Posts Tagged ‘Wisconsin’

Mother’s Gifts to Children Create Dispute Over Special Needs Daughter

SEPTEMBER 21, 2015 VOLUME 22 NUMBER 34

What plans should you make when you have a child receiving Supplemental Security Income (SSI) or Medicaid benefits? Should you create a special needs trust? Disinherit that child so their benefits won’t be affected? Leave their “share” of your estate to another child or children instead?

We get asked this question regularly. Most of the time our answer is easy, and strongly delivered: create a special needs trust. Choose a trustworthy child to administer the trust, or maybe a professional trustee. Let the trustee act as your surrogate after your death — deciding how to use the trust’s money to best benefit your child.

Do not, whatever you do, leave your child’s inheritance to another child with instructions to take care of their sibling. Do not do that even if you completely trust that child. Do not do it even if you are prepared to write something that makes clear that they are not required to behave honorably — that you are not trying to create a de facto trust for your child with disabilities.

Why not? Because bad feelings will be generated. Litigation is likely to be involved. Your children, and their children, and your sons-in-law and daughters-in-law, can not be counted on to all agree about how they should behave — especially with you not around to exercise moral authority over them.

How do we know this? Because of Mary Jane. Let us explain.

Mary Jane had several children. We’re going to call them Robin, Randi, Rachel, William and Walter. Robin is developmentally disabled. In 1995, Walter died in a terrible accident. At the time, Mary Jane received a settlement from Walter’s death; she gave $51,000 of her settlement money to each of her children, except that she gave $102,000 to Randi and less than $1 to Robin.

Did Mary Jane intend to have Randi use the “extra” $51,000 share for Robin’s benefit? At the time she said not — there was explicitly no restriction on how Randi could use her gift. The family problem created by this uncertainty didn’t become active until almost two decades later.

After she made the gifts to her children, Mary Jane did her own estate planning. She created a special needs trust for Robin, naming William as trustee. An equal share of her estate was to go to the special needs trust upon her death. She also helped Robin sign a power of attorney, naming William as her agent after Mary Jane’s death. Then, in 2003, Mary Jane died.

After Mary Jane’s death, her third daughter (Rachel) began asking Randi what she had done with what she, Rachel, thought of as “Robin’s” $51,000 gift from back in 1995. Randi declined to tell her. Rachel then turned to William, insisting that he should make Randi answer her questions. He, in turn, also declined to act.

At this point, it’s worth reviewing the players. Robin was to receive an equal share of Mary Jane’s estate, though in a special needs trust. But Robin had not received an equal gift from the settlement of Mary Jane’s claim arising from Walter’s death. Instead, Randi had a double share. Meanwhile, William had been put in charge of Robin’s inheritance and also managed Robin’s own affairs. Rachel had no apparent standing or role in any of these arrangements.

Still, when Rachel did not get a satisfactory answer, she filed a lawsuit. She sued Randi (for not agreeing that half of her 1995 gift was really for Robin) and William (for not insisting that Randi account for that gift). She asked that the court make Randi account, and that the $51,000 (plus interest) should be held in trust for Robin’s benefit.

The trial judge dismissed Rachel’s lawsuit, finding that she had produced no evidence that the gift from Mary Jane was in trust at all. Rachel appealed.

The Wisconsin Court of Appeals upheld the dismissal. The appellate judges agreed that there was no evidence that Mary Jane had intended the “double” gift to Randi to be a trust for Robin. Dismissal of the lawsuit was proper. Robbins v. Foseid, September 3, 2015.

How does Mary Jane’s case establish the importance of actually creating a trust? After all, assuming that she did not intend to make Randi’s “double” gift a trust, the courts upheld her intentions, right?

Yes, but at a significant cost — both in legal fees and in family disharmony. Of course we don’t have enough information about her family to know if they generally got along well before the death of Walter and Mary Jane’s gifts to her children. If they did mostly get along, however, her failure to be clear about her intentions might be a significant part of the later decline in the relationship.

If, on the other hand, Mary Jane actually did intend the double gift to benefit Robin, those intentions are now completely dependent on Randi’s goodwill toward Robin. Maybe Randi will do exactly the right thing, but wouldn’t it have been more effective and better thinking for Mary Jane to have made the original gift into a special needs trust — probably just like the one she created a year later as part of her estate plan? And what happens now if Randi should die, leaving her estate to her husband, or her children, or her creditors?

Our basic point: when you are making plans for your child who has a disability, you should not count on everyone correctly guessing your intentions, or acting honorably, or even living long enough to carry out the tasks you are implicitly setting for them. Make your intentions explicit, and the lines of authority clear. Create a special needs trust.

Joint Tenancy with Right of Survivorship, or Community Property?

MARCH 24, 2014 VOLUME 21 NUMBER 12

Which is better? How should we take title to our house? How about our brokerage account?

These questions are really common in our practice. The answer is actually pretty straightforward, but we do need to lay a little groundwork.

Arizona is a community property state. That means that property held by a husband and/or wife is presumed to belong to them as a community. That presumption does not apply if the property existed before the marriage, or was received by a gift or inheritance. There are special rules for property you owned in a non-community property state before you moved here. It’s also possible for a married couple to enter into an agreement that changes the nature of community property, but those agreements are relatively rare.

Historically, there was one great disadvantage to community property ownership, and one great advantage. That is, there was one advantage and one disadvantage if you assume that the couple would never get divorced. If you have substantial separate property and are considering turning it into jointly-held property, is that advisable? That question is beyond our short essay today, and the answer depends on your comfort level with your spouse and marriage. We’re not particularly accomplished marital counselors, and we don’t have any facts for your personal situation.

But assuming you and your spouse live together more-or-less-happily until  one of you dies, here are the competing considerations to holding property as community property:

Advantage: Income taxes. Upon the death of one spouse, property held as community property takes on a new “basis” for calculating future capital gains. If you have stock that you bought at $1,000 and that you now sell for $10,000 (congratulations!), you have “recognized” $9,000 of gain and will pay income taxes based on that amount. But if you held that property in joint tenancy with your late spouse, it got a step-up in basis to his or her date-of-death value; assuming the stock was worth $10,000 on that day, your income tax is only on $4,500 of the total gain. But if you had held that stock as community property with your late spouse, there would be no capital gains tax on the sale at all.

Disadvantage: Probate. Until 1995, community property could not pass automatically to the surviving spouse. That meant that a probate was often required to transfer the deceased spouse’s community property interest to the surviving spouse. Since no probate was required for property held in joint tenancy (the “right of survivorship” part of joint tenancy means the surviving joint tenant receives the property without having to go through the probate process), most married couples opted for joint tenancy rather than community property.

In 1995, the Arizona legislature made the disadvantage to community property disappear — they created a concept of “community property with right of survivorship.” That means a married couple can have it all: they can get the full stepped-up basis for income tax purposes, but avoid probate, on the first spouse’s death.

Does that mean that all property should be titled as community property with right of survivorship? Almost, but not quite. There are a handful of problems that occasionally crop up and have to be considered:

  • Not every married couple intends to leave everything to one another. You can still get the full stepped-up income tax basis and leave your share of community property to someone else — your children from a prior marriage, perhaps, or another family member. In such a case it might make sense to hold the property as “community property” (with no right of survivorship) but have a will or trust to make provisions for each spouse’s share.
  • The income tax benefit does not always appear. Note that the benefit is not a direct tax savings, but only a potential savings. If you get a full stepped-up basis on property that you then hold until your own death, you haven’t really saved any tax money. But the community property benefit just might give you flexibility — you can decide to sell property after your spouse’s death on the basis of good investment advice, rather than the tax effect.
  • The option only applies (this is obvious, but we need to say it) to married couples. “Community property” is not available to anyone else. Is it available to same-sex married couples? We think so (see our articles on the subject over the last few months here, here and here), but we might turn out to be wrong about this.
  • The benefit may not even be necessary for some assets. No growth in your brokerage account? No benefit. You invest only in municipal bonds and certificates of deposit? Minimal to no benefit. But here’s the big one: most people’s biggest growth asset is their home — and there’s already a substantial ($250,000) exemption from capital gains taxes for a single (widowed) person selling their home.
  • Have you already established a trust as part of your estate plan? You may not need to go through the analysis, since the practical effect of your plan may be the same as the benefit of community property with right of survivorship — or better. Ask your estate planning attorney to review this with you.
  • There are sometimes costs to making the change. For real estate, you will need someone to prepare a deed (you can probably get it right on your own, but it makes sense to hire a professional). In addition, there are modest costs to record the new deed.
  • This only applies to Arizona property. No problem with your brokerage or bank account — they are Arizona property if you live here. Your vacation cottage in Montana, or your Mexican condo held in a land trust, are a different matter. But if your vacation cottage is in Alaska, or California, Idaho, Nevada or Wisconsin, you might be able to do something similar. Ask a local lawyer about the possibility.
  • We need to reiterate: if you have separate property and transfer it to community property with right of survivorship to take advantage of income tax benefits, you may have made a gift of half of your separate property to your spouse. Be careful, and make sure you know what you’re doing.

What’s your bottom line? Should you change everything you own from joint tenancy with right of survivorship to community property with right of survivorship? Maybe, but your home is the least urgent thing to tackle. Your brokerage account? Absolutely. Your summer cottage in another state? Check with your lawyer and ask her (or him) to find out whether the other state has community property with right of survivorship.

Note that none of this really helps you deal with retirement accounts, IRAs, 401(k) accounts, separate property you brought from another state or your complex estate planning intentions. For those, you really need to talk with your lawyer. Also, please be clear: we do not know the correct answer if you live in a state other than Arizona — talk to your local lawyer about that.

 

Decedent’s Family Permitted to Challenge Validity of Marriage

OCTOBER 7, 2013 VOLUME 20 NUMBER 38

Though we do not handle divorce cases at Fleming & Curti, PLC, we do find ourselves dealing with divorce, annulment, child support and spousal maintenance issues from time to time. One common question we see involves late-life marriages between a (sometimes) confused senior and a (sometimes, but not always) younger suitor. The questions sometimes come from the senior himself or herself (“I love my fiance, but can my children do anything to challenge this marriage?”) and sometimes from other family members (“Dad wants to marry his caretaker, but we children think she’s just taking advantage of a demented older man for his money. What can we do about it?”).

It is extremely difficult to generalize about these issues, since they are very, very fact dependent. When lawyers say “fact dependent,” incidentally, they usually mean that they anticipate that testimony will be conflicting, that litigants will hear only the part of the testimony that supports their own position, and that the cost, complexity and time spent on litigating the “fact dependent” questions will be substantial, perhaps even prohibitively so.

There is one recurring legal question, though. If either spouse is incompetent (setting aside the definition of that very flexible word for a moment) at the time of a marriage, that marriage may be invalid. But the incompetent spouse is usually not the one challenging the validity of the marriage, and family members who do challenge it are often trying to set aside the marriage after the death of the incompetent spouse. In general terms, only spouses are permitted to litigate divorce, annulment and support questions, and the availability of divorce proceedings usually ends with the death of either spouse. So can family members challenge the validity of a marriage after the death of an allegedly incompetent spouse?

According to the Wisconsin Supreme Court, the answer is “yes.” Of course, Wisconsin cases do not carry direct authority in Arizona (or other states), but the rationale may be persuasive — so it’s worth describing the case even for an Arizona audience.

Naomi Latigue (not her real name) had been married for thirty years when her husband Larry died in 2001. They had not had any children together, but Larry had three children from his first marriage. Naomi had signed a will leaving her entire estate to Larry and, if he died before her, to his children — as if they were her own children (though she had never adopted them).

Several years after Larry’s death, Naomi suffered a stroke. It left her deeply affected — for purposes of the later Supreme Court decision, we can assume that her competence was marginal, at best. After what was probably another stroke in 2008, she was admitted to the hospital and then, two weeks later, discharged to a nursing home.

While she was at the nursing home, her live-in companion (of about five years — predating her first stroke) checked her out twice — first to get a marriage license and then, a week later, to get married before a local judge. He did not tell her family members about the plan or the fact of the marriage (they learned about it from her insurance carrier when making claims a few weeks later). Her step-daughter filed a guardianship petition and a temporary guardian of the person and of the estate (what we in Arizona would call a temporary conservator) was appointed. Naomi died a few days later, before the guardianship petition was resolved.

Wisconsin, like most states (perhaps all states) provides that a spouse who marries the decedent after their will is written is entitled to some share of the probate estate. Naomi’s new husband filed a probate petition, alleging that her original will could not be found but that in any event he was entitled to a share, and to appointment as personal representative. Naomi’s step-daughter filed a competing petition, seeking probate of a copy of Naomi’s will and arguing that the marriage was invalid.

The probate court considered arguments of the parties and ultimately ruled that the only way to challenge the validity of a marriage is by filing a petition to have it annulled. By state law (the same rule applies in Arizona) only the affected spouses can prosecute an annulment proceeding, and so there was no mechanism for Naomi’s step-daughter to challenge the validity of the will. Accordingly, Naomi’s husband was appointed as personal representative and awarded a share of her estate.

The Wisconsin Supreme Court reversed that holding, and remanded the case back to the probate court for a determination about whether the marriage was valid. It is true, wrote the Justices, that spouses can only challenge the validity of their marriage by filing an annulment petition, but that does not prevent a probate court from determining whether Naomi was competent to enter into the marriage. If she was not, said the court, the marriage was void from the moment it was entered into, and Naomi’s heirs could make that argument in the probate court. Estate of Laubenheimer, July 16, 2013.

Would the same principles apply in Arizona? Probably. Arizona does have one case with somewhat analogous facts and a similar result. In Estate of Rodriguez, a 2007 Arizona Court of Appeals case, the decedent had referred to herself as married and had signed a will leaving the bulk of her estate to her “husband.” After her death it developed that he had still been married to his first wife at the time of his marriage to the decedent, and so her family challenged the validity of the marriage. He argued that the probate court had no jurisdiction to void the marriage, since the couple had not resided in Arizona at the time of her death; the Court of Appeals, in language similar to the Wisconsin Supreme Court’s opinion in Naomi’s case, ruled that the probate proceeding was not an annulment petition but a separate challenge to a void marriage.

Arizona Community Property Is Not Always Subject To Probate

OCTOBER 9, 2000 VOLUME 8, NUMBER 15

Arizona is one of nine “community property” states in the country, and that can be the source of some confusion about estate planning, taxes and property ownership rights for married couples. Recent changes in Arizona’s law make the “community property” designation a little more friendly and understandable, and the benefits to this unique property ownership choice are now clearer.

“Community property” concepts were not part of the English common law. Under the system imported to most of the American states, property was owned by one spouse or the other, though the non-owner might acquire some rights in his or her spouse’s property. The French and Spanish, however, understood the marital community to be a separate entity from either spouse individually, and permitted the “community” to own property. Each spouse then holds an equal interest in the community’s property.

Those American states with rich Spanish or French histories tended to adopt some version of the community property concept. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states, although the method of implementing the concept varies somewhat. Alaska also permits some trust assets to be held as community property.

In community property states a married couple is presumed to hold assets as community property regardless of the actual title on the asset. Couples may, however, choose to hold their property in joint tenancy or as tenants in common if they wish.

One important advantage to having assets titled as community property comes, oddly enough, from federal tax law. Although capital gains taxes are ordinarily due any time an appreciated asset is sold, the increased value of property held by a decedent at the time of death is not taxed. The property’s income tax “basis” is said to “step up” to its value on the date of the owner’s death, often resulting in substantial income tax savings for heirs.

Jointly owned property only receives a partial “step up” in basis. Property held in joint tenancy will usually only get half the income tax benefit on the death of one joint owner. Community property, however, is treated differently: the entire value of a community property asset gets “stepped up” to the value on the first spouse’s death, resulting in twice the income tax savings.

The main drawback to holding community property in Arizona has long been the requirement of a probate proceeding to pass the property to the surviving spouse. Although the long-term tax savings can be substantial, the probate costs are immediate and, in most people’s minds, too high. Since 1995 Arizona has permitted married couples the best of both worlds: property can be held as “community property with right of survivorship” and secure the favorable income tax treatment while still avoiding the probate process. The value of this type of property ownership is, of course, restricted to married couples.

One caveat: some commentators, relying on fairly arcane interpretations of the federal tax law, argue that the “community property with right of survivorship” designation could conceivably be found to result in no step up in tax basis at all. So far the federal government has not taken such a position, but there remains some slight possibility of a problem. In addition, the effect of titling separate property as community property (with or without the “right of survivorship” language) has more than just tax effects. In other words, you should consult an Arizona attorney before changing title on your existing assets or deciding how to title a new acquisition.

Pre-Death Transfers By Two Seniors Invalidated As Frauds

NOVEMBER 24, 1997 VOLUME 5, NUMBER 21

Two recent cases, from the courts of Wisconsin and Tennessee, set aside transfers of property made by seniors prior to their deaths. While the circumstances are different, the two cases illustrate some of the typical motivations for gifts to children, as well as the possible effects of such transfers.

The “Vest Pocket” Deed

When Acie Lee Maness married Jewell Maness in 1975, he already had three grown sons and a 330-acre farm in Henderson County, Tennessee. He and Jewell both worked (he for the City of Lexington, she for two private employers). While her income paid for food, utilities and household bills his income was mostly used to pay expenses on the farm.

Mr. Maness ran a small herd of cattle at the farm, and allowed his sons to keep a few head of their own on the property. At different times, Mr. Maness even gave each of his sons an eight-acre parcel on the edge of the farm. It was clear, however, that Mr. Maness operated the farm, with only occasional help from his sons. Until 1992, the farm income (and Mr. Maness’ wages) went to pay off a mortgage on the farm as well.

Shortly after Mr. Maness’ death in 1993, one of his sons informed Mrs. Maness that he had transferred the farm to them nearly ten years earlier. When she investigated, she discovered that Mr. Maness had signed a deed to the property, conveying it to his three sons, and had given the deed to his son Willie. He had instructed Willie and his wife not to tell anyone about the deed, and to hold it in their safe deposit box (such unrecorded deeds held until the death of the original owner are sometimes called “vest pocket” deeds). They had removed it and recorded it three days after Mr. Maness’ death, and the title now appeared to be in the sons’ names.

Mrs. Maness sued to set aside the transaction, alleging that it was fraudulent because it had the effect of depriving her of her statutory right to inherit a portion of her husband’s property. In Tennessee, as in most states, a surviving spouse is entitled to at least a share of the deceased spouse’s estate, and Mrs. Maness argued that the transaction deprived her of that right.

Noting the secrecy with which the deed was cloaked, the Tennessee Court of Appeals agreed with Mrs. Maness. The court also noted that even by a conservative estimate the farm constituted nearly two-thirds of the value of Mr. Maness’ estate, and Mr. Maness’ behavior in hiding the transaction from his wife indicated that he had intended to defraud her of her inheritance rights. Maness v. Estate of Maness, Tenn. Court of Appeals, November 12, 1997.

The Medicaid Transfer

Meanwhile, in Wisconsin, Janet D. Johnson lived with her daughter Jean during what turned out to be Mrs. Johnson’s last illness. Mrs. Johnson had a will which directed that all her assets be divided equally among her four children. Shortly before her death, however, Mrs. Johnson transferred all her investment accounts into Jean’s name.

At about the same time, Mrs. Johnson made an application for Medicaid benefits from the State of Wisconsin. In that application, she falsely alleged that she had no remaining assets, and that she had made no gifts during the previous 36 months. Apparently, the principal purpose of the transfer had been to attempt to make Mrs. Johnson eligible for Medicaid assistance with the cost of her care.

Mrs. Johnson died shortly thereafter, and her other children sought to have the property returned to her estate. The Wisconsin Court of Appeals ruled that Jean held the assets in a “constructive trust” for the benefit of the estate (and, ultimately, the four children). In effect, the transfer was set aside.Estate of Johnson, Wisc. Court of Appeals, September 2, 1997.

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