SF/TSG:  #007

This material has been developed by and is presented by The Sandwich Generation ®

Will YOUR Heirs Get
What You Want Them To?
Or Will They Be Cheated??
by Carol Abaya, M.A.

With a 40% divorce rate in the country, extra care is need to financially protect children of previous marriages.  Planning is important because many divorcees remarry.  In fact, more than 50,000 Americans over the age of 65 remarry each year.  This number is far greater for those in the Sandwich Generation.  But planning is also important because death may cause the separation.

Scenario 1: A (husband)  and M (wife) married in 1969, both having children from their first marriages.  A and M joined financial forces, holding all assets in joint tenancy  (survivor receives all).  In 1984, M died suddenly.  M's Will left everything to A .  However, the Will would not have been important because all assets were held jointly, and would have gone to the survivor regardless of what the Will might have stated.

 Then, at age 75, A remarried, and he and D (his new wife) pooled all their assets and currently hold everything (house, bank accounts, charge cards and other assets) in joint tenancy (survivor receives all).  Neither has a separate bank account or charge card or singularly owned assets.

Thus A brought to this marriage both his and M’s assets.  M’s children received nothing when their mother passed away, even though some of her money had been used to purchase their home.  M’s children will now have to wait until both A and D pass away to inherit anything.

The scenario described above is more complex than the usual remarriage situation because there are five "sets" of children involved.  A has two children from his first marriage.  M had three children from her first marriage.  D has two children from her first marriage and one from her second.  D’s second husband also had children.

In all cases in this scenario, former spouses passed away (rather than being a divorce situation.)

Scenario 2:   H and E, now in their 50s, married 18 years ago.  Both H and E have three children from their previous marriages.  H’s first wife had custody of his children, and E’s husband had custody of her children because of financial reasons.

While none of the children ever lived with H and E, they are all close friends.  In fact, they were friends even before H and E knew each other.

H and E  hold their hard assets jointly, but have separate bank accounts and charge cards.

Both of their Wills split assets six ways, which will be distributed upon the death of the surviving spouse.

% Distribution

In Scenario 1, A and D each have a separate Will.  Everything will initially go to the survivor, and then be distributed to the children according to a formula worked out between them.  (Because assets are under $650,000 and Minnesota has a spousal exemption, there is no need to protect the surviving spouse in reference to estate taxes).  Originally A and D had a pre-nuptial agreement, which has been superceded by the current Wills, drawn up about two years ago.

In putting together their Wills, A and D were faced with choices, A says.  "We can spend all the money before we die.  Or whatever is left will be equitably distributed.  We looked at what will be fair.  We talked openly, and looked at the people involved."

How did they arrive at an equitable distribution formula?

A says, "You don’t find ‘equal’ assets being brought into a marriage.  We looked at each one’s initial contributions (hard assets) and the children involved.  Then we arrived at percentage numbers we feel comfortable with."

Both Wills have a clause prohibiting the survivor from changing his/her Will.

Even though he did not have to, A has made provisions for M’s children in his Will.

Dangers

Scenario 1 clearly points out the advantages  and disadvantages of owning all assets in joint tenancy.   The one advantage is that joint tenancy helps by-pass the Probate process and the survivor immediately gains ownership.  However, this scenario takes place in Minnesota, where Probate is simple and inexpensive.  So there is no need to avoid it.

The disadvantages, however, are serious.  M’s children did not receive anything from their mother even though her assets were used to purchase the house A and M lived in.   (Because A and D are the kind of people they are, they are providing for M’s children in their Wills.)

Alan Smith, a San Diego elder law attorney, points to other problem areas.  "While there is a clause in both A’s and D’s Wills saying the survivor can’t change his/her Will, there is nothing to prevent the survivor from extravagant spending or gifting to his/her own children, thus leaving out the other children.  There also should have been a clause saying that one spouse cannot change his/her Will without formal notification and even agreement of the other spouse.

"Even if there is a joint Will with ‘reciprocal contract’ wording, it can be challenged, " Smith notes.

Smith and other estate planning experts also advise including the words "per stirpes" in reference to a child’s share.  "This means that if one child predeceases the parent, that the grandchildren receive that share," notes Garry Pitney, a New Jersey CFP.  Pitney adds, "Often people do not take into consideration the value of insurance policies, IRA’s and pension plans, which often can push assets over $650,000.  Also, in multiple marriage situations, it is critical to keep the beneficiary names current.  You may not want to really leave an ex-spouse (if divorce) or a predeceased one as the beneficiary to your life insurance."

Also, banks can initially freeze bank accounts, thus leaving the survivor even temporarily without access to funds to pay for daily expenses, including food.  Or the bank may freeze half of the assets until inheritance tax implications are determined.  Half of all assets held jointly are still calculated in the deceased’s estate for both state and federal tax purposes.  So there is no "saving" on taxes.

Divorce Scenario

In Scenario 2, H and E (who live in New Jersey) own their house and other hard assets jointly.  Each has a separate bank account and charge cards.

Both of their Wills state that the surviving spouse receives all assets, and that upon the death of the second spouse, assets will be split six ways.  There is a clause "per stirpes" that means if one child predeceases the parent that the child’s share goes to the grandchild(ren).  The eldest of each spouse will serve as co-executors of both of the Wills.

Having separate bank accounts and charge cards protects the survivor’s ability to pay immediate bills and own personal credit rating.

However, there is no clause in the Wills referring to them being a reciprocal contract nor one that would prohibit the survivor from changing his/her Will.  There is also no clause prohibiting the survivor from gifting large sums of money or highly valued assets.

And neither H or E has a Living Will nor do they have Power of Attorney for each other.

Footnote: Information  dealing with complex legal issues such as estate planning are for general information only and to alert readers as to some of the elements that need to  be considered.  As each scenario is different and state laws are different, an elder law attorney should be consulted.

 

 

 

The Evaluation

How does a couple place a value on assets brought into a marriage because changes in the financial picture may occur over the time of the marriage?

Things to look at include:

  • how assets are held: joint tenancy; tenants in common, or single name
  • the value of each asset
  • whose asset it really is
  • the number of children/beneficiaries
  • projecting possible changes in specific assets over the time of the marriage
  • arriving at a method of distributing assets, and when assets will be distributed

Besides the initial inventory compilation, experts advise regular review of documents, noting changes in beneficiaries and current parameters/desires.

As seen in the accompanying article, one of the couples holds all their assets jointly, with the survivor receiving all upon the death of one spouse.  This method is commonly used with married couples, but it can create problems as also noted in the accompanying articles.

On the flip side, few couples have everything owned separately, especially if assets are under that $650,000 magic number for federal estate tax purposes.

If nothing else, the home is usually held in joint tenancy.  Some bank accounts might be joint, but often each spouse has his/her own "slush" account.

When assets are near or over the $650,000 amount, keeping separate ownership of at least some portion of stocks and bonds, simplifies distribution to beneficiaries and reduces taxes.

Assets can easily be identified to be put in a trust after the death of one spouse so that the survivor has needed income.  However, the principal will be protected for the children of the deceased spouse.  Upon the death of the surviving spouse, these already identified and separated assets can easily be transferred to heirs.

Or assets can be held jointly, but as tenants in common rather than joint tenancy.  Provided the Will is consistent with bequeathing desires, the deceased’s share can be put into a trust to guarantee income for the survivor or passed directly onto heirs.  When a couple’s assets are over $650,000 and the surviving spouse has sufficient income, holding assets separately or tenants in common with these assets going directly to heirs can save thousands of dollars.

 

 

 

Advantages and disadvantages of joint ownership:

Advantages

  1. depending on the state, there may be no estate taxes on the assets of the first to die, if assets are under the $650,000 benchmark for federal purposes.
  2. assets held jointly do not have to go through probate or be included in probatable assets for probate fee purposes.  They are included in total estate value for federal tax purposes.
  3. smooth transition from one spouse to another, (with caveats)
  4. secure income for surviving spouse
  5. good if this is only marriage and there are no other children

Disadvantages

  1. Will of first is meaningless as to intent to protect children from previous marriage, because all goes to survivor
  2. surviving spouse can change his/her Will and leave out deceased’s children
  3. does not preclude survivor from gifting away assets that may have belonged to deceased.
  4. bank accounts may initially be frozen, and funds unaccessible to survivor until certain legal issues are taken care of.

 

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