Posts Tagged ‘surviving spouse’

You Have a Trust — Now You Need a Beneficiary Designation

MARCH 21, 2016 VOLUME 23 NUMBER 11

You have decided to create a revocable living trust, naming your oldest daughter as successor trustee. Your trust directs that, upon your death, $10,000 is to go to each of your grandchildren, $50,000 to the Good Intentions charity, and everything else will be divided equally among your three children. So what should you put on your IRA beneficiary designation?

You might already have recognized that we just served up a trick question. There is, sadly, not an easy and obvious answer — at least not on the basis of the information spelled out so far.

It is going to be hard to tell you the correct (or even the best) answer here, but let’s look at some of the options. As you consider them, you might want to have your IRA custodian’s actual beneficiary designation form at hand. Don’t have one with you? Not a problem: you can probably download the form. Most major financial institutions offer their forms online — here are forms for Vanguard, Fidelity, TIAA-CREF. Look for your IRA custodian before we move on. We’ll wait.

Here’s something we notice about your IRA custodian’s form: it isn’t terribly flexible. Want to designate two charities? You might need to attach a separate sheet. Want to try to leave dollar amounts (“up to the first $100,000”)? You might not be able to do it at all. But let’s still look at some of the options. For the moment, we’re going to assume that you do not have a living spouse — but we’ll come back to that later.

You could just leave the IRA to the trust. This has several advantages. It’s straightforward. It lets you make any other changes you want in the trust document, and you’ll never have to fill out the beneficiary designation form again. It automatically takes care of a batch of follow-up questions unaddressed on the beneficiary designation form (like “what happens if a beneficiary is under age 18?” or “what happens if one of my beneficiaries dies before me?”).

It should be said that there are some problems with naming a trust as beneficiary. For one, the named beneficiaries might have to take all their inherited IRA money out slightly faster than if they had been named individually. For another, you might be assured — again and again — that you “can’t” name the trust as beneficiary, or that you incur extra tax liability if you do (this is incorrect, but common, advice). You’ll need to arm yourself with enough understanding that you don’t succumb and make more changes later.

So how do you actually name the trust? The online forms we looked at tell you to put down the name of the trust (“The Jones Family Trust”) and its date. Check the appropriate box (is this a current trust, or one created under your will?). Leave blank the space for a tax identification number if your trust uses your Social Security number.

You could just leave the IRA to your children. Let your trust fund the $10,000 for each grandchild, and the $50,000 to charity. The IRA could just pass to your children. The good news: it’s pretty straightforward to fill out the form (just list the three children, put 33.33% as to each and, probably, check the “per stirpes” box to make sure that any deceased child’s share goes to his or her children). The bad news: any share of the IRA designated to your child with a disability, or a spending problem, or a greedy spouse — will go outright to that child. It might cause other financial problems, but that might not be an important consideration.

You could leave the IRA to Good Intentions. It turns out that IRAs are particularly good resources for any charitable inclinations you might have. Why? Because the charity doesn’t have to pay any income tax on the IRA proceeds. But you are leaving a flat dollar amount to the charity, rather than a percentage — and most of the beneficiary designation forms assume percentages. So you have to either create a personalized beneficiary designation (and hope your custodian will accept it), or adjust the amount you leave to the charity outside the IRA, or modify your estate plan every year or two as your IRA grows and shrinks.Still, this approach might make sense. How to carry it out? Just put the charity in as beneficiary. Ask them for their tax ID number (they’ll give it to you). And watch the IRA balance every year to make sure you’re leaving the right amount (not too little, not too much) to Good Intentions.

You could leave the IRA to your grandchildren. You’re planning on leaving a small amount to each grandchild anyway, and leaving it in an IRA for most of their lives would allow it to grow, tax free, for years. But they will have to withdraw small sums every year after your death, so it can actually complicate things (especially if they are under age, or not yet ready to manage their own funds).Want to use this approach? Just list each grandchild, with date of birth. Pay attention to new additions (by birth or adoption). Make a decision about step-grandchildren, and monitor familial relationships accordingly. Review your beneficiary designation every year or two.

But what about your spouse? We promised we’d come back to this. For most people, in most circumstances, it makes sense to name your spouse as the primary beneficiary. Most of the specific items we’ve listed here will fit under the “Secondary Beneficiaries” or “Contingent Beneficiaries” section of the form.Why is this important? You probably want the account to benefit your spouse first. You might need your spouse’s approval to make any other arrangement. There are significant income tax advantages a spouse has over other beneficiaries (well, most other beneficiaries). But everyone’s situation is different, so make sure you explore this with your estate planning attorney before changing the beneficiary designation.

This looks pretty easy, right? What could go wrong? Well, how about this, or this. Be careful out there. Are you our client? Let us help you with the beneficiary designation form. Not our client? Talk to your estate planning lawyer.

Does Your Existing Trust Split Into Two Shares On a Spouse’s Death?


A letter from a reader asks: “My husband and I set up a revocable trust which will divide our assets in half when one of us dies. This was to avoid estate taxes.  Now that estate taxes are no longer a problem, are there still benefits to splitting our assets when one of us has died?”

What a great question!

The short answer: if your combined estate is well under the $5.43 million threshold for estate taxes (in 2015), there is probably no tax reason for splitting the trust on the first death. If your combined estate is less than two times that figure, the answer is probably the same. But that’s not to say that there’s no reason to provide for a split of the trust — it’s just not a tax reason.

Here are some circumstances in which you might still want to split your trust — not necessarily in half, but into two shares — on the first spouse’s death:

  • You might worry about what will happen with the surviving spouse after one spouse dies. Will he or she remarry? Become infirm and susceptible to influence from people outside the family? Begin to favor one child over the others, or disfavor one child? If you feel strongly that “your” share of the estate (and here we’re talking as much about a “moral share”, if you will, as a legal share) needs to be locked down if you die first, then you might still want to provide for a trust split on the first death. Let us talk — and by “us” I mean you, your husband and your lawyer, all together.
  • You might feel like some of the assets are really yours, not your spouse’s. Did you receive a substantial inheritance that you have kept separate? Did you bring more assets to the marriage? Is there a particular asset (your home, or a summer cottage where your children spent every summer, or stock in a family business, or something similar) that you feel particularly strongly about passing to your children? Time for us to talk.
  • Is this a second marriage, with children from prior marriages? We should probably discuss how the two of you feel about the likely connection the surviving spouse will maintain with stepchildren.
  • Does your spouse have a problem managing money, or completely different ideas from yours about how to invest or maintain assets? Guess what — we need to talk.
  • Do either (or both) of you own real property in another state? Because the estate tax answers might be different.

Note a common thread here: there are no easy, pat answers. Each consideration means we need to talk through what’s important to you and to your spouse, and what is legally possible — and efficient.

There are some downsides to splitting the trust on the first death. For one, it probably increases the cost of managing the trust. It certainly increases the responsibility of the surviving spouse to account to the children, and maybe (depending on your trust’s terms) even grandchildren or others. It might (but probably won’t — we don’t want to alarm you unnecessarily) actually increase income taxes. It probably will mean that the surviving spouse has some limitations in how they deal with the portion of the trust that becomes irrevocable on the first death — and that can be emotionally troubling. And remember that what’s sauce for the goose — well, you know the rest of that aphorism.

Incidentally, the same answers apply to a couple who never did set up a trust that splits on the first death. Even though taxes may not compel such a split, it might be a choice that makes the couple feel more comfortable about what will happen after the first death.

Here’s a thought experiment for you: we find that it’s relatively easy for married couples to imagine what life would be like if one spouse died (though it may not be pleasant to contemplate). What’s more challenging is to imagine what life will be like ten, or fifteen, or twenty years after your spouse dies — or (harder still) what life will be like for your spouse twenty years after you die.

The same client goes on:

“Is the second trust still vulnerable to nursing home expenses?”

Another good question. It takes a little explaining, but the journey should be worth it.

If you set up a trust for yourself (let’s assume you are single for a moment) and then enter a nursing home, your assets will probably not be protected from the cost of the nursing home. That’s an overgeneralization — there are actually some kinds of trusts that might protect your assets from long-term care costs. But they will usually have been in place for five years, and be very restrictive. For the moment, let’s just go with “no, the trust you create for yourself is not safe from nursing home costs”.

If your spouse dies and leaves his or her entire estate to you outright, then the trust you set up will look the same. Even if you and your spouse set up a joint trust and then he or she dies, leaving you with the power to revoke the whole trust, that will be the same as the trust you set up with your own assets. So no, the trust that does not split into two shares on the first death will not (usually) protect against nursing home costs.

But if your joint revocable trust splits into a revocable and an irrevocable share on the first death, the answer may be different. If that seems like a likely scenario, or you particularly want to pursue protection from long-term care costs, then that may be another reason for considering a split on the first death — even though there is still no estate tax reason to make the split.

This client keeps asking really good questions:

“What if my husband decides to make large gifts out of the second trust. Can he do that ?”

Sorry to be a lawyer here, but the answer is: “it depends”. Mostly it depends on the language of the trust.

Of course there’s another reality. If the surviving spouse is the trustee of the trust, and the trust terms say “whatever else he/she does, he/she is not to give a single cent to my worthless brother Arnold,” and the surviving spouse gives a few thousand dollars to Arnold, who is going to enforce the trust’s terms? The children? They likely won’t find out about it until well after it happens, and you know how likely Arnold is to pay the money back, right?

Once again, this question needs to be the subject of more discussion with your lawyer. But what excellent questions.

Important note: These off-the-cuff answers are just that, and they really should encourage you to discuss the questions with your lawyer in some depth. If you are not an Arizonan, they may not be correct at all. If we are not your lawyers, you might get a different answer, or at least different emphasis. These are actually hard questions.

Can You Disinherit Your Spouse? It Depends


Most of us are fascinated by the lives and deaths of famous people. Their legal and financial affairs tend to be complicated, and they are sometimes messy. They may also provide some constructive information, useful to illustrate broader points applicable to many of us. One such illustration: the death and estate of the late, great country singer/songwriter James Travis Reeves — better known as Jim Reeves to his legions of fans.

The recently-decided Tennessee case isn’t actually about Jim Reeves’ estate at all. The singer died in a tragic airplane crash in 1964, leaving behind his wife Mary and a considerable collection of then-unreleased records. In the years since his death a number of “new” releases have helped maintain his legacy. In fact, two of his most famous recordings (Don Gibson’s “I Can’t Stop Loving You” and Cindy Walker’s “Distant Drums”) were released in the two years after his death.

In 1969 Reeves’ widow Mary remarried — to a former Baptist minister named Terry Davis. Mary Reeves Davis lived thirty more years, and during that time she helped maintain the public’s interest in the velvet voice of “Gentleman Jim” Reeves. In fact, in the last few years of her life the annual income from Jim Reeves’ songs and legacy was estimated at several hundreds of thousands of dollars.

When Mary Reeves Davis died in 1999, her will left $100,000 to her husband Terry Davis, and the bulk of the rest of her estate to a niece and nephew of Jim Reeves. That sets up the legal question involved, indirectly, in Jim Reeves’ “estate.” Since all of his assets, and his rights and recordings, had passed to his widow, it was his legacy that was subjected to her new husband’s challenge.

Here’s the legal question involved: can you disinherit your spouse, or significantly reduce their share of your estate? Assume (you will have to assume, because the information is not public enough for us to figure it out) that Mary Reeves Davis’ estate was substantial, and that the future rights to her late husband’s recordings will continue to produce income for decades. Could Mary Reeves Davis leave her husband of thirty years $100,000 and discharge any legal obligation she had to him?

The answer, as you might suspect, will vary significantly from state to state. In some states (not including Arizona, incidentally) a surviving spouse has the right to a minimum inheritance — if the deceased spouse’s will does not leave a sufficient amount, the surviving spouse may “elect against the will.” That means that they are entitled to a minimum share of the estate, with that minimum varying from state to state.

That’s the law in Tennessee, where Mary Reeves Davis lived and died. So did Terry Davis have the right to elect against her will, and receive a share of her estate exceeding the $100,000 bequest?

If you were reading this complicated story carefully, you will note that Mary Reeves Davis died in 1999 (on Veteran’s Day, in fact — almost exactly fourteen years ago). How could the legal question in her probate estate just be getting resolved?

Trial of the probate dispute actually was concluded two years ago, though that doesn’t help explain the long delay. Over the twelve years of litigation Terry Davis retained and discharged six sets of attorneys, with the final firing taking place just days before the long-delayed trial had been set to begin. The judge in the case allowed Mr. Davis to fire his lawyers, but refused to continue the trial any longer for him to secure new counsel. He represented himself in the 2012 trial. After losing in the probate court, he filed an appeal with the Tennessee Court of Appeals; that court’s ruling was finalized last week.

So what was the final issue, and what can we learn from it? It turns out (as it so often does) that the primary legal question was very narrow: could Terry Davis elect against his wife’s will when he had already accepted the $100,000 she bequeathed to him? The answer: no. Under Tennessee law, at least, in order to elect against the will, the surviving spouse must refuse any specific bequest in order to elect the statutory minimum to which he or she would be entitled. Oh, and Terry Davis had no legal right to be represented by a lawyer at the trial, so the judge’s refusal to grant him a continuance as his last law firm withdrew was not a legal error. Estate of Davis, October 28, 2013.

What does a Tennessee case, applying Tennessee’s very-different law, tell us about Arizona court proceedings, estate planning, or inheritance issues? Although Arizona law is very different (there is no “right of election” against a will in Arizona), there are still some valid points to take away, and the Jim Reeves music in the background of this case helps make those points more memorable.

Yes, you can disinherit a spouse. Under Arizona law, regardless of what the will says there is a minimum amount to which the spouse is entitled, however. That amount, though it varies slightly depending on other circumstances, is usually $37,000 (a figure, by the way, that has been unchanged for decades). Even that magnanimity is limited, however. If the spouse receives any other property — by operation of joint tenancy titling, or by a trust, or by beneficiary designations — that can reduce the amount to which the spouse is entitled.

Tennessee law is more protective of spouses, though it turned out that Mary Reeves Davis’ surviving husband did not get more of her probate estate than her will provided. There was testimony, however (and the probate court found), that Terry Davis had transferred more than $250,000 from Mary Reeves Davis’ accounts just before her death. That did not help his claim of entitlement to maintenance from her estate under Tennessee law. But the bottom line is clear: if you want to disinherit your spouse, you will have an easier time doing so under Arizona law.

Why is that so? Are Arizona legislators anti-family? Hardly. Arizona, as you may recall, is a “community property” state. That means that there is an assumption that half of the assets owned by a couple already belong to the surviving spouse, and so the minimum protection provided by probate laws makes more sense. It doesn’t, however, help figure out how to deal with the division when the deceased spouse had substantial separate property (like an inheritance, or separate property brought into Arizona and maintained as separate property) and the surviving spouse has few resources. That complicated problem is material for another day — and an Arizona case as illustration.

Step-Children and Disinherited Children Might Have Rights — It Depends

A prospective client asks: “Can my mother cut me out of her will after my father dies? His will leaves everything to the children after her death.” That deceptively simple question comes in a number of variations (like: “My mother’s will left everything to her children, but her estate was not probated. After her husband, my stepfather, died, we learned that everything went to his children from a prior marriage. Can we do anything about that?” Or: “Our father and stepmother had a joint trust leaving everything to all of their children — my siblings and my step-siblings — when the second one of them died. After my father’s death, my stepmother changed the trust to go only to her children. What rights do I have?”

To each of those questions the answer is almost certainly the same: “It depends.” That’s the classic lawyer’s answer, but it reflects a reality that we deal with whenever we talk to a new client or prospective client. We almost never have enough information to give a definitive answer after the initial consultation, and that is particularly true with these questions.

What does it depend on? State law, sometimes. The actual wording of documents, in most cases. Titling of the property, pretty often. The cost of pursuing the issue weighed against the value of the “lost” inheritance, almost every time.

Please remember that what we describe here is based on Arizona law. It’s what we know; we don’t know enough about other states’ laws to do more than speculate about whether the same answer would be true in another state. Heck, sometimes we don’t know enough to determine whether Arizona or some other state’s laws even apply to the question. So check these answers with a qualified lawyer in your state (or the state where your parent(s)/step-parent lived and died).

Disclaimers aside, let’s look at some of the more-common scenarios:

1. Herb and Vonda signed identical wills, leaving everything to one another and, on the second death, to their three children in equal shares. Herb died. No probate was even filed, since everything was owned as joint tenants with right of survivorship. All Vonda had to do was distribute Herb’s death certificate and everything was transferred to her name. Five years later Vonda changed her will to leave everything to one of the three children.

Vonda’s will might be subject to challenge based on undue influence or lack of testamentary capacity, but it is unlikely to be set aside based on Herb’s intention that his property be divided equally among his children. He left everything to Vonda — both in his will and by the joint tenancy designations. She was probably free to do what she wanted with what then became her own property.

Herb and Vonda might have signed an agreement to keep their wills the same. Their wills might have even included a provision that promised the survivor would not change her will after the first spouse died. But such a provision would be rare (not unheard of, but rare). Even if there was such a provision it’s not completely clear that it would apply in these circumstances, since Vonda did not acquire Herb’s interest in the jointly held property by his will — she got it by operation of the joint tenancy arrangement.

2. Richard and Fern signed a joint revocable trust. It provided that on the first spouse’s death, the survivor would have complete control over the trust and the property in the trust — including the right to amend the trust. If the trust was not amended, it would leave everything to Richard and Fern’s only son, Ralph. All their assets were transferred into the trust.

After Fern died, Richard amended the trust to leave everything to a neighbor. At least that’s what Ralph suspects. The neighbor is named as trustee and refuses to even give Ralph a copy of the amended trust. Ralph wants to know if he has a right to at least Fern’s half of the joint estate, and how he can find out about the circumstances of any amendment. He has a copy of the old trust showing him as beneficiary (though the copy he has does not show that it was actually signed). The lawyer who prepared that draft trust won’t return his phone calls.

Can Ralph get a copy of the new trust? Not necessarily. If he has been completely eliminated from the trust, the trustee is under no obligation to give him anything. How does he know if that’s the case? He doesn’t. He could bring a court case to have the Judge interpret the validity of the suspected amendment, but if it is as the neighbor says he will probably lose — he probably won’t get a copy of the trust document and he may end up paying the neighbor’s legal fees in addition to his own.

To be clear, if the neighbor consulted us we would advise that it’s easier to show Ralph the amended trust and be done with it. But we would also tell him (assuming Ralph has been excluded and the document appears to have been properly prepared) that he is not obligated to do so. Ralph is likely to get further by being reasonable and friendly than by being confrontational. Oh, and he is probably not entitled to any portion of “Fern’s estate,” since she appears to have left it all to Richard.

3. Grant and Julia were each married once before they got together. Grant has two children from the first marriage, Julia has three and the two of them had one child together. They signed a joint revocable living trust and transferred all their assets into the trust’s name. It provided that on the death of one of them, the entire trust estate was to be divided into two shares — with half of the combined assets assigned to each share.

One share of the trust would continue to be completely under the control of the surviving spouse (the trust refers to this as the “Survivor’s Trust Share”). The other (the “Decedent’s Trust Share”) is held in trust for the benefit of the surviving spouse (he or she is entitled to all the income and, if he or she needs it, principal of this trust share). On the death of the second spouse, according to the trust document, the “Decedent’s Trust Share” is to be divided equally among all six children. The surviving spouse is named as trustee of the Decedent’s Trust Share, but has no power to modify or amend it.

After Grant died, Julia continued to administer both halves of the trust. She never provided any accountings to any of the children, though her oldest daughter did help her keep bank records and took documents to the accountant for tax preparation every year. None of the children wanted to confront her about how she was handling the money, and so no one every challenged her.

When Julia died (more than a decade after Grant’s death), it turned out that the Decedent’s Trust Share was empty. Julia had withdrawn most of the money in the last five years of her life, and had used it to fix up her house (it was titled to the Survivor’s Trust Share) and to make substantial gifts to two of her children (including the one helping out with the accounting). She had also incurred significant medical bills, and had even paid for in-home care for most of her last two years. Most of the children — and especially Grant’s children — felt like she should have moved into an assisted living facility to save money during that period.

When Grant’s oldest son asked for more information, Julia’s daughter (who, it turned out, had been named as successor Trustee) blew up at him and accused him of just being about the money — not caring what his father would want or what his step-mother needed. He wants to know now what he is entitled to.

Can he get account information? Almost certainly — especially for the Decedent’s Trust Share. Is he entitled to information about the Survivor’s Trust Share? Maybe, if he is still a beneficiary (or if the finances of the Survivor’s Trust Share would affect what Julia had needed from the Decedent’s Trust Share).

We always encourage clients to ask themselves one more question, though: will Grant’s son be happy with any likely outcome? Probably not. The cost of pursuing his step-mother’s estate and his step-sister will likely be high, and the resolution will not give him everything he is entitled to receive. Depending on the size of the estate and the portion at issue, it might be financially worth pursuing. Basically: “it depends.”

Dispute Over Family Home Pits Children Against Stepchildren

OCTOBER 19, 2009  VOLUME 16, NUMBER 58

More than a decade ago we told you about a Utah case involving a widower’s remarriage (see Surviving Spouse Revokes Trust–Children Disinherited from February 2, 1998) . Although the children of the deceased woman and her surviving husband were supposed to receive everything on his later death, the widower revoked his living trust and transferred everything to his new wife. The children were effectively disinherited.

Of course we see that result all the time, as unanticipated shifts in family dynamics follow death and remarriage. When two people with grown families marry, they seldom consider, much less carefully plan, what will happen when the inevitable occurs. Now an interesting case — and, interestingly, again out of Provo, Utah — raises an unusual variant of the same story.

Harold and Edith LeFevre had seven adult children. After Edith died in 1987, Harold married Ellen Stout, who had five grown children of her own. When Harold died in 1993, he had made no estate plan at all. The second Mrs. LeFevre met with her late husband’s children to discuss his estate, and they all agreed that she should live in the family home for the rest of her life. She agreed that she would create a trust that left the home to the children, and that she would handle the probate of Harold’s estate to get the house into the trust.

One month after Harold’s death his widow met with her attorney to plan her own estate. The trust she had him prepare, however, did not resemble the agreement she had entered into with her stepchildren. Instead, the LeFevre family home was left half to her stepchildren and half to her own children.

Ellen then handled the probate of her late husband’s estate, transferring the residence into the trust she had created. Two years later, she amended the trust to disinherit the LeFevre children altogether, leaving the home and all her other assets to her children only.

For nearly a decade Ellen LeFevre lived in the home, becoming increasingly reclusive and withdrawn. Her son encouraged her to cut off communication with her stepchildren, and when she died in 2004 they were not even aware of the fact for some months. After they learned of her death and requested a copy of the trust, they were surprised to learn that they would not receive any portion of their father’s estate.

In a contested proceeding, the probate judge imposed a “constructive” trust, ruling that Ellen LeFevre had agreed to place the home in trust and then had violated that agreement. The Utah Court of Appeals agreed, and ordered that the home be transferred back to the LeFevre children.

According to the appellate judges, Ellen LeFevre had entered into a valid agreement, she had breached the terms of that agreement, and her children had been “unjustly enriched” as a result of her breach. The appellate court did not agree with the children that they should have their attorney’s fees paid by Ellen LeFevre’s estate. In the Matter of the Estate of LeFevre, October 9, 2009.

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