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 Ms assets. Ms children received nothing when their mother passed away, even though some of her money had been used to purchase their home. Ms 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. Ds 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. Hs first wife had custody of his children, and Es 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.
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 dont find equal assets being brought into a marriage. We looked at each ones 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 Ms children in his Will.
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. Ms 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 Ms children in their Wills.)
Alan Smith, a San Diego elder law attorney, points to other problem areas. "While there is a clause in both As and Ds Wills saying the survivor cant 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 childs 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, IRAs 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 deceaseds estate for both state and federal tax purposes. So there is no "saving" on taxes.
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 childs 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 survivors 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.
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 deceaseds share can be put into a trust to guarantee income for the survivor or passed directly onto heirs. When a couples 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.