Leaving Inheritance Unequally to Heirs

Clients occasionally ask to create estate plans leaving property to beneficiaries who are not their natural heirs (next of kin). When they do, it might be because of estrangement, or because of the involvement of that heir’s family (think in-laws), because one of the heirs doesn’t need the money, because of how they might spend once received or because they do not have close natural heirs.  When it comes to estate planning, equal isn’t the same as fair, explains the article “Are Unequal Inheritances Fair?” from Advisor Perspectives.

The first will I ever drafted as a law student had this issue.  The elderly mother wanted to leave everything she had to two of her four children.  The two she wanted to provide for lived far away, had very few assets, but still helped mom with her bills or spent time with her.  The two remaining children were much better off, but also spent far less time with her despite living in the same city.

She loved her children equally, but recognized that the value of the inheritance was different for the children who supported and who were in need compared to the two who did not support her and were self-sufficient.  In her case, I drafted the will leaving everything to the two supportive daughters, and we used ethical will language to explain the reason why she didn’t leave everything to all four. (see here for info on an ethical will: https://galligan-law.com/estate-planning-attorneys-recommend-that-clients-consider-writing-an-ethical-will-or-legacy-letter/)

But, that solution doesn’t always work, especially where the heirs don’t get along, or would become suspicious of each other.  This is exacerbated where a child is being cut out for reasons like substance abuse or family difficulties.  So, here are a few things to consider when removing a natural heir from your estate plan or substantially reducing their share.

Be Direct. Clients often are worried about hurting the feelings of the heir they cut out, and so don’t want to be direct.  I handled an estate of a client who reduced the share of one child compared to the other.  This was a very complicated estate, and the attorney who prepared the last estate plan made a subtle change in a very complex document so that one child wouldn’t get a particular trust fund and the other would.

The estate turned out better than anticipated, but the problem with a subtle cutting out is the child doesn’t believe its true or that is what their parent wanted.  They don’t believe mom or dad made this choice, and instead they believe the other child (who typically is going to be the executor in this situation) is cheating them, unduly influenced them, the attorney made a mistake or that mom or dad lost capacity.  This leads the fight directly from one beneficiary to the other.

Instead, being clear and direct about your intentions directs the beneficiary’s focus on what you wanted (which is where estate planning should be focused) instead of looking for ways they wronged.  The law allows you to leave the property to whom you want, so better to be clear about your intentions then to leave your family to fight over it.

Use a Trust. The value of the trust in this situation varies a bit amongst the states, but generally stated, using a trust is better than a will when not leaving everything to your natural heirs.  Wills are very public, and depending on your state may require notice to your heirs, whether or not they are a beneficiary.  Trusts can both make the administration more private and can avoid fighting.  Trustees also often have more power to close the trust or handle disputes than an executor who is handling a will.

Leave Property in a Different Way. In some cases, clients want to remove a beneficiary because of a concern over the child’s receipt of assets.  For example, if a child is bad with finances, has creditors, a messy marriage, substance abuse issues and so on.  It is a situation where the emphasis isn’t “I want to leave everything to two of my three children,” but an instance where “I don’t want to give one money, so it has to go to the other two.”   In this case, it’s possible that you could still leave the difficult child an inheritance, but do so in a way to protect the inheritance and the beneficiary from the money.

For example, I have regularly written blogs about leaving inheritance in trust for a beneficiary and we regularly draft estate plans using them.  If the problem is spending habits or addiction, you could leave the inheritance to a child in a trust and leave someone else in charge of the trust.  That trustee could spend the money on their behalf so that the beneficiary receives the value of the inheritance without direct control, which is where the problems arise.

Similarly, beneficiaries who have disabilities and may use government benefits could receive a trust which keeps the assets outside of their control (so not countable for their benefits) but is still available should they need it.  Likewise, leaving property in a trust to a child where you are concerned about divorce helps protect the property by keeping it separate from the marriage.

You can see this article for more details and ideas on how trusts help beneficiaries:  https://galligan-law.com/protecting-inheritance-from-childs-divorce/

In sum, the reason a client wants to remove a beneficiary might be addressable in a different way so that they can still receive their inheritance.

None of these are perfect solutions, but are worth considering for your family if you wish to remove or reduce an heirs share.

Reference: Advisor Perspectives (Aug. 22, 2022) “Are Unequal Inheritances Fair?”

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How Do I Store Estate Planning Documents?

It’s a common series of events: an elderly parent is rushed to the hospital and once children are notified, the frantic search for the estate planning documents starts. It’s easily avoided with planning and communication, according to an article from The News-Enterprise titled “Give thought to storing your estate papers.” However, just because the solution is simple doesn’t mean most people address it.

As a general rule, estate planning documents should be kept together in a fire and waterproof container in a location known to and accessible by fiduciaries, and copies of some documents should be given to the fiduciaries in advance.

Most people think of bank safety deposit boxes for storage. However, it’s not a good location for several reasons. Individuals may not have access to the contents of the safe deposit box unless they are named on the account. Often a court process is necessary for permission to open a safety deposit box if no one is named on the account.

Even with their names on the account, emergencies don’t follow bankers’ hours and access may be difficult. Further, what if the Power of Attorney giving the person the ability to access the safe deposit box is inside the safe deposit box or the principal has died and the Will is in the box.   Bank officials are not likely to be willing to open the box to an unknown person and proof of that person’s authority is in the box.  This is like locking the key in the safe.

Even further, COVID and the economy have led many banks to close or not offer safety deposit boxes.  Banks don’t want to maintain as many brick and mortar locations, so that means safety deposit boxes have to go.

When you store estate planning documents, a well-organized binder of documents in a fire and waterproof container at home makes the most sense.

Certain documents should be given in advance to certain organizations or individuals.  For instance, health care documents, like a Medical Power of Attorney, Directive to Physicians (Living Will) and HIPAA authorizations, may be given to your agents, as well as to your primary care physician or to the medical facility if you go in for a procedure.  This way, agents have the necessary documentation should an emergency occur, and medical systems can add the documents to their file for you.  This way everyone (especially medical providers) are on the same page about your wishes and who will speak on your behalf.

Mary touched on other items that shouldn’t be kept in a safety deposit box in this article.  https://galligan-law.com/things-you-should-not-keep-in-your-safe-deposit-box/  

Financial Powers of Attorney should be given to each financial institution or agency in preparation for use, close in time to when you expect to need it.

This may feel onerous, however, imagine the same hours spent communicating with banks plus the immense stress if the need to use it is time sensitive. Banks often want to review POA’s in advance of their use before accepting them, and that may take several weeks.

If your estate plan includes a trust, you’ll want your trustees’ to have a copy when you are ready to give it to them, and the original can be kept safe with your documents.

Wills are treated differently than POA documents. Wills are usually kept at home and not filed anywhere until after death.

Also, with all documents, especially the Will, it is important to track and keep safe the originals.  You may sometimes be able to probate copies of Wills, but it’s better to keep the original secure and avoid the need to probate a copy.  This is less critical for other documents, but the same policy holds.

Having estate planning documents properly prepared by an experienced estate planning attorney is the first step. Step two is ensuring they are safely and properly stored, so they are ready for use when needed.

Reference: The Times-Enterprise (June 11, 2022) “Give thought to storing your estate papers”

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Why you Should Elect Portability

Clients frequently have heard of the estate and gift tax, and have heard of the high exemption amounts.  The exemption is currently at a staggering $12.06 million, higher than it has ever been.  Many clients have also learned that for a married couple can double that exemption, so they have essentially $24 million combined. With these high exemption amounts, many clients ignore the estate tax or don’t believe it will be relevant for them.

However, it is important to recognize that a surviving spouse only gets the first spouse’s exemption by electing something called “portability.”  I’m going to talk about what portability, the process of electing it, and how it is beneficial even when your assets aren’t anywhere near the current exemption amount.  The recent article “It’s So Important to Elect ‘Portability’ For Your Farm Estate” from Ag Web Farm Journal describes it as well, specifically in the context of family farms.

When one spouse dies, the surviving spouse can choose to make a portability election. This means that any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse.  This is why the second spouse may have $24 million.  They are electing to keep the first spouse’s exemption of $12 million, and have their own $12 million exemption.   It is critical to recognize, however, that it is not automatic, and that is where most married couples make a mistake.

The process of electing portability involves filing an estate tax return with the IRS.  In most portability cases, no taxes are due, but you must file a form to obtain the exemption.  Essentially, the process involves filing the return to show the IRS what the decedent’s exemption was, and that the surviving spouse will be entitled to it in the future.  In many cases where you are only filing to elect portability, the IRS has relaxed standards for describing and valuing assets which go to a surviving spouse.  They do this because in those scenarios, they recognize you are only filing to elect portability, and that the value of assets won’t be relevant as no tax will be due.

The time frame for filing the return varies based upon the case, but you should act quickly.  The standard due date is 9 months from death, although in some cases it can be extended up to 2 years from death.  That is especially helpful where the surviving spouse didn’t speak to an accountant or lawyer after the first spouse died, and they only learn about the benefit of portability long afterwards.

Before portability was an option, spouses each owned about the same amount of assets, or the amount of assets which would use up each other’s exemptions. They would then leave as much as possible to a trust for the spouse and potentially other family members designed to use as much of the first exemption as possible, because if you didn’t use it, it was lost.  This planning made sense, but also required more complicated estate planning that got you the same result as portability does now.  Once portability arrived we were able to simplify many estate plans that no longer needed this complexity of planning.

Here’s an example. A married couple owns assets jointly and their net worth is about $14 million. When the husband dies, the wife owns everything. However, she neglects to speak with the family’s estate planning lawyer. No estate taxes are due at this time because of the unlimited marital deduction between the two spouses.

However, when she dies, she owns $14 million dollars (or more based upon growth) and dies with an exemption of $12 million.  Her estate will pay the estate tax on the difference between the exemption and her assets.  That tax bill is about $800,000.

If the wife had filed an estate tax return electing portability when her husband died, her exemption would be $24 million, and no tax would be due.

Now, I said earlier that this will apply to more than just people with $24 million dollars.  The reason is the current exemption amount is set to return to its prior level of $5 million dollar indexed to inflation in 2026.  So, let’s go through that scenario again with updated, more realistic numbers.

Husband and wife own $14 million, everything goes to the wife when husband dies and wife doesn’t elect portability.  When she dies in 2026, her exemption is $6 million (this is an estimate based upon inflation).  So, the tax will apply on the difference between her $14 million and the $6 million dollar exemption.  That is roughly $3.2 million in tax.

With the exemption as high as it is now and with the expectation of it lowering in the future, portability is critical.  If husband died when the exemption was $12 million and wife elected portability, she would get both his $12 million exemption and her own of $6 million dollars.  The combined exemption of $18 million exceeds her $14 million in assets, and no tax is due.  It saved over $3 million dollars.

Hopefully this last scenario explains how timely this is.  We raise this issue in nearly every estate administration of a married couple as electing portability now is nearly perfect insurance against future estate tax.  It is worth considering in any case where the combined assets will be close to one person’s exemption, especially where more volatile assets such as insurance, businesses and real estate are involved as the market may value them higher than expected at the time of death.

An experienced estate planning attorney can work with the family to evaluate their tax liability and see if portability will be sufficient, or if other tools are necessary.  It is also worth discussing this with an attorney if you recently lost a spouse and want to take advantage of portability.  If estate tax is a concern for you, you may also want to review this article.  https://galligan-law.com/practice-areas/estate-tax-planning/  

Reference: Ag Web Farm Journal (April 18, 2022) “It’s So Important to Elect ‘Portability’ For Your Farm Estate”

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