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Estate Planning Blog

Serving Clients Throughout North Central Missouri

blended families

Divorce, Death and Details: Missteps can Create Estate Planning Disasters

This estate battle shows how small details can become huge headaches. Four courts and several years after this estate battle began, a family won a case that could have been easily prevented, as reported in The Dallas Morning News article “The way out of the ERISA trap: A tale of divorce, death and money.”

A couple married and then divorced. The divorce decree clearly stated that Mike was awarded all of his employee benefits, including his life insurance. However, when Mike logged into his employer’s benefits systems, it would not allow him to delete his ex-wife as the beneficiary of his life insurance. It may have been programmed that way. There are laws concerning removing spouses from employee benefits. Or it was a glitch. However, Mike did not pursue it.

When Mike died, he was survived by his parents, who claimed his estate, but the $377,000 life insurance policy was not part of his estate because his ex-wife was still the beneficiary.

His parents filed a claim with the insurance company for the proceeds of the insurance policy.

The first court they filed in was the probate court, so they could be properly recognized as Mike’s heirs. The probate court found in their favor and named Mike’s dad as the independent administrator of his estate.

The second court was federal court. That’s because employee benefits are governed by a federal law ERISA—the Employee Retirement Income Security Act—that controls employee benefits, including employer-provided life insurance. These matters can only be dealt with by a federal court.

The federal court ruled that because Mike’s ex was on the beneficiary form, she was the rightful owner.

However, Wendy had waived her rights to the insurance benefits when she signed off on the divorce decree. Mike’s parents were determined to win this battle.

Their legal team took the argument next to court three—the original divorce court. Mike’s dad, in the position of the estate administrator, argued that while Wendy did have a right to receive the money under ERISA, she did not have a right under state law to keep it. She had waived that right in the divorce decree. The divorce court agreed and found that Mike’s estate owned the proceeds. The money was to be turned over to Mike’s parents.

Court number four came when Wendy petitioned the state appellate court to overturn the award. She lost.

What were the factors that allowed Mike’s parents to win this case? The divorce decree contained clear language regarding the life insurance policy. If it had been poorly drafted, the results could have been different. Mike’s parents went through all the correct procedural courts—establishing heirship, then probate, then divorce enforcement case.

One step could have been added: a restraining order so that the ex could not squander the money between the time that she received the proceeds and when the final judgement was rendered.

Reference: The Dallas Morning News (Jan. 24, 2021) “The way out of the ERISA trap: A tale of divorce, death and money”

 

Is Estate Planning for Everyone?

How Do You Keep Inheritance Money Separate?

Families with concerns about the durability of a child’s marriage are right to be concerned about protecting their children’s assets. For one family, where a mother wishes to give away all of her assets in the next year or two to her children and grandchildren, giving money directly to a son with an unstable marriage can be solved with the use of estate planning strategies, according to the article “Husband should keep inheritance in separate account” from The Reporter.

Everything a spouse earns while married is considered community property in most states. However, a gift or inheritance is usually considered separate property. If the gift or inheritance is not kept totally separate, that protection can be easily lost.

An inheritance or gift should not only be kept in a separate account from the spouse, but it should be kept at an entirely different financial institution. Since accounts within financial institutions are usually accessed online, it would be very easy for a spouse to gain access to an account, since they have likely already arranged for access to all accounts.

No other assets should be placed into this separate account, or the separation of the account will be lost and some or all of the inheritance or gift will be considered belonging to both spouses.

The legal burden of proof will be on the son in this case, if funds are commingled. He will have to prove what portion of the account should be his and his alone.

Here is another issue: if the son does not believe that his spouse is a problem and that there is no reason to keep the inheritance or gift separate, or if he is being pressured by the spouse to put the money into a joint account, he may need some help from a family member.

This “help” comes in the form of the mother putting his gift in an irrevocable trust.

If the mother decides to give away more than $15,000 to any one person in any one calendar year, she needs to file a gift tax return with her income tax returns the following year. However, her unified credit protects the first $11.7 million of her assets from any gift and estate taxes, so she does not have to pay any gift tax.

The mother should consider whether she expects to apply for Medicaid. If she is giving her money away before a serious illness occurs because she is concerned about needing to spend down her life savings for long term care, she should work with an elder law attorney. Giving money away in a lump sum would make her ineligible for Medicaid for at least five years in most states.

The best solution is for the mother to meet with an estate planning attorney who can work with her to determine the best way to protect her gift to her son and protect her assets if she expects to need long term care.

People often attempt to find simple workarounds to complex estate planning issues, and these DIY solutions usually backfire. It is smarter to speak with an experienced elder law attorney, who can help the mother and protect the son from making an expensive and stressful mistake.

Reference: The Reporter (Dec. 20, 2020) “Husband should keep inheritance in separate account”

Can an Inheritance Lead to Trouble for Marriages?

Is an inheritance a blessing, or a curse? That’s the question from the recent article “When One Spouse Gets an Inheritance It Can Be Hard on a Marriage” posed by The Wall Street Journal. The emotional high of receiving an inheritance is often paired with legal issues. Emotional and life changing decisions can take a toll on the best of partnerships. Spouses may disagree with how assets should be used, or if an inheritance should be set aside for children from a prior marriage. The question of what happens to the inheritance in the case of death or divorce also needs to be addressed.

Couples are advised to start exploring these issues, with the help of an experienced estate planning attorney as soon as they know an inheritance is in their future. For starters, couples should learn about the legal issues surrounding inheritances. Most states recognize inheritances as separate property. However, if funds are co-mingled in a joint account, or the deed for an inherited house is in both names, it becomes more complicated to separate out, if necessary.

Couples who decide to use an inheritance for a large purchase need to be mindful of how the purchase is structured and recorded. Writing a check directly from an account dedicated to the inherited funds and keeping records to show the withdrawal is recommended. If a check needs to be drawn from a joint or single account, the inherited funds should only be placed in the account for a short period, preferably close to the time of purchase, so it is clear the funds were transferred solely for the purpose of the particular transaction.

It would be wise to obtain a written agreement between spouses, making it clear the money was contributed with the understanding if there is a sale of the property or a divorce, inherited funds and any appreciation would be credited back to the contributing spouse.

For one couple, a $100,000 inheritance received by a man in his mid-50s with adult children and a second spouse created friction. The man wanted to set the funds aside for his children from a prior marriage, and his wife felt hurt, because she had every intention of giving the money to his children in the event of her husband’s death. She didn’t see the need to keep things separate. However, when advisors ran a series of projections showing the wife would be well cared for in the event of his death, since most of his own $1 million estate was earmarked for her, she relented. They also helped her understand if she racked up big medical bills later in her own life or creditors went after the estate, the money would be better protected by keeping it separate.

Risks come with co-mingling inheritances. It is important for couples understand how this works. Another example: a couple who expected to receive a sizable inheritance and did not save for their own retirement. Instead, they used up the wife’s inheritance for their children’s college educations. When the husband filed for divorce, the wife was left with no access to her ex-husband’s expected large inheritance and had no retirement savings.

These are not easy conversations to have. However, couples need to look past the emotions and make business-like decisions about how to preserve and protect inheritances. It’s far easier to do so while the marriage is intact, then when a divorce or other unexpected life event shifts the financial event horizon.

Reference: The Wall Street Journal (Sep. 13, 2020) “When One Spouse Gets an Inheritance It Can Be Hard on a Marriage”

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