Don’t Name Minors as Beneficiaries to Insurance, Annuities & IRAs

“Joe”, a widower, recently passed away owning an IRA and life insurance policies that named his daughter as a primary beneficiary, with his daughter’s children (Joe’s grandchildren) as contingent beneficiaries. Unfortunately, Joe’s daughter predeceased him, so his grandchildren stepped into the role as primary beneficiary.

 When the children’s father went to collect the IRA and life insurance benefits for his children, the financial firms said that they wouldn’t pay the benefits directly to the children. This is due to the fact that the children were minors, and they cannot legally sign for the money. The children’s father offered to sign on their behalf, as the legal guardian.

 Not good enough under the law.

 The financial firms are concerned that if the father were to collect the proceeds and were to use them for his personal benefit, then the grandchildren could later successfully sue the financial firm for recovery. Believe it or not, this concern is well founded in the law.

 So how does a minor beneficiary collect the benefits from a life insurance policy, IRA, annuity or other similar financial instrument that names the minor as a beneficiary? The usual course of action is to file a legal guardianship with the court. The child’s parent can be named as the guardian over the property (in this case “property” refers to the insurance and IRA monies), and the court will oversee the distribution of the proceeds. The guardianship will last until the minor child becomes an adult.

 Every year the guardian of the property will have to petition the court to spend the money on behalf of the minor beneficiary. The guardian will also have an obligation to file formal accountings with the court – detailing income, expenses and distributions.

 Sounds time consuming and expensive doesn’t it? One can certainly see how a guardianship proceeding will serve to protect benefits that could be improperly consumed by a child’s parent or other guardian, so the law makes sense.

 But isn’t there an easier way?

 There is. The easiest way to avoid an expensive court administration over the minor beneficiary issue is much the same method used to avoid probate. I’m talking about the use of trusts.

 Assume, for example, that Joe instead created a trust. Instead of naming his grandchildren as contingent beneficiaries to his IRA and life insurance policy, he names his trust. The trustee that he appoints in the trust following Joe’s death (could have been the grandchildren’s father – could be some other trusted friend, relative or even a bank or trust company) would have the legal authority to collect the insurance proceeds and IRA monies and would then distribute those monies to or for the benefit of the grandchildren pursuant to the trust provisions.

 If Joe were to want those proceeds held until the grandchildren reached college, and to pay for the college education using those proceeds, Joe could specify this in the trust.

 Because the trustee of the trust has a fiduciary responsibility under the law to the trust beneficiaries, the financial firms can make the payment to the trustee without fear of their own liability under the law. Instead, the legal liability transfers from the financial service firm to whomever is serving as trustee of the trust proceeds for the grandchildren.

 When dealing with IRA accounts, the trust that serves as the beneficiary needs to be drafted with a careful eye towards preserving the tax deferred benefits. Often the trust needs to have special provisions concerning the beneficiary’s “required minimum distributions” (MRD).

 You may be aware that owners of IRA accounts have MRDs upon attaining the age of 70½. What you may not know is that EVERY beneficiary of an IRA account (including Roth IRAs) also will have MRDs – even if the beneficiary is younger than 70½. So the trust needs to include the five requirements for a beneficiary to be considered “identifiable” under the tax laws, and therefore be entitled to preserve the tax free growth associated with the IRA account.

 I won’t bore you with the five requirements here. If you would like to read them for yourself, look up Treasury Regulation s.1.401(a)(9)-4. Then tell me how long it took you to get cross-eyed!

 Failure for any trust to meet those five requirements often results in the IRA income being wholly taxed in the year following the IRA owner’s death. This is often a very bad tax result.

 So if you have named minors as beneficiaries or as contingent beneficiaries to life insurance, IRAs or annuities, you should consult with your estate planning attorney to ensure that all of these issues have been addressed. 

 ©2010 Craig R. Hersch

It’s Not the Money or Property They Fight Over

I was very close to my great grandmother, whom I called “Bubby”. A framed picture in my home includes her image along with an 1890 silver dollar. She told me that her father handed her a silver dollar bearing the year of her birth when she arrived in America. She hadn’t seen him in many years, as he had to save for her passage. Until my Bubby’s death in 1976 we celebrated our birthdays together, as ours were only one day apart on the calendar.

 When she died that silver dollar was invaluable to me. I was only 12 years old, but I dearly wanted it to remember her by. My sister, incidentally, has our Bubby’s soup spoon framed in a box. It hangs proudly in my sister’s dining room.

 So you might find it interesting that in my twenty years of practicing estate planning law I rarely encounter siblings who fight over a deceased parent’s money or property. Generally speaking, the very few disputes I’ve refereed between siblings involved tangible personal property items like rings, watches, jewelry and other items just like coins and soup spoons.

 Don’t underestimate the sentimental value of an item that’s been handed down over the generations from father to son or from mother to daughter. If you have more than one son, you may not want to assume that the eldest will treasure granddad’s watch. Mothers of daughters and even granddaughters often own a certain string of pearls, a diamond broche or a bracelet that has sentimental value to one or more family members.

 So if you own such items that you would like to see passed down to a certain child or grandchild, the first course of business is to find out whether he or she wants it. It doesn’t have to be the main topic of conversation during a visit or phone call, but at some opportune moment it makes sense to confirm the intended recipient is willing.

 Don’t take “let’s not talk about this now” as an answer, either. Many adult children don’t want to sound as if they are awaiting your imminent demise. An appropriate response might be, “I intend to hold onto my [insert item name here] for quite some time. I just want to make sure that if I leave it to you that this is something you would treasure as I have. Or perhaps there’s something else that you find more valuable sentimentally.”

 Be careful here. I’ve had some occasions where more than one child proclaims that he was “promised” an item by their father or mother. If you don’t intend to promise that certain item, but are merely talking about it, make that clear.

 Once you’ve decided who is to receive these tangible personal property items, then it is time to make a list. Florida law actually gives us an easy mechanism to make a list of our tangible personal property outside of our will or trust, and to easily amend it without having to visit your attorney.

 So long as our will or trust mentions the list properly under the Florida statute, (this would be the job of you working with your estate planning attorney) then you may create a list and it need only be signed and dated. The list does not have to be witnessed. If you should choose to update the list, sign and date it again. I suggest providing a copy of the current list to your estate planning attorney so that he may retain a current copy in your file.

 One other note of caution – if you give an item away during your lifetime, remove the item from your list. Also, if you intend for the value of the gift to be deducted from the total value of what that beneficiary receives from your estate or trust, then you should mention this to your attorney to ensure he includes appropriate language within your will or trust documents.

 What happens if you don’t have such a list? Then it is typically up to your personal representative and/or trustee to decide who is to receive which tangible personal property items, or which ones should be sold or auctioned. This is where the disputes may arise. The child with the unfortunate task of deciding the fate of sentimental items might find themselves in the unfortunate position of wanting something, but it might look like self dealing if they take it when another beneficiary also expresses a desire to acquire that same item.

 Creating such a list can mean more than leaving thousands of dollars to your loved ones. Although my Bubby didn’t have much in the form of monetary wealth when she died, she left me a real treasure, one that can never be replaced.

 ©2010 Craig R. Hersch

Saving Assets from Nursing Home Costs

One of the most common statements we hear from folks is that “I don’t want to become a financial or emotional burden to my spouse and children.” Yet for many, the costs of either in-home nursing or for assisted living have the potential to far outweigh their life savings. That’s because the average monthly long term care cost in an assisted living center here in Southwest Florida ranges from $4,000 to $10,000 monthly, with in home care averaging much more.

What many people fail to realize is that health insurance and Medicare will not cover these costs.  Paying for long-term care is a personal financial responsibility. Whether you are newly retired or have been retired for a long time, long term care costs are often a #1 concern- but are rarely addressed ahead of an actual family financial crisis. 

We must therefore reengineer how we plan for our future, taking into account the very real possibility that long-term care costs are something that we’ll have to deal with – either for ourselves or for a loved one. 

Over the past few years, the eligibility rules have made it more difficult to qualify for public benefits, such as Medicaid. Rather than expanding benefits for an aging population, the states and the federal government have instead cut growth in public benefit programs in an effort to rein in spending. 

These factors make planning sooner, rather than later, all the more important. The sooner you address these issues in your estate plan, the more likely you and your family will find success. “Self-insuring,” or paying your own way, may be an option.  If you have sufficient income without having to dig into your investments to pay long term care costs, this may be the way to go.  But even then, what about the future well-being of your spouse or your children?

Planning to “self-insure” for long-term care expenses requires a collaboration of financial, estate and tax planning, to ensure that sufficient income can be generated to prevent the depletion of assets.  When you plan to self-insure, you should work closely with your advisors to ensure your estate and tax planning fits hand-in-glove with your financial planning.

Unlike Medicare, Medicaid is a government program which pays medical costs and long-term care costs.  By qualifying for this important benefit, you may be able to relieve your loved ones from the stress that comes with long-term care giving.

However, Medicaid is designed as a payer of last resort, and to qualify you must meet strict financial and other eligibility requirements.  The rules governing Medicaid are complex, and frequently change, requiring great care in the planning and application for benefits.  In Florida, many of the eligibility rules were drastically changed in November 2007.

In order to qualify for Medicaid benefits, an individual must meet strict asset and income limits.  In 2010, an individual applying for Medicaid can have only $2,000 in total countable assets.  This would include property such as most real estate, stocks, bonds, bank accounts, and CDs, just to name a few.

Certain assets, such as a Florida Homestead, are excluded from the calculation for Medicaid purposes.  However, there are limitations on these exemptions.  For example, the equity in your Homestead cannot generally exceed $500,000.

In 2010, your gross monthly income must not exceed $2,022. These numbers change annually, by the way.  Even if you have only $1 in excess of the government mandated amount, you will be disqualified from receiving benefits.  Remember this is your GROSS income, not your NET income.  Tax free income, for example, is part of gross income. Many people forget this. 

In the Medicaid eligibility calculations, the government assumes that almost all of your income will be paid toward the cost of care. How much is almost all, you might ask? Well, the government allows an individual in a nursing home to keep only $35.00 per month of their income in excess of their care costs when on Medicaid. 

But you should know that there are planning opportunities to legally work around these asset and income rules.

The key to remember here is that without proper planning, all assets and income above these levels must be spent on care or on exempt items before Medicaid will pay the first dime towards your care.

There are special rules that apply when the Medicaid applicant is married.  Medicaid generally requires that both spouses’ assets to be available to pay for the ill spouse’s care. This is true whether or not a married couple has any legal arrangements, such as a prenuptial agreement – that would otherwise mandate some contrary understanding. Medicaid ignores such legal arrangements.

Medicaid does allow, however, the “well” spouse to keep some assets.  In 2010, that amount is just under $110,000 of assets or money. That amount may not be sufficient for the surviving spouse’s needs for the rest of his or her life.  Most of our clients who have more than $110,000 of assets would like to leave as much as possible to their surviving spouse or children. There are legal ways to accomplish this goal.

In addition, Medicaid does allow the well spouse to retain her income. Again, there are planning opportunities married couples can implement to maximize the amount of assets they retain and the amount of income the well spouse might enjoy for the rest of his or her life. Space limitations do not allow me to outline those here, as the planning that goes into long term care could fill volumes.

Anti-Lapse Statute Excludes Granddaughters From Estate

For those of you who believe that you can write a will just effectively as an attorney and save a lot of money I bring to you the latest case from California that points out how important it is to know all of the law surrounding estates and trusts. Not using an attorney well versed in estate law could lead to – and often does lead to – unintended consequence. Allow me to present to you a case out of California. You be judge if the law worked correctly or if this would have been an unintended consequence of a contingency not thought of at the time the will was created:

In re: Estate of Nellie G. Tolman the deceased left a will that bequeathed a $10,000 gift to each of her granddaughters  - Deborah and Laurie – with all of the rest of her estate to her daughter, Betty Joe Miller. The value of Nellie’s estate was roughly $1 million.  Deborah and Laurie were the daughters of Nellie’s deceased son, Lloyd. Each of the bequests to Deborah and Laurie stated that the gift would “lapse” if they failed to survive Nellie.

So Nellie’s will basically left $20,000 to her granddaughters who were from her son’s side, with everything else to Betty Joe, Nellie’s daughter.

Unfortunately, Betty Joe also predeceased her mother. Nellie’s will did not say what would happen to Betty Joe’s share in the event that Betty Joe predeceased. In other words, the gift of everything else (the bulk of Nellie’s estate) did not say that the gift lapses in the event Betty Joe predeceased her.

Interestingly, Nellie’s will did provide the following: “Except as otherwise specifically provided for herein, I have intentionally omitted to provide herein for any of my heirs who are living at the time of my demise, and to any person who shall successfully claim to be an heir of mine, other than those specifically named herein, I hereby bequeath the sum of ONE DOLLAR ($1.00).”

Since Betty Joe predeceased Nellie, the court had to determine who was entitled to Betty Joe’s share. Betty Joe had a son, Michael, who was Nellie’s grandson. Betty Joe also had a daughter who predeceased her with three children of her own.

The granddaughters alleged that the language in the will should be read to mean that everything that would have gone to their aunt, Betty Joe, should instead go to them, and not to Betty Joe’s descendants (Michael and the three grandchildren of Betty Joe). They read the language to mean that Betty Joe wanted to specifically disinherit Michael and Betty Joe’s three grandchildren.

The California appellant court said “not so fast – Deborah and Laurie!”. California (like most states) has something known as an “anti-lapse” statute. That statute provides that unless a contrary intention appears in the will, an heir at law’s descendants will step into the shoes of the heir at law as if she survived, taking in her place.

What this means in this case is that Betty Joe’s share is not split amongst her nieces and her child and grandchildren. Instead, Betty Joe’s share is treated as going to her lineal descendants – in other words ½ goes to Michael (her son) and the other ½ to her deceased daughter’s children – her three grandchildren. Deborah and Laurie share nothing of Betty Joe’s share.

If Nellie had wanted Betty Joe’s share split amongst all of her descendants (including Deborah and Laurie), she would have to specifically say in her will that Betty Joe’s share would “lapse” in the event she predeceased Nellie, and would have named where that share would otherwise go.

So the antilapse statute effectively worked to leave the amount intended to Betty Joe to instead go to Betty Joe’s heirs.

Was this a fair and proper result? No one other than Nellie would know what she would have wanted. But that’s what happened. And it happened because of a statute, and not necessarily what was written (or not written) in the will.

©2010 Craig R. Hersch

Can a Prenuptial Agreement Serve as a Will Substitute?

Brenda and Eddie decided to marry – each had a prior marriage that ended in divorce, and each had children from those prior marriages.  Brenda and Eddie met and lived in the Chicago suburbs at the time. After fifteen blissfully wedded years, both retired from their respective jobs to move to Florida. Since they both dreamed of spending time boating, they bought a beautiful property with Gulf access.  Brenda and Eddie both contributed an equal (and substantial) amount of money to purchase the home.

 Brenda had created a will before her marriage to Eddie that left everything to her two children. Likewise, Eddie’s will was created before his marriage to Brenda and left everything to his three children. Both Brenda and Eddie desired to leave their respective estates to their children rather than to each other. Brenda and Eddie verbally agreed to this arrangement. They had attorneys draft a brief prenuptial agreement, but that agreement only waived their respective rights to alimony in the event that they divorced.

 On the advice of their Illinois attorneys, when they bought the house in Florida they titled it as “tenants in common” rather than as “husband and wife” or “joint with rights of survivorship”. Their attorney explained that should one of them die, by titling the house as “Tenants in Common”, upon one of their deaths the equity of that portion of the home would follow to each of Brenda’s and Eddie’s respective families.

 Since Brenda’s will already left everything to her children, and Eddie’s will did the same for his, neither party thought that it was necessary to update their wills after their marriage. They didn’t intend to leave anything to each other, and their wills already left the assets to their respective children, so why spend money on creating new legal documents?

 Big mistake.

 When Brenda died her children discovered that under most state laws, including Florida’s, there is a presumption that one spouse would have left at least a portion of his or her estate to the other if the Last Will and Testament was signed before the marriage and a new one wasn’t created after the marriage. Since Brenda’s will was signed before her marriage to Eddie, and Brenda never signed a new will after the marriage but before her death, Florida law presumes that had Brenda got around to making a new will, then she would have included Eddie.

 The Florida attorney told Brenda’s children that Eddie could claim an “intestate share” of Brenda’s estate. “Intestate” refers to a condition where one dies without a will. Florida law provides that a spouse can claim fifty percent (50%) of the decedent spouse’s estate as an “intestate share” when the decedent spouse has children. So in this case, up to fifty percent of Brenda’s estate was exposed to a claim.

 When the children pointed out that Brenda and Eddie had signed a prenuptial agreement, the attorney reviewed the agreement to determine if each party specifically waived their rights to each other’s estates. In this case, the prenuptial agreement did not address spousal rights in the event of death.

 The attorney explained that even if Brenda had created a new will after their marriage that excluded Eddie, without an agreement waiving each other’s rights to each other’s estates, Eddie could still claim a thirty percent (30%) spousal elective share. In other words, even if the presumption that Brenda would have included Eddie if only she had gotten around to creating a new will after their marriage is defeated (in that she did create a will but still excluded him) – absent a nuptial agreement specifically waiving rights to the estate, Eddie could still claim up to thirty percent of Brenda’s estate.

 Even if Eddie lived up to his verbal agreement not to lay claim to any portion of Brenda’s estate, there was nothing that would prevent one of his children who held his durable power of attorney from claiming it on his behalf. While this may seem far-fetched – if Eddie became incompetent there would be a real question as to whether someone holding a power of attorney had a fiduciary duty to Eddie to lay claim to his share of Brenda’s estate. This would be even that much more problematic if Eddie never told the power holder of his intent and verbal agreement with Brenda.

 To make matters even more complicated, under Florida’s constitutional and statutory laws, unless the Florida spousal homestead rights are specifically waived in a prenuptial agreement, then the surviving spouse is entitled to a “life estate” in the decedent spouse’s interest in the home.

 While Brenda died believing that her children would be immediately entitled to half of the value of the Florida home that she helped purchase, that wasn’t really the case. Eddie received a life estate in Brenda’s interest in the home. While this might have been what Brenda and Eddie envisioned, problems can arise with this arrangement. Eddie can’t sell the home without the consent of Brenda’s children, and they can’t sell the home without his signature.

 Because Breda’s children had a “vested” interest in the home, if one of the children had a creditor issue that could affect the title to the home and make it difficult to sell without satisfying the creditor.

 When Eddie got sick and had to go into a nursing home, fights ensued between Brenda’s family and Eddie’s family over how much the home was worth, and how much they should sell it for.

 All of these problems could have been avoided through a carefully drawn up estate plan – not only after Brenda and Eddie’s marriage, but also through an update upon their move to Florida.

©2010 Craig R. Hersch