Why Marital Agreements are an Important Estate Planning Tool for Re-Married Couples
By Kiley Stuchlik, Attorney at Law
Individuals often come to second marriages with children from a previous relationship. Additionally, they often already own real property or other significant assets. This dynamic makes estate planning for remarried couples even more important.
In Idaho, if one dies without a testamentary instrument such as a last will, then state law provides that the surviving spouse is entitled to one-half of the separate property of the decedent spouse (if there are surviving issue or parents of the decedent) and all of the decedent spouse’s interest in community property. See IC 15-2-102. At the beginning of the marriage, what is separate property is clear but throughout the marriage, deeds may be exchanged between spouses, joint debt may be incurred with real property pledged as collateral, and property may be bought and sold, all of which, makes the distinction between separate and community property less clear. Given that reality, one can imagine the difficulty in dividing an intestate estate between a surviving spouse and a decedent’s spouse’s heirs upon death, especially if the surviving spouse and the decedent’s other heirs (issue or parents) do not get along.
The good news is that what constitutes separate versus community property can be addressed by agreement. For remarried couples, a common estate planning tool is a marital agreement, also known as a prenuptial agreement, if the agreement is executed before marriage. A marital agreement is simply a document wherein each spouse has an opportunity to not only list the separate property that they own in the marriage, but also to release and waive any interest they would have in the other spouse’s separate property. The reason this is important is because it gives each person an opportunity to give away their separate property to their own children without the property being in jeopardy of being distributed to the surviving spouse and then to the surviving spouse’s children in a way that would exclude the decedent’s own children from receiving any portion of the decedent’s estate.
For a marital agreement to be binding, spouses must engage in a full disclosure of their respective assets. The agreement should include a complete description of all property, with a list of each spouse’s separate property and a list of the property (if any) that the couple will treat as community property. Each spouse must have an opportunity to use a separate attorney of the spouse’s choosing to assist in negotiating the language of the marital agreement. Finally, neither spouse can be coerced or forced into signing a marital agreement. The marital agreement itself will state that each individual is signing of his or her own free will based on each spouse’s knowledge after consulting with an independent attorney or after having been given the opportunity to do so and voluntarily choosing not to consult with an attorney.
Once a marital agreement is in place, it is binding on each spouse and their respective heirs. Each spouse is then free to use their estate planning documents, such as a last will and testament, to provide for specific gifts of separate property upon death. A marital agreement can make distribution of an intestate estate, where a spouse dies without a last will, much easier since the agreement will be binding on the intestate heirs with respect to what is community versus what is separate property. There will be no presumption, or grounds for any claims that the property is community and is thus owned by the surviving spouse.
Besides making distribution upon death more clear and potentially much less contentious, marital agreements can bring peace of mind to the couple and their families. If you’re ready to move forward with a plan of your choosing and gain some peace of mind through executing a marital agreement, a last will and testament, or both, we can help.
The importance of planning for long-term care.
By Kiley Stuchlik, Attorney at Law
There seems to be a stigma that if we plan for death, it’s more likely to happen. While there is no evidence to support that concern, there is a 100% chance of dying whether we plan for it or not. A smaller, but still quite large probability that looms over us is the likelihood that as we age, we are going to need long-term care. As with planning for death, there is no evidence to support the fear that planning for long-term care will increase the probability that we will need it. Given the likelihood that one will need long-term care, it is important to plan for it and for reasons explained below, it is important to plan for long-term care as early as possible.
A person can have his or her long-term care paid for by the state via Medicaid, a program that acts as an interest-free loan to pay for a resident’s basic, long-term care provided all applicable eligibility requirements are met. The state’s interest-free loan will come due upon the Medicaid recipient’s death or upon the death of the surviving spouse of the Medicaid recipient, in the case of married couples.
In order to receive Medicaid, one must meet all 5 of the following eligibility requirements:
The bottom line is that long-term care is expensive. The average monthly cost of a one-bedroom unit in an assisted living facility in Idaho is currently around $5,000, or $60,000 per year. That reality makes it even more important to think about long-term care and how one will pay for it. If you have questions about employing strategies to qualify for Medicaid or protect assets, we are happy to help. If it’s a situation that’s outside of our scope of expertise, we’ll make sure to connect you with a trusted expert in the field.
When should you review your estate plan?
By Steve & Kiley Stuchlik, Attorneys at Law
It’s good idea to review your estate plan on a regular basis, such as every few years, and upon the occurrence of major life events to determine whether changes should be made to your estate plan. Additionally, there may be changes to state or federal tax code or other laws that govern your estate that would make it necessary or desirable for you to revise your estate plan. These are changes that you are not necessarily going to be aware of on your own, which is why it’s important that you keep in touch with professionals, such as an estate planning attorney and tax advisor, regarding your estate plan.
The following are 6 major life events that necessitate a review of your estate plan:
You also should work with your estate planning attorney to establish proof that you changed your state of residence. This is particularly important when you have a substantial estate and moved from a state with an inheritance or estate tax to a state that does not impose such a tax.
When you acquire real estate in another state, you should review your estate plan to ensure that title to that real estate is held in a manner that is consistent with your estate planning objectives or better yet, contact a trusted estate planning attorney licensed in the state in which you are buying the property before you close the transaction so that your attorney can advise you on the best way to take title to the property in light of your estate planning objectives. Doing so could save you from incurring additional recording fees down the road or from unintended results of vesting language in a deed.
You can also do some planning to make sure that your heirs do not have to engage in estate administration in more than one state upon your death. As we mentioned in a previous blog, any real property owned in your name (as opposed to owned by you as trustee of your revocable living trust) may be subject to estate administration (probate) in the state in which the property is located. That means that for a decedent who owned real property in his or her personal name in more than one state, the heirs will have to engage in estate administration proceedings in each state in which the decedent owned real property in the decedent’s personal name. That result can be avoided with some estate planning.
2. The objects of your affection have changed. For most people, a change in who they desire to leave their assets to happens when there’s an addition to the family, such as the birth of a new child or grandchild. While general language can be included in an estate plan to ensure that these after-born heirs are included (if that’s what’s desired), it’s still a good idea to review one’s estate plan to ensure that a new addition will be provided for based on the language in one’s estate planning documents. Additionally, revising one’s estate plan to specifically mention a new beneficiary (as opposed to relying on some general language) can help avoid potential conflicts or uncertainty when it comes time for your beneficiaries to interpret your estate plan.There may be instances when it is appropriate to delete someone who is named as a beneficiary in your estate plan. There might be a death or divorce in the family. You also might want to disinherit someone who’s been irresponsible with money or has become estranged from the family. If it’s someone in close relation to you whom you want to disinherit (meaning they may be entitled to notice of the estate administration), it is always better to specifically mention in your estate plan that you do not wish to leave anything to that person (as opposed to just ignoring the person in your estate plan).
3. You have been divorced, married or become widowed. Although there are state laws that apply in these situations to keep an ex-spouse from inheriting from a former spouse, it’s still better to revise one’s estate plan and make sure it is current and reflects one’s desires considering the new circumstances. Upon an event such as this, it is imperative that you check with your account holders (bank, investment, etc.) and life insurance company to ensure that your beneficiary and payable on death forms are current.
4. Your assets or liabilities have changed. A significant change in the value of your estate since your estate plan was drafted necessitates a review of your plan, whether the estate’s value has increased or decreased. You need to review how the property is divided and decide if that still is what you want considering your new circumstances.A change in the composition of your estate also merits a review. You might have sold an asset, such as a business or real estate, that was a major part of the estate. Or you might have added such an asset. Either change means a review of your plan is in order.
5. Your beneficiary designation for your qualified retirement plan is outdated. One of the major mistakes in estate plans is failing to update the beneficiary designations of IRAs, 401(k)s and other retirement plans. The beneficiary of these accounts is determined by the beneficiary designation form on file with the plan, not the language of your will or trust. If the value of your account has increased substantially you may wish to add a beneficiary, which must be accomplished by contacting your plan administrator and executing a new form.
6. Executors/trustees or guardians become inappropriate. The executors and trustees are the people who implement your plan and often determine how successful it is. Persons you nominate as guardians for your minor children will care for them in the event you and the other legal guardian pass away. Even when the appointments were made carefully at first, circumstances might have changed with respect to those individuals such that they are no longer an appropriate choice. Carefully reconsider the people appointed in your estate plan. Are they still able and willing to perform these jobs as you’d like them done? Has your estate or circumstances changed such that someone else is now a better choice for these roles? Has anyone aged, relocated, or passed away? Determine who is the best choice for these positions today.
If you’ve had a major life event and want to discuss how that event impacts your estate plan or have reviewed your plan and want to make changes, we’re here to help.
What are the ownership and tax consequences of gifting my home to my child during my lifetime?
By Steve & Kiley Stuchlik, Attorneys at Law
Last month, we mentioned that one should not engage in DIY estate planning through the execution of deeds to make a lifetime transfer of real property without first obtaining the advice of an attorney. We noted that there are ownership and tax consequences to transferring title to real property. Many parents of adult children ask us about simply deeding (gifting) their home to their children during their lifetime as a way to avoid probate and/or avoid the state putting a lien on their home for the cost of the parents’ medical care (e.g. Medicaid).
While those objectives may be accomplished, there are many consequences to a lifetime transfer of real property such that in most cases, gifting your house to your child now, via execution of a deed and without payment of a fair purchase price, is NOT the best option. While some states, such as Oregon, allow for a transfer on death deed meaning that the property is not transferred during the owner’s lifetime but rather, the transfer occurs automatically upon the owner’s death to the person designated in the deed, Idaho does not allow for a transfer on death deed.
The only circumstance when deeding your house to your child during your lifetime without payment of a fair purchase price is an ok option is when all of the following facts are true (and even then, a person should seek competent legal and tax counsel before proceeding):
And now for the reasons why deeding the house to your child during your lifetime without payment of a fair purchase price is most likely not the best option:
If your circumstances are such that gifting your home is an ok option, then you should consult competent tax and legal counsel to assist with the transfer. If gifting is not an ok option for you, then you should consider consulting with legal and tax counsel to engage in estate planning in order to pass your home onto your children without the potential ownership and tax consequences of a lifetime gift.
Should I avoid probate? What are the pros and cons of utilizing a revocable living trust?
By Steve and Kiley Stuchlik, Attorneys at Law
Last month we explained what probate is. This month, we are discussing whether you should employ strategies to avoid probate and the pros and cons of utilizing a revocable living trust as a planning tool that can avoid probate.
The type of your assets is an important consideration because some “non-probate” assets pass “automatically” outside of a probate proceeding via a beneficiary designation form or transfer on death designation. Investment accounts, for example, can be set up to pass by a payable on death designation. Thus, this type of asset will not be subject to a probate proceeding as long as you properly execute the beneficiary paperwork before your death.
With respect to real property, probate can only be avoided by employing a strategy such as: transferring title to the trustee of your revocable living trust; executing a survivorship deed; executing a transfer on death deed (not allowed in Idaho)*; or via executing and recording a devolution on death (aka “community property”) agreement with a legal description of the real property, for real property located in Idaho (this works to pass property from one spouse to another without administration, not for transfer to children or other heirs). *One should be careful not to engage in DIY estate planning through the executing a deed without first contacting an attorney as there are ownership and tax consequences to consider.
Value of Your Assets
The value of a decedent’s assets affects what probate administration proceeding, if any, will be required in order to transfer a decedent’s assets. Idaho and Oregon, for example, both have more expedient administration proceedings for estates where the value of the decedent’s assets is under certain threshold amounts. Thus, to determine whether you should employ a probate avoidance strategy, the value of your assets should be considered.
Location of Your Assets
Although the primary place of probate administration will be the state of the decedent’s domicile, if the decedent died owning real property in the decedent’s name in other states, a probate proceeding (often referred to as an “ancillary probate”) will need to be carried out in each such state in which the decedent owned real property. Those proceedings will be necessary for the decedent’s Personal Representative to have the legal authority to transfer title to that real property per the decedent’s will or per the intestate laws of succession, for a decedent who died without a will.
As we explained last month, some states, such as Idaho, are more “probate friendly,” meaning that court costs are relatively lower and the proceedings are relatively informal and expedient. Accordingly, if you own real property solely in Idaho, it’s likely that executing a will and having that property administered through a probate proceeding upon your death, will be a good option. On the other hand, if you own property in another less probate friendly state or in multiple states, it’s likely that employing a probate avoidance strategy, such as creating and funding a revocable living trust during your lifetime, is a better option for you.
Goals for Your Legacy
If your goals for your legacy involve retaining control over assets and/or people after your death or potentially limiting estate tax liability (you should also consult with a qualified tax advisor about these concerns), then trust planning may be necessary. Trust provisions can restrict when beneficiaries will receive assets and what those trust assets can be used for, among other limitations. You can also designate who will be in charge of managing trust assets and distributing them to your beneficiaries. Trust provisions can be included in your will and become effective upon your death or they can be included in a revocable living trust and become effective during your lifetime. If you have concerns about becoming incapacitated, a trust may be able to provide more robust planning for your incapacity then you would be able to accomplish through other means, such as by executing a durable financial power of attorney. While a probate proceeding is a public proceeding, a trust administration is a private proceeding. Thus, if you want to control beneficiaries and/or property or plan for your incapacity and you wish to keep those plans private, avoiding probate through the use of a revocable living trust is the best option for you.
2. The pros and cons of utilizing a revocable living trust.
A revocable living trust (RLT) is an agreement that you as the trust creator (“Trustor”) enter into with yourself in your capacity as “Trustee”—the person designated by the agreement to manage your assets. This agreement, generally referred to as a “Trust Agreement” or “Trust”, must be created during your lifetime and is legally in effect as of the date you execute it. You can designate a co-trustee or alternate trustees to manage your assets in the event of your incapacity or death. Married couples typically create a joint RLT with both spouses as the Trustors and initial Co-Trustees.
In order for the RLT to accomplish the purpose of avoiding probate upon your death, your RLT must be funded. An RLT is funded when ownership of your assets is transferred from your name personally into your name as Trustee of your RLT, during your lifetime. Various transfer mechanisms such as deeds, vehicle title transfers, retitling of bank accounts, re-issuance of insurance, etc. must utilized (a person should always seek competent legal advice when funding a trust to avoid potential pitfalls).
The creation of a RLT does not eliminate the need for a will. A will is needed to nominate guardian(s) for minor children and to act as a catch-all transfer mechanism for any assets that you did not transfer to yourself in your capacity as Trustee of your RLT during your lifetime (commonly referred to as a “Pour-Over Will”). Your will should direct the personal representative of your estate to transfer all assets to the surviving or successor Trustee of the RLT upon your death so that they can be added to the trust estate and managed according to the terms of your Trust Agreement.
Upon your death, the Successor Trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold and manage the trust property for the benefit of your beneficiaries. Like a will, a RLT can provide for the distribution of property upon your death. Unlike a will, it can also: (a) provide you with a vehicle for managing your property during your lifetime; (b) authorize the Successor Trustee to manage the property and use it for your benefit should you become incapacitated; and (c) allow your heirs to avoid initiating a probate proceeding upon your death (provided the RLT was fully funded). That being said, a RLT will still need to be administered upon the surviving trustor’s death and trust administration is similar to probate administration and may require the assistance of an attorney.
To summarize, the following are the pros and cons of utilizing a RLT:
If you are considering a revocable living trust or other probate avoidance strategy, we are happy discuss your situation and help you decide what is the best option for you. As always, we are here to help.
What does “probate” mean?
By Steve & Kiley Stuchlik, Attorneys at Law
Probate is the legal (court) process for the general administration of an individual’s estate, with or without a will (i.e., payment of decedent’s debts and distribution of a decedent’s asset as directed in the decedent’s will or as directed by the state’s intestate succession laws in the case of a decedent who passed without a last will).
It’s important to note that there may be more than one process available for the distribution of the assets of a decedent, which will be dictated by the laws of the state of administration (where the decedent was domiciled or owned real property). Idaho and Oregon, the two states we practice in, for example, vary quite a bit in their options; but, both states do have a more expedient “small estate” process available for estates where the value of the decedent’s assets is under certain amounts. Idaho also has a proceeding available for a surviving spouse where an estate consists solely of community property.
Depending on the nature of the decedent’s assets, the assets may be “non-probate assets,” meaning assets will pass outside of probate such as by a beneficiary designation or payable on death designation; thus, unless the decedent also has assets that are subject to probate administration, no court probate proceeding will need to be initiated.
If you have been nominated to be in charge of an estate or you are a potential heir to the estate of a relative who passed away without a will, it is important to discuss the decedent’s situation with an attorney experienced in probate administration to determine if probate is necessary and if so, the most appropriate proceeding.
With the caveat in mind that the type of procedure required will vary depending on the state of administration and the nature and value of a decedent’s assets, a typical, non-small estate probate would proceed as follows:
The following are circumstances under which probate will be avoided:
The last two categories are examples of what are referred to as “non-probate assets,” which will not need to be transferred pursuant to a court probate proceeding. Nonetheless, non-probate assets will be subject to the legitimate debts of the decedent. In the case of assets transferred to a trustee, there will need to be a trust administration, which procedure is similar to a probate proceeding.
You might be wondering whether you should employ a planning strategy to avoid probate. And likely, you’ve heard a horror story about a probate that took years and cost thousands of dollars in court costs and attorney’s fees. The truth is that in some states the probate process is more involved, meaning an increase in attorney time, and the courts require higher costs throughout the process. On the other hand, there are other states, such as Idaho, where court costs are relatively low and there is minimal court involvement, meaning lower attorney’s fees. Frankly, an estate that drags on for years or gets horribly expensive is mostly likely due to fighting among the heirs and devisees, rather than the process itself.
In order to definitively advise you as to whether you should endeavor to avoid probate, we need to know your state of domicile, information about the nature of your assets (type, value, location) and what is important to you and your legacy. Next month, we’ll explain some circumstances under which one would want to avoid probate and the pros and cons of creating a revocable living trust as a planning tool.
What happens to my property if I die without a will?
By Kiley & Steve Stuchlik, Attorneys at Law
Last month, we explained that a Last Will and Testament or a Revocable Living Trust with A Pour-Over Will constitute the main estate planning documents that govern the distribution of your assets upon your death. But you might be wondering, what happens if I die without any such instrument? You might have heard the term “intestate.” Does that mean that if you die without an estate plan your assets pass to the State? No, not unless your intestate heirs cannot be determined—see below. What is meant by intestate is that if you die without a properly executed testamentary instrument (such as a will or trust), the distribution of your assets will be governed by the intestate laws of the State in which you are domiciled at the date of your death.
In other words, each state has drafted a default estate plan to govern who should receive a decedent’s assets in the absence of a properly executed testamentary instrument.
In Idaho, the laws of intestate succession can be summarized as—down (issue, i.e. children), up (parents), and out (siblings, cousins, etc.) with specific rules for succession that relate to a surviving spouse. Idaho code provides that with respect to intestate succession when the decedent is survived by a spouse, the decedent’s interest in community property (all property acquired during marriage except by gift or inheritance and kept separate) passes to the surviving spouse. SeeI.C. 15-2-102. It further provides that the decedent’s interest in separate property (acquired before marriage or during marriage by gift or inheritance and continuously kept separate), will pass one-half to the decedent’s issue (children, and down, as appropriate per any predeceased issue) or if the decedent died without issue, one-half to the decedent’s parents. If the decedent died without surviving issue or parents, the decedent’s interest in separate property will pass entirely to the surviving spouse.
In the case of intestate succession for an individual who dies without a surviving spouse, issue, or parents, the estate would be split in half, with one half passing to heirs on the decedent’s paternal side and the other half passing to heirs on the decedent’s maternal side--siblings (if any), then first cousins, first cousins once removed, etc., depending on predeceased heirs. Only in circumstances where an individual dies without such living relatives or where it is impossible to determine the decedent’s relatives or when no one steps up to take on that task, will the decedent’s property escheat (pass) to the state.
For some people, such as the case with a decedent of a long-term marriage where all property is community and there is a surviving spouse, the effect of intestate succession may accomplish what the decedent wanted anyhow. Or, in the case of a couple with only joint children, intestate succession may accomplish want the parents would have written up in a testamentary instrument if they had executed one. But, the circumstances of many families are such that intestate succession would not achieve the decedent’s desired outcome. In the case of a decedent survived by stepchildren for example, you can imagine situations where because of the closeness of the stepparent-child relationship, stepchildren would be shocked and hurt to be unintentionally disinherited by the state’s intestate succession laws.
Besides being able to determine who gets your assets, another objective you can achieve through planning is to nominate individuals you want in charge of administering your estate and distributing your assets. You can also express your instructions for the administration of your estate on issues such as: waiving bond, having certain expenses paid, and passing assets free of secured debt, among other issues. Thus, even if the intestate plan of distribution works well for you and your family, there are still important objectives that you can accomplish by executing a testamentary instrument.
Even spouses who only own community property and want to leave everything to each other benefit from engaging in some estate planning. Through planning, those spouses can ensure that the surviving spouse will not have to engage in any court administration of the deceased spouse’s estate in order to confirm title to the assets in the surviving spouse’s name. And while you cannot avoid the necessity for court administration just by having a will, there are other planning techniques that can be utilized to accomplish that purpose. In next month’s blog, we’ll explain what court administration (aka “probate”) is and the techniques that can be used to avoid probate, if that is a desired outcome.
Planning for Your People and Why You Need to Do It
By Kiley Stuchlik, Attorney at Law
Perhaps you’re thinking that you don’t own an “estate” and that estate planning is only for the rich and elderly. I’ll admit that estate planning is not the most accurate term for the type of planning we, at Stuchlik law, help people engage in. More accurately, we engage in people planning. What I mean by people planning is that we help you plan for the most important people in your life, including yourself. While we plan for your death, we also plan for events that may occur during your lifetime.
For example, if you are a parent with minor children, we can help you get a custodial power of attorney executed so that should you go on a trip without your children, you can designate someone to take care of your children and you can legally authorize that person to make important decisions on their behalf while you are away.
Other documents that plan for lifetime events include a durable financial power of attorney (“POA”) and a living will and durable power of attorney for healthcare. The durable POA can be used for convenience when you cannot physically be somewhere to sign. Also, because the POA is durable, it survives your incapacity and can be used out of necessity. For example, if you get in an accident and become mentally incompetent but need to sign something, your agent under the durable POA can sign on your behalf. Having the durable POA in place could save your loved ones the time, hassle, and expense of initiating a costly court conservatorship proceeding in order to manage your financial affairs upon your incapacity.
The living will and durable POA for healthcare allows you to provide guidance on your end-of-life care and also allows you to designate someone as your agent to make health-care decisions for you in the event that you are unable to communicate those decisions.
And yes, we deal with your property, your “estate,” as part of your people planning. We help you determine who gets what assets and who will be in charge of distributing your estate assets. Those decisions are memorialized in a Last Will and Testament or through a Living Trust with a Pour-Over Will.
However, even a will or trust can provide critical planning for your people. For instance, if you are preparing a will or trust at a stage in life when you have young children, it is a good idea to include trust provisions so that should you die when your children are still young, those provisions ensure that your assets will be managed for your children’s benefit by someone you trust until your children reach each a certain age when you feel they will be responsible enough to receive your assets outright.
Another critical way in which these documents can help serve people is through special needs or supplemental needs trust planning. For example, if you have a disabled adult that you want to provide money to (either before or after your death) but you know he or she is receiving government, means-tested benefits, you should. provide those funds through a carefully drafted supplemental needs trusts so as to ensure that your gift does not disqualify the individual from the government benefits. Sadly, before attorneys engaged in this type of trust planning, people were simply advised to disinherit their disabled loved ones.
As a parent of young ones myself, I would be remiss not to mention that the most critical objective parents of minor children can achieve through planning is to designate who will take care of their children, both physically and financially, in the event that both parents/legal guardians pass away. Through nomination of individuals to serve in these roles, you can provide critical instruction to a judge who will ultimately have the task of formally appointing people to fulfill those roles. You can also document anyone you would not want to serve in those roles. Without these instructions, the judge will have to rely solely on the testimony of those who willingly participate in court proceedings to appoint a guardian and conservator for your children.
If you’ve made it this far, I hope that you now understand why, regardless of the size of your “estate,” you need to engage in planning for you and your people and you understand that such planning is not just for your death but also for events that may occur during your life. If you’re ready to move forward with planning for your people, please contact us. We provide affordable, flat fee services.
When it comes to management of financial accounts, choosing the "convenient" option may lead to inconvenient and unintended consequences.
When it Comes to Management of Financial Accounts, Choosing the “Convenient” Option May Lead to Inconvenient and Unintended Consequences
Generally speaking, there are three (3) ways that a person can hold a bank account (and other like financial accounts) with another person:
When setting up or reviewing one’s accounts, it is important to be sure that the account is titled properly to avoid any unforeseen consequences.
When people age, they inevitably start asking the question, “How will my affairs be handled if I am hospitalized or I lose the mental capacity to handle my affairs?” One self-help solution to this conundrum that I often hear from people is, “I ‘put’ my adult child on my accounts, and he/she will take care of it…” (i.e. option 1 above). The reason that I hear most often as to why people picked that option is: “It’s convenient.”
But, is adding an adult child to a financial account a good idea? The answer in most, if not all, instances is no.
Adding an adult child to your financial account(s) may result in the following unintended consequences:
For example, if you have three children that you want to benefit equally in your estate under your will or trust (including receiving an equal share of your financial accounts), but you put one ofthose children on one or more of your financial accounts, that child will receive a disproportionate share of your estate because that child will receive the balance in those account(s) as a matter of law via the child being a co-owner of the account(s). In other words, the other children will not receive a share of those co-owned account(s) under your will or trust. *
*There may be options to rectify this situation, but it will likely require the cooperation of the unintended beneficiary (i.e. your co-owner child) and will add undue time and undue time and expense to administration of a your estate.
For example, if the child on the account is sued and suffers a significant judgment, the judgment creditor may seek to satisfy the judgment out of your account, because legally, your child also now owns your account, even if this was not your intention.
Merely adding your child to the account will likely not trigger such a requirement, but if your child withdraws more than the current IRS gift tax exemption threshold (approx. $15,000.00), then you may [will most likely] need to file a gift tax return.This consideration should be discussed with your CPA and/or professional tax advisor.
Before making the decision to add an adult child to your financial account(s), a person should seek counsel with their attorney, CPA, and other professional financial advisor(s), as it may be more advantageous to your child, from a tax standpoint, to inherit account balances rather than received them by gift during your lifetime.
Because the child becomes an owner of the account, the money in the account may be a countable resource if your child is attempting to qualify for means-tested benefits such as Medicaid or financial aid for their own college-aged children.
The good news is that there are alternatives to adding your child to a financial account as a co-owner. As I mentioned in option 3 above, a child can be designated a power of attorney on the account, or if it is consistent with your estate plan, a child can be added as a “payable on death” beneficiary of certain accounts. Additionally, there are broader alternatives, such as a financial “durable power of attorney” or a revocable living trust, that may accomplish your goals if you are concerned about the management of your financial affairs in the event of your incapacity or disability.
In any event, you should consult with an estate planning attorney prior to making any decision with respect to your estate plan, including making changes regarding the ownership of financial accounts or changes regarding the designation of payable on death beneficiaries for those accounts. As outlined above, adding a child to your account may seem convenient at the time, but it can cause some very inconvenient consequences both before and after your death.
Corb Lund Got Me to Thinking. . .
For those of you who do not know, a Corb Lund is not a new brand of automobile. He is a singer/songwriter from Alberta, Canada, who, in my humble opinion, along with his band “The Hurtin’ Albertans,” makes some of the best music a person can find these days. Lyrically, he is a talented storyteller and has a knack for making the listener think and feel. In any event, I recommend you check him out, if you don’t already know: www.corblund.com. Also, you can see him at the 2020 Weiser River Music Fest: www.weiserrivermusicfest.com.
I was listening to one particular song the other day called the “S Lazy H,” and Corb Lund got me to thinking. The premise of the song is as follows. A man grew up on a big cattle ranch (the S Lazy H) that had been in his family for generations. Because the man’s dad needed help running the ranch, he did not go off to college. Meanwhile, his sister went off to the city. After his parents passed away, he continued running the ranch. But, after a time, his sister returned with her new husband (who happens to be a lawyer). His sister wants her half of the ranch (presumably spurred on by her nefarious lawyer husband) and proceeds to force the man to sell a large portion of the ranch to buy out his sister’s half. Eventually, he is unable to make ends meet with what was left and loses the S Lazy H. It is Corb Lund storytelling at its finest. It is also sad, and a story that far too many people can relate.
The situational irony here is that the song’s villain is a lawyer, and a lawyer (in addition to a couple more team members) is just the person who could have helped avoid the sad ending in the first place. Now, for those of you who know me, you know that self-deprecation is one of my few talents, and I certainly make no exception for my chosen profession. That being the case, though, I am not above coming to the defense of lawyers when the situation calls for it.
Family farms and ranches are an icon, especially here in the American West where we have chosen to call home. And the folks who make their living on those farms and ranches are some of our greatest land stewards. It makes sense that those same people have a special sentimentality for the land they care for, and to some, the thought of subdivisions, development, or foreign interests looms like a dark cloud over the future of those open spaces. In the case of the S Lazy H, its unfortunate end could have been avoided by some foresight, communication, and planning.
When considering a succession plan, it is important for any person to make a fair assessment of what it is that they have. In the case of the S Lazy H, the man’s parents would have known that they had a relatively large cattle operation that relied on a significant amount of acreage in order to be viable, and they had two kids. Based on the story in the song, they knew (or should have known) that the law would default to each of their kids getting one-half of their estate upon their death. And they presumably knew that neither of their kids had the liquid capital to buy out the other’s half upon their parents’ death (not that their daughter and her fancy-pants lawyer husband would have wanted to ranch anyway). Armed with this information, the parents should have asked themselves several questions:
After answering these questions, it was then time for the parents to sit down and have a frank discussion with their children.
A person’s estate plan is a personal decision, but in the case of succession planning for the family farm or ranch, communication among the family is usually advisable. There is a lyric in the song that goes like this: “[s]ometimes right isn’t equal / [s]ometimes equal’s not fair.” This is an apt assessment of the situation that often arises in succession planning, but if you ask me (not that you did. . . but you’re getting an answer anyway), communicating what is right, what is equal (or not), and what is fair (or not) is best put on the table on your own terms. Planning on your terms, on the front end, rather than letting a court sort it out on the back end, will ultimately make the succession process easier and will alleviate (at least to some extent) hurt feelings. As I alluded to above, in order to keep agriculture operations viable, the division of an estate may not always be “equal” among heirs. This is not to say that every succession plan should have an unequal allocation of estate assets, but if there is an “on-farm/ranch” child it may make sense to leave that asset to that child. On the other hand, if keeping the farm/ranch in the family is not a priority, it may make perfect sense to direct that the property be liquidated, and the proceeds distributed equally among the heirs.
In the case of the S Lazy H, the parents would have been ahead to call a family meeting and let their children know their vision for the future of the ranch. On the one hand, the parents could have told their son, “It’s time for you to find another job, because we are going to leave the ranch to you and your sister equally.” Or, on the other hand, the parents could have said, “There have been six generations of our family on the S Lazy H, and we would love to see it continue; so, we are going to leave the ranch to you, son, and this is how it will work. . .” In either circumstance, one of the kids likely would have felt put out, but at least the cards would have been on the table, so to speak. Furthermore, it would have provided the opportunity for the children to come to terms with their parents’ decision and make their own plans accordingly. Additionally, irrespective of their decision, the parents should have communicated with their professional team in order to effectively put their plan into action when the time came.
Even if there is going to be an unequal allocation of the family farm or ranch, it does not necessarily mean that the estate has to be unfair. It is important that, in addition to the family, folks communicate with professionals that can objectively advise them on their estate plan including: their attorney; their tax advisor; their financial planner(s); and their insurer(s). Compiling a qualified team of professionals that understands your situation and goals will go a long way toward reaching peace of mind about your legacy and ensuring a seamless succession of your family farm or ranch.
In the case of the S Lazy H, the parents could have considered the value that their son would be getting in the inheritance of the ranch. The parents then, in consultation with their attorney, could have made arrangements in their properly drafted will or trust to leave other assets such as cash, other (non-ranch) real property, or personal property to their daughter. Additionally, with some foresight, they could have considered leaving investment accounts or life insurance in an “unequal” share to their daughter, by working with their financial advisor(s) and insurance agent(s). Perhaps in the end, their estate would not have been divided 50-50, but they could have planned to make the end result more equitable to everyone involved, while at the same time preserving the legacy of the S Lazy H.
The takeaways from the lesson of the S Lazy H are this: 1) If leaving a family farm or ranch as part of a person’s legacy is important to them, then they need to take the time to have some foresight, communication and planning; 2) Lawyers can be your friend – they’re not always the villain; and 3) Corb Lund makes some excellent music.
But I suppose that if everyone heeded my advice here, then we would never have gotten “S Lazy H,” and it is one heck of a great song. So, for that I will be thankful, and let’s hope that Corb won’t have reason to pen a sequel.