be a good option for older homeowners, but there are some potential drawbacks you should know. A life estate is an interest in real property that entitles the life estate owner (sometimes called the “life tenant”) to the right to occupy, possess, or otherwise use the property for the lifetime of one or more individuals (usually the lifetime of the person or persons who hold the life estate interest).  A life estate owner has the right to possess and use the property for the duration of the life estate. A “remainderman” has an ownership interest in the real property. However, they have no right to possess or use it until the life estate terminates, typically when the life tenant dies.

  • The Property Avoids Probate. Property held in a life estate isn’t required to go through probate but rather transfers ownership to the remainderman. This also eliminates the complications of stating your intentions for your property in a will.
  • The Property is no Longer Part of the Estate. Once your state’s Medicaid look-back period is over, a property transferred through a life estate won’t count against your eligibility for the program.
  • It Keeps Elders in Their Homes. Even though a life estate effectively transfers property ownership to the remainderman, the life tenant has guaranteed residency, if desired, for the rest of their life.

While life estates are helpful tools, they do have several drawbacks:

  • The Property is still Vulnerable to the Debts of the Heirs. Because the life estate transfers property rights to a designated heir, the heir’s creditors may have the right to seize the inherited assets to cover any outstanding debts, contradicting the life tenant’s wishes to pass their assets on directly to the heir.
  • The Heirs’ Rights to the Property Vest at Creation. Once you create a life estate, the property rights vest in the heir(s) and can’t be revoked without the heir’s consent.
  • The Property Can’t Be Sold or Mortgaged. If a life tenant wants to significantly alter the property, convert it into a rental, or even decide to sell, they must have the remainderman’s permission.

A life estate may be a good option for older homeowners because it allows them to set up a straightforward, legal directive for an heir to inherit property without probate. Life estates also let the owner control the property in most respects. If created in a timely manner, a life estate can even help its creator qualify for Medicaid assistance. However, life estates do have some disadvantages. Ask an experienced estate planning attorney if this is a good move for your situation. If you are interested in learning more about life estates, please visit our previous posts. 

Reference: Quicken Loans (Aug. 9, 2022) “What Is A Life Estate And What Property Rights Does It Confer?”

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Be cautious using Portability in a Second Marriage Estate Plan

Be cautious using Portability in a Second Marriage Estate Plan

Be cautious using portability in a second marriage estate plan. Despite its advantages, portability isn’t always the solution, even as it’s been used to take the pressure off couples to focus on using as much estate and gift tax exclusion as possible after the first spouse’s death. According to a recent article from Wealth Management, “Portability and Second Marriages,” portability might be a mistake.

The couple and their estate planning attorney need to consider whether leaving the executor with the discretion to use portability is appropriate, and if it is, who the executor should be and how the estate tax burden should be allocated.

The problem with portability in nonstandard families is this: it allows the surviving spouse to use the DSUE (Deceased Spouse’s Unused Exemption) amount personally, instead of requiring it be used for the beneficiaries of the first spouse to die. It’s almost like leaving assets outright to the surviving spouse. In the case of a testate decedent, Treasury regulations provide that only the executor may make the portability elections. The executor should probably not be also a beneficiary and should not be responsible for making the portability election.

Let’s say the estate isn’t large enough to require an estate tax return filing. If the executor is a child from a prior marriage, they may not choose to incur the expense of filing an estate tax return solely to make the portability election for the second spouse. Instead of having the family involved in a disagreement over the need for a return or determining who will pay for its preparation, a better option is to have the estate plan direct whether an estate tax return should be filed to elect portability and if this is done, establish who is responsible for the cost of the preparation and filing.

In complex families with children from a prior marriage, a Qualified Terminable Interest Property (QTIP) trust is used for the surviving spouse, with the trust assets eventually passing to the client’s descendants. However, if the QTIP trust is combined with portability, the estate plan may not operate as intended.

Here’s an example. Ted marries Alba several years after his first wife, Janine dies. Ted has three children from his marriage to Janine. He bequeaths most of his estate to a QTIP trust for Alba and the remainder to his children, naming Alba his executor. At Ted’s death, Alba elects QTIP treatment for the trust and portability. She then makes gifts of her assets to her family using Ted’s DSUE amount. Alba dies with an estate equal to her basic exclusion amount, which she also leaves to her family. The QTIP trust pays estate tax, and Ted’s children receive no benefit from Ted’s exclusion amount.

Even if Alba didn’t make gifts to her family, assuming her estate was large enough to absorb most of her applicable exclusion amount (including the DSUE), the QTIP trust would have to contribute to pay the estate taxes attributed to it unless the estate plan waives reimbursement. Thus, the QTIP trust could bear most or all of the estate tax at the death of the second spouse, while the second spouse’s personal assets are sheltered in part by the deceased spouse’s DSUE amount.

In cases like this, the prudent course of action may be to use traditional credit shelter/marital deduction planning. If there’s a DSUE amount available, the estate plan could direct whether it will be used and how the tax burden on the QTIP trust is handled.

Be cautious using portability in a second marriage estate plan. An experienced estate planning attorney will look at the family’s situation holistically and evaluate which strategies are most appropriate to distribute the property per the parent’s wishes to minimize taxes and ensure that the estate plan achieves its goals. If you would like to read more about estate planning for second marriages, please visit our previous posts. 

Reference: Wealth Management (June 21, 2023) “Portability and Second Marriages”

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Estate Plans Require Preparation for Success

Estate Plans Require Preparation for Success

Making wishes clear to family members is never enough to satisfy legal standards, according to a recent article, “Preparation is essential part of estate plan” from The News-Enterprise. Quite the opposite occurs when family members refuse to follow verbal requests, especially when personal grievances come to the surface during times of grief. Estate plans require preparation for success.

A second misconception concerns the spouse or children being able to step in and take action for a loved one whose health is declining solely based on the family relationship.

Many parents have children who would make poor agents, so many don’t name their children to act on their behalf. Even if you want your spouse or child to act on your behalf, you have to name them in the proper legal documents.

A third frequent misconception is that documents can be created when needed. Not so! Documents like Power of Attorney, Health Care Power of Attorney, Living Will and others must be created well in advance. An incapacitated person cannot sign legal documents, so if no planning has been done, the family will have to petition the court to name a guardian—an expensive, time-consuming and complicated process.

Every adult should have three basic documents while they are in good health: a Health Care Power of Attorney, a Durable Power of Attorney and a Last Will and Testament.

The Health Care Power of Attorney gives another person the right to make healthcare decisions for you if you are unable to do so. It also gives another person the right to access protected health care information, including medical and health insurance records. It may also be used to authorize organ and/or tissue donation and set limitations for donation. Finally, the document may direct end-of-life decisions regarding artificial life support.

The Durable Power of Attorney allows another person to handle legal and financial matters. It can be effective upon signing or upon incapacity. Without correctly executed Powers of Attorney, the family will need to apply for guardianship.

The Last Will and Testament determines who should receive any specific property and how your property is to be divided and distributed. Wills are only effective upon death, so any property in the will continues to be yours until death. Wills are also used to name the executor who will be responsible for administering the estate. It can also be used to set up additional protections for disabled beneficiaries, minor children and others who are not good with finances.

Speak with an experienced estate planning attorney to be certain to have these essential documents to prepare for the times when life doesn’t go as expected. Preparation is required for the success of your estate plan and those you love. If you would like to learn more about drafting an estate plan, please visit our previous posts. 

Reference: The News-Enterprise (May 13, 2023) “Preparation is essential part of estate plan”

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Who is Authorized to Amend a Trust?

Who is Authorized to Amend a Trust?

Procrastination is the most common mistake in estate planning when people don’t create a will and trusts and when documents are not updated. For one family, a revocable trust created when both parents are living presents some complex problems now, when the surviving wife wants to make changes but is suffering from serious health issues. So who is authorized to amend a trust?

As described in the article “Estate Planning: Who can amend the trust” from NWI Times, this scenario requires a careful review of the trust document, which should contain instructions about how it can be amended and who has the authority to do so. An estate planning attorney must review the trust to ensure it can be amended.

If the trust allows the surviving settlor to amend the trust, the authority to amend it may only be given to the surviving settlor. The mother may be permitted to amend the trust. However, it can’t be anyone acting on her behalf.

If the language in the trust makes the power to amend personal, a guardian or an attorney-in-fact likely won’t be able to amend the trust. Likewise, if the mother is incapacitated and cannot do this herself, the trust may not be amendable while she is ill or disabled.

However, if the trust allows the surviving settlor to amend the trust and the power is not personal, a legal representative, such as a guardian or an attorney-in-fact, may be able to amend the documents for her, if they have the authority to do so under the terms of the trust.

Anyone contemplating this amendment must be aware of any “self-dealing” issues. The legal representative will be restricted to making changes only for the benefit of the beneficiaries and should be mindful before attempting to amend the trust.

Suppose the authority to amend doesn’t exist or other restrictions make it impossible, depending on the state’s laws. In that case, it may be possible to docket the trust with the court and obtain a court order authorizing the trustee to depart from the terms of the trust or even amend the document.

Accomplishing this is far easier if all involved agree with the changes to be made. Unfortunately, if any interested parties object, it may lead to litigation.

Depending upon the desired change, entering into a family settlement agreement may be possible after the mother dies. If everyone is willing to sign off, an agreement can be written authorizing the trustee to deviate from the terms of the trust. This will also require the guidance of an estate planning attorney to ensure that the agreement follows the state’s laws.

If family members disagree with the change, the trustee can refuse to accept the settlement agreement to protect themselves from potential liability. It is wise to sit down with your estate planning attorney and ensure you and your loved ones are familiar with who is authorized to amend a trust. If you would like to learn more about trusts, please visit our previous posts. 

Reference: NWI Times (May 7, 2023) “Estate Planning: Who can amend the trust”

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How an Annuity Beneficiary Works

How an Annuity Beneficiary Works

It is important to understand how an annuity beneficiary works. If the beneficiary of an annuity is your spouse, they can take over ownership of the annuity and receive payments under the annuity schedule. The annuity would be tax-deferred, and your spouse would only owe taxes on the distributions when they take them, says Forbes’ recent article, “What Is An Annuity Beneficiary?

However, the rules differ if your beneficiary is someone other than your spouse. A non-spouse has three options when inheriting an annuity:

  • A lump sum payment. The beneficiary gets the annuity’s remaining value as one upfront payment and must pay income taxes immediately on the lump sum.
  • Nonqualified stretch, where the annuity payouts—and the required income taxes—are stretched throughout the beneficiary’s lifetime; or
  • Beneficiaries can withdraw smaller amounts from the annuity during a five-year period after the annuity holder’s death or withdraw the entire amount in the fifth year.

Only the annuity owner can name a beneficiary. However, they can change beneficiaries at any time, provided the annuity contract doesn’t require you to name an irrevocable beneficiary. You can also choose multiple beneficiaries, designating a percentage of the annuity for each person. Annuity contracts also frequently let you designate a contingent beneficiary—a person who will get the annuity payments if the primary beneficiary dies before the annuity owner does.

The choice of beneficiary also significantly impacts how taxes are handled, so taking the time to document your wishes can save your loved ones from problems in the future.

While you aren’t required to name a beneficiary when you purchase an annuity, it’s highly recommended.

Suppose you don’t have a designated beneficiary in the annuity contract. In that case, the annuity must go through probate—the legal process for recognizing a will and distributing the assets within an estate.

These proceedings can be expensive and time-consuming. It could be several months before everything is resolved and the heirs receive their inheritance. An estate planning attorney will help you understand how an annuity beneficiary works and how to ensure your planning addresses your needs. If you would like to learn more about the role of the beneficiary, please visit our previous posts. 

Reference: Forbes (Jan. 19, 2023) “What Is An Annuity Beneficiary?”

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Life Estate can be a Cost Effective Option

Life Estate can be a Cost Effective Option

A life estate can be a cost effective option for couples. The person who holds the life estate is known as the life tenant. He or she is entitled to live in and use the properly as they see fit. However, they don’t have the right to sell or transfer the property to someone else.

Realty Biz News’ recent article entitled, “What is a Life Estate and How to Use It,” explains that a recorded deed will reference that a property is a life estate and name the life tenant. Once the life tenant passes away, the property passes to the remainderman—those who will inherit the property after the life estate ends. Let’s look at some of the reasons why someone might want to have a life estate:

Estate Planning. By transferring property into a life estate, the original owner can ensure that the property will pass to a designated beneficiary without probate. It can be particularly useful for people who want to avoid the time, expense and complexity or the probate process.

Asset Protection. The original owner can protect the property from creditors and other potential liabilities by transferring the property into a life estate. This is useful for those in high-risk professions or with significant debts or legal issues.

Family Dynamics. A life estate can also be used to address family dynamics and ensure that everyone is taken care of. For example, a parent might create a life estate to ensure that their adult child can live in the family home for the remainder of their life without giving them outright ownership of the property.

Tax Planning. By transferring property into a life estate, the original owner can reduce their taxable estate and potentially lower their estate tax liability. This can benefit individuals with large estates who want to minimize their heirs’ tax burden.

When a life estate is created, the property is divided into two parts:

  1. the life estate; and
  2. the remainder interest.

The life tenant has the right to use and enjoy the property during their lifetime. The remainderman has the right to inherit the property after the life estate ends.

Remember, with a life estate; the ownership is broken down into possession and ownership. The life tenant has possession and ownership until they pass away; the remainderman has ownership only. When the life tenant passes away, the property passes to the remainderman, who becomes the new owner. The remainderman has the right to sell, transfer, or otherwise dispose of the property as they see fit. Speak with your estate planning attorney to see if a life estate can be a cost effective option for your family’s planning. If you would like to learn more about life estates, please visit our previous posts. 

Reference: Realty Biz News (March 20, 2023) “What is a Life Estate and How to Use It”

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Protecting Inheritances in a Blended Family

Protecting Inheritances in a Blended Family

Blended families have estate planning challenges differing from traditional families, explains a recent article from The Record Courier, “Estate Planning for Blended Families.” A blended family is one where one or both partners have children from a prior marriage. The details vary, but the concern is the same: the possibility for the children to be disinherited if after one spouse dies, the surviving spouse reduces or eliminates any provisions made for the deceased spouse’s children. Protecting inheritances in a blended family becomes a major priority.

A well-drafted estate plan, created by an experienced estate planning attorney, can address this issue to ensure that the deceased spouse’s children are protected and provided for after the death of their parent.

When creating the estate plan, consider what would happen if the surviving spouse remarried. This frames the drafting process in an optimal way for the children. Provisions should be made to protect them and a number of strategies may be used.

A simple last will and testament or even a revocable trust with no provisions typically won’t be enough to address the complex needs of a blended family. When the first spouse dies, the surviving spouse remains free to change the terms of their will, which could place the children of the deceased spouse at a disadvantage.

Designating an independent fiduciary can help ensure that the children of the deceased spouse have sufficient assets. The independent fiduciary can protect the children’s interests with no risk of self-dealing. An oversight by an independent fiduciary also minimizes the chances of conflict between children and stepparents.

A properly designed estate plan protects the children of both parents, regardless of which spouse dies first. One commonly-used strategy is to create a trust leaving the assets to the surviving spouse during the spouse’s lifetime but then passes the remaining assets to the children of the deceased spouse.

Another option is to divide the estate upon the death of the first spouse, with half the estate protected for the children of the deceased spouse. The surviving spouse has access to those assets for certain needs. However, limitations may be put into place. This is applicable if the two partners bring assets of equal size to the marriage.

In some cases, the strategy to ensure that children receive the assets intended for them upon their parent’s death is to leave them to the children outside of the trust, passing them directly by naming the children as designated beneficiaries on select accounts and/or life insurance policies.

If the children are minors, creating a separate trust may be an optimal means of protecting inheritances in a blended family.

A premarital or post-nuptial agreement is also used to clarify the rights and responsibilities of each spouse during the marriage and can also be used to specify the children’s living situation and expenses and require assets to be used to maintain their standard of living.

With mindful and comprehensive estate planning, couples can leave a financial legacy for all of their children, while still providing for surviving spouses. If you would like to learn more about blended families, please visit our previous posts.

Reference: The Record Courier (March 12, 2023) “Estate Planning for Blended Families”

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Steps Seniors should take before Remarrying

Steps Seniors should take before Remarrying

Seniors in particular think about remarrying with an understandable degree of concern. Maybe your last relationship ended in a divorce, or there’ve been too many dating disasters. However, according to a recent article from MSN, “Planning to remarry after a divorce? 6 tips to protect your financial future,” there are some steps seniors should take before remarrying to make relationships easier to navigate and protect your financial future.

Not all of them are easy, but all are worthwhile.

No marrying without a prenup. Who wants to think about divorce when they’re head-over-heels in love and planning a wedding? No one. However, think of a prenup as about the start, not the end. It clarifies many issues: full financial clarity, financial expectations and clear details on what would happen in the worst case scenario. Getting all this out in the open before you say “I do” makes it much easier for the new couple to go forward.

Trust…but verify. Estate planning ensures that assets pass as you want. A revocable living trust set up during your lifetime can be used to ensure your assets pass to your offspring. Unlike a will, the provisions of a revocable trust are effective not just when you die but in the event of incapacity. A living trust can provide for the trust creator and their children during any period of incapacity prior to death. At death, the trust ensures that beneficiaries receive assets without going through probate.

Consider life insurance. Life insurance, possibly held in an irrevocable life insurance trust (ILIT), which allows proceeds to pass tax-free, can be used to provide funds for a surviving spouse or children from a prior marriage. Make sure to review all insurance policies, including life, property and casualty and umbrella insurance to be sure you have the correct coverage in place, insurance policies are titled correctly and premiums continue to be paid.

Estate planning. While you are planning to remarry is a good time to check on account titles, beneficiary designations and powers of attorney. Couples should review their estate plans to be sure planning reflects current wishes. Married couples have the benefit of the unlimited marital deduction, meaning they can gift during their lifetime or bequeath at death an unlimited amount of assets to their U.S. citizen surviving spouse without any gift or estate tax. For unmarried couples, different estate planning techniques need to be used to pass the maximum amount to partners tax free.

Check beneficiaries. After divorce and before a remarriage, check beneficiaries on 401(k)s, pensions, retirement accounts and life insurance policies, Power of Attorney and Health Care Power of Attorney documents. If you remarry, a prenup agreement or state law may require you to give some portion of your estate to your spouse, so have an estate planning attorney guide you through any changes. Couples should also check beneficiaries of life insurance and retirement plans.

Choose trustees wisely. Consider the advantages of a corporate trustee, who will be neutral and may prevent tensions with a newly blended family. If an outsider is named as an executor, or to act as a trustee, they may be able to minimize conflict. They’ll also have the professional knowledge and expertise with legal, tax and administrative complexities of administering estates and trusts.

These are just some of the major steps seniors should take before remarrying. Sit down and discuss the implications on you planning with your estate planning lawyer. If you would like to learn more about remarriage protection, please visit our previous posts. 

Reference: MSN (Feb. 11, 2023) “Planning to remarry after a divorce? 6 tips to protect your financial future”

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Consider Portability as a Solution for your Surviving Spouse

Consider Portability as a Solution for your Surviving Spouse

If you expect to have a large portion of your unused estate tax exemption remaining, you might consider portability as a solution for your surviving spouse. Portability is a process in which any unused estate tax exemption can be transferred from the deceased spouse to the surviving spouse, according to a recent article from Ag Web, “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”

What portability helps the surviving spouse to achieve is to put their assets in the best position to be transferred upon their death, to the next generation, with little or no estate taxes being owed.

In 2023, each spouse has a $12.92 million exemption from federal gift and estate taxes, but this high amount is set to drop about $6.6 million per person in 2026. Electing portability now will lock in the high exemption if a spouse dies before December 31, 2025, when the high exemption level ends.

The portability election does not happen automatically, and its critical to take this action, even if all assets were jointly owned and no taxes are owed when the first spouse dies. To elect portability, the surviving spouse must file form 706 Federal Estate Tax Return with the IRS.

Many financial advisors may not believe electing portability is necessary. However, it is. One estate planning attorney advises financial advisors and CPAs to obtain a written document affirming their decision from surviving spouses, if they decline to elect portability.

Portability is relatively recent to married farming couples. This is why many people in the agricultural sector may not be aware of it. An estate planning attorney can help the surviving spouse to file a Form 706. The value of assets may be estimated to the nearest quarter million dollars of value at the first spouse’s death.

Form 706 must be submitted to the IRS within nine months of the first spouses’ death. The deadline can be extended with the use of Form 4768 for an additional six months. However, if the surviving spouse misses the initial deadlines for filing, they can still elect portability up to five years from the date of their spouse’s death, by invoking “Relief under Revenue Procedure 2022-32.”

There were so many applications for extensions made to the IRS that in 2022, the change was made to give surviving spouses more flexibility in applying for portability.

Talk with your estate planning attorney to consider portability as a solution for your surviving spouse. If you would like to learn more about portability, please visit our previous posts. 

Reference: Ag Web (Jan. 30, 2023) “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”

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A Joint and Survivor Annuity is an Option

A Joint and Survivor Annuity is an Option

A joint and survivor annuity is an option to consider for some spouses. An annuity is a contract between an investor and a life insurance company. The purchaser of an annuity pays a lump-sum or several installments to the insurer, which then provides a guaranteed income for a certain period—or until their death.

Forbes’ recent article entitled “What Is A Joint And Survivor Annuity?” says that understanding an “annuitant” is key to understanding how a joint and survivor annuity works. An annuitant may be either the buyer or owner of an annuity or someone who’s been selected to get the annuity payouts. A joint and survivor annuity typically benefits joint annuitants: a primary annuitant and a secondary annuitant. Under this policy, both get income payments during the lifetimes of both the annuity owner and their survivor.

With joint life annuity, you can expect payments throughout the lifetime of the primary annuitant. If that person passes away, the survivor—the other annuitant—receives payouts that are the same as or less than what the original annuitant received. However, if the secondary annuitant dies ahead of the primary annuitant, survivor benefits aren’t paid when the primary annuity dies. The annuity buyer can designate themselves and another person, like their spouse, as joint annuitants.

A joint and survivor annuity differs from a single life annuity in a few ways:

  • A single-life annuity benefits only the annuity owner, so income payouts cease when that person dies; and
  • A single-life annuity usually pays out less than a joint and survivor annuity, since a single-life annuity covers just one life, while a joint and survivor covers two.

Under some joint and survivor annuities, the amount of the payout is decreased after the death of the primary annuitant. The terms of any decrease are set out in the annuity contract.

The payout to a surviving secondary annuitant, generally a spouse or domestic partner, ranges from 50% to 100% of the amount paid during the primary annuitant’s life, if the annuity was bought through certain tax-qualified retirement plans.

A joint and survivor annuity is an option to consider, but you need to ask these three questions before setting one up:

  • How much in payout is needed for both annuitants to support themselves?
  • Do you have other assets (like a life insurance policy) to help the surviving joint annuitant after one of the annuitants dies?
  • How much would the payouts be lessened after the death of a joint annuitant?

Remember that you usually can’t change the survivor named in a joint and survivor annuity. If you are interested in learning more about annuities in estate planning, please visit our previous posts. 

Reference: Forbes (Dec. 19, 2022) “What Is A Joint And Survivor Annuity?”

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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