Blended Families: Simple Wills

Recently, I have had an increase in recently widowed clients of a blended marriage, wanting their estate plans reviewed and updated. The document that dominates the conversation is their Last Will and Testament. Every one of them so far as asked, “Can I change my will and not include my spouse’s children?”

Most married couples have what are referred to as “I love you” wills. Generally, they leave the entire estate to each other, and then to both sets of children from a previous marriage. The wills are executed based upon the idea that, should I die first, my spouse has promised to share my estate with my children.

Ideally, Spouse A dies first. Everything goes to Spouse B. When spouse B dies, everything is split equally between the surviving children of both spouses. The reality is, the surviving spouse has no legal obligation to leave your children anything upon his/her death.

Yes, the wills were executed with the intent the estate would go to both sets of children. But, these promises to give the estate to both sets of children is really more morally binding than legal.

When Spouse A passed away and Spouse B inherited the estate, the estate became wholly Spouse B’s. Once the estate is wholly Spouse B, he/she is free to dispose of their estate in any manner they choose.

So, when these clients ask me the questions “Can I change my will?” I tell them, “Yes you can.” Because legally, YES THEY CAN.

Reason for changing their documents range from “I never see his/her kids”, “They stopped calling and visiting”, etc.

How do I protect against this scenario? How can I ensure my children receive part of my estate if I should pass first?

Simple. A Trust.

A trust developed with specific language addressing can ensure that upon your death, your estate shall go to your children and you spouse cannot change the distributions.

For more information, contact an estate planning attorney today!

 

An Unfunded Trust is a Useless Trust: The Michael Jackson Predicament

planning

A Revocable Living Trust (RLT) is a developed with the intent to avoid Probate. When the Grantor dies, the named trustees simply follow the trust instructions and distribute the trust assets accordingly. No judge or court hearing is needed. Unlike a will, a trust is completely private and the public never knows how the assets pass.

A trust is a great tool to have in anyone’s estate planning toolbox. However, one of the most common mistakes people make is never actually funding their trust.

Music legend Michael Jackson made this exact mistake.

Michael Jackson had a revocable living trust created in order to protect his massive estate for his three children and his mother. Reports state the trust was designed so that his children would inherit 50% of his estate and the other 50% would go to his mother. The trust detailed that the children would be receive specific amounts at ages 21, 30, 35, and 40.

Since his death, reports estimate Jackson’s estate is worth about $600 million dollars. Upon review of Jackson’s estate planning documents, it was discovered the trust was never funded.

So, what happens when a trust is not funded?

When a person creates a trust they also create what is called a “pour over will”. This type of will ensure that any asset not placed in the trust will end up in the trust and distributed according to the trust. Since a “pour over will” is a will, the asset must be probated before being placed in the trust.

In Jackson’s case, his entire estate was left out of his trust. Therefore, his entire estate has to go through the probate process before the trust can be funded. This caused several issues.

First and foremost, the estate is essentially “frozen” and cannot be distributed to Jackson’s named heirs. The children and his mother are living off an allowance that is managed by the estate executor’s and overseen by a judge.

Second, the estate being probated means the estate is now open to litigation. Jackson’s siblings are contesting the distributions of his estate to only his mother and his children, alleging fraud, at being omitted from the distribution plan.

Third, the trust would have protected Jackson’s estate from creditors. Since the estate has to be probated, creditors can now take advantage of the statutory period allowing them to make claims against the estate. Reports indicate the amount of creditors making claims against the estate could take several years to sort out and address.

In sum, all of these impediments serve to prolong the probate process, which will cost the estate money. Once the process is over, and the creditors, courts, and attorneys are paid, then whatever remains will be placed in the trust.

Lesson of this story? FUND YOUR TRUST. A RLT is designed to avoid probate and all of the possible issues associated with the process. When you fail to fund your trust, you essentially invalidate the entire point of creating one.

An unfunded trust is a useless trust.

 

The After Born Child Problem: Phillip Seymour Hoffman & Heath Ledger Blunders

One common estate planning mistake that could have disastrous consequences is not updating your documents to include additional children. Continuing with the “celebrity blunders” theme, let’s examine two celebrity cases dealing with this mistake: Phillip Seymour Hoffman and Heath Ledger.

Phillip Seymour Hoffman

Hoffman died from a drug overdose in 2014, leaving behind three children with his common law wife. His estate was valued at about $35 million dollars. Thankfully, Hoffman left behind a valid will. The issue is the will was executed in 2004 when he only had one child, his son. The will was never updated to include his two young daughters.

Now, ideally, that should not matter because the will left everything to the three children’s mother, Hoffman’s common law wife. Which should have meant she would inherit and use the inheritance to take care of the couple’s three children, then pass it on after she dies.

In reality, it caused some major setbacks.

The first setback was the issue of the common law marriage. Since Hoffman and his spouse were only common law married, anything she inherited is subject to federal and estate tax laws. Common law spouses are not afforded the ability to leave an unlimited amount to their surviving spouse. Any inheritance will be taxed according the particular state’s estate tax laws and if the estate meets the federal limit, possibly federal estate taxes.

Meaning that out of the $35 million dollar estate, Hoffman’s estate would have to pay estate taxes of over $15 million dollars, according to an article written by FORBES.

Now, to avoid the estate tax issue, Hoffman’s wife could have disclaimed her share, and had the estate follow the contingency plan in Hoffman’s will. This is where the second setback comes into play.

If she disclaimed her portion of the estate, Hoffman’s will instructed the estate assets be placed in a trust for his son and it outlined at what age he could receive distributions from the trust. Since the will does not mention his daughter or reference any language like “to my son, and any other children born hereafter,” his son technically inherits it all.

Thankfully, most states address the “after born child” problem and have provisions in place to handle these situation so a child born after a will can inherit. The provisions do not mean the estate is automatically going to the split estate three ways, however. Each state’s provisions are different and usually require the appointment of a guardian ad litem for the excluded child or children to handle the estate process on their behalf.

The lesson here: (1) Know what your estate planning documents say and how they work in regard to estate taxes and how heirs inherit. (2) Ensure the documents have language in them that deal with the “what ifs” like “what if I have more children”, “what if my primary beneficiaries pre-decease me”, etc. (3) Updated your estate plan regularly. A good rule of thumb is at every big event (births, deaths, weddings, divorces, etc.) update your estate plan to reflect your wishes.

Heath Ledger

Heath Ledger passed in 2008 and his heirs were left in a similar situation as Hoffman’s. His will was outdated did not include his young daughter. Instead, the will left his approximately $20 million dollar estate to his parents and siblings.

Now, in this situation, the issue of if his daughter could petition to be included as an “after born child” would depend on where Ledger was deemed to be domiciled. A person’s estate is probated in the state they are a resident. Ledger was an Australia native with an Australian will, but died in his New York apartment. Thus, there could have been some debate as to which place had jurisdiction to probate his estate.

Thankfully, in this situation, Ledger’s family did not dispute or fight about the estate, but simply agreed to allow his daughter to inherit.

The lesson here: (1) Again, update your estate plan after big life events. (2) Do not rely on family members to be willing to equally share your estate if issues arise.

Having an estate plan is just the first step in ensuring your wishes after death are met. The second step is to be aware that as life goes on, your estate plan should be amended to reflect those changes.

Most estate planning attorneys are willing to review existing estate planning documents and discuss how the documents work in regards to your stated wishes. If you have an existing estate plan that could be out of date, talk to a licensed estate planning attorney and see if it is time to update your plan.